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REA reports solid revenue up by 25%, EBITDA up by 27%

Investment Thesis:

  • Clear no. 1 market position in online property classifieds, with consumers spending over more time on realestate.com.au app than the number two website. 
  • Growth opportunities via expansion into Asia and North America.
  • Recent strategic partnerships with National Australia Bank (property finance) could potentially be positive in the long term. 
  • Upside in key markets – particular in areas where REA is under-penetrated and could potentially win market share from competitors. 
  • New product developments to increase customer experience. 
  • Regular price increases help offset listing pressure. 

Key Risks:

  • Competitive pressures lead to a further de-rating of the PE-multiple.
  • Volume (listings) outlook remains subdued in the near term. 
  • Execution risk with Asia/North America strategy.
  • Failing to get an adequate return on the recent acquisition of iProperty.
  • Value/EPS destructive acquisitions. 
  • Decline in Australian property market.
  • Given REA trades on a very high PE-multiple, underperforming to market estimates can exacerbate a share price de-rating.
  • Recent tightening of lending practices by banks would affect Financial services business.

Key highlights:

  • REA reported a strong 1H22 result which was largely in line with expectations. 
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%. 
  • The core Australian residential business did the heavy lifting, with revenue up +31%, driven by solid residential buy listings growth of +17% over the half (up +11% in 1Q & up +22% in 2Q despite lockdowns in Melbourne & Sydney).
  • Management did note that listings in Jan-22 had been unusually high which may lead to a decent 3Q performance, however 4Q is likely to be lower.
  • The current negative sentiment towards technology stocks in an increasing interest rates environment also adds further pressure to REA’s share price.
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%.
  • REA delivered positive operating jaws over the half = revenue up +25% – operating expenses growth +17%, with growth in costs driven by higher headcount and salaries in a tight labour market.

Company Description: 

REA Group (REA) provides online property listings, web management, financial services and data analytics to the real estate industry via advertising services. For consumers, REA offers the largest online real estate search engine in Australia. The Company also has operations and growing presence in Asia and other parts of the world.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights

Suncorp’s Battered Bottom Line Masks Positive Momentum Across the Group

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy and Outlook:

There are positive signs for the future of Suncorp and perhaps early validation of management’s strategic investments though. Australian gross written premiums, or GWP, increased 5%, with the insurer benefiting from premium rate increases as well as growth in policy numbers. In New Zealand, increases were even larger, with GWP up 14%. Improved digital sales and service capabilities, including claims lodgment and tracking, should bring cost savings and improve the customer experience. Lifting marketing of key brands and simplifying product offerings are also likely helping. Cost inflation in home and motor insurance in the mid-single digit percent range has so far been offset by rate increases and further negated by work the insurer is doing to manage costs. Tools to better allocate work to builders and benchmark repair costs are examples.

Suncorp has a point with areas government should focus on. Improve public infrastructure, provide subsidies to improve resilience of private dwellings, address planning laws and approval processes, and remove inefficient taxes and charges on insurance premiums.

Financial Strength:

Suncorp has a track record of returning surplus capital to shareholders via special dividends and share buybacks. The fully franked final dividend of AUD 23 cents is down from AUD 26 cents per share last year, with the payout ratio at the top end of the 60%-80% target range. Home loans grew at an annualised rate of 5.3%, but net interest margins, or NIM, tumbled 12 basis points to 1.97%. Growth in premiums and home loans have come at cost. Operating expenses increased 5.8% as Suncorp ramps up spend on digital initiatives and marketing, and insurance commissions grow with premiums. Digital sales made up 38% of Australian insurance sales in the half, up from 33% in first-half fiscal 2021, with some brands already at 50%.

Company Profile:

Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Freight Demand To Remain Strong In Near Term, Benefitting Cummins

Business Strategy and Outlook

It is viewed Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. 

The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. It is likely, Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to growing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, it is probable the truck market to also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. It is viewed this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. It is seen, some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. 

Cummins has exposure to end markets that have attractive tailwinds. In trucking, it is likely new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, it is alleged Cummins will continue to invest in BEVs and fuel cells to power future truck models. It is foreseen a zero-emission world is inevitable, but is believed Cummins can use returns from its diesel business to drive investments.

Financial Strength

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, it is seen the company can meet its near-term debt obligations given its strong cash balance. It is also viewed, comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities. Cummins can also generate solid free cash flow throughout the economic cycle. It is alleged the company can generate over $2 billion in free cash flow in Analysts’ midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, it is likely management is determined to improve its distribution business following its transformation efforts in recent years. It is probable Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. In Analysts’ view, Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Profile 

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

2021 a Year of Strong Growth for C.H. Robinson; Outlook Positive, but Expect Normalization in 2022

Business Strategy and Outlook

C.H. Robinson dominates the $80-plus billion asset-light highway brokerage market, and its immense network of shippers and asset-based truckers supports a wide economic moat, in our view. Although the company isn’t immune to freight downturns, its variable-cost model helps shield profitability during periods of lack lustre demand, as evidenced by a long history of above-average profitability. The firm does not own transportation equipment, and a large portion of operating expenses are tied to performance-based variable compensation, which tends to move in line with net revenue growth. The firm is thought to be well positioned to capitalize on truck brokerage industry consolidation (including market share gains) despite intensifying competition.

Over and above underlying shipment demand trends, share gains will probably remain the key growth driver for Robinson long term. For perspective, it is estimated that Robinson’s stake of the domestic freight brokerage industry at roughly 18% in recent years, up from 13% in 2004, based on market data from Armstrong & Associates. The truck brokerage business is still vastly fragmented, and small, less sophisticated providers are finding it increasingly difficult to keep up with rising demand for efficient capacity access and the need to automate processes. Robinson’s industry-leading network of asset-based truckload carriers (most small) should remain highly valuable to shippers over the long run. This is particularly because truckload-market capacity will probably continue to see growth constraints due in part to the stubbornly limited driver pool.

Robinson has also positioned its air and ocean forwarding unit to contribute to growth. In this segment, it competes with other top-shelf providers like Expeditors International. In 2012, it purchased Phoenix International, which doubled Robinson’s forwarding scale, and organic growth has continued (on average), along with additional tuck-in deals that have boosted the firm’s global footprint. Buying scale and lane density are important in order to secure adequate capacity for shippers, particularly during the peak season.

Financial Strength

C.H. Robinson has taken a more active stance with its balance sheet over the past decade, increasing leverage in part to fund occasional opportunistic acquisitions. Before 2012, the firm was largely debt free. That said, its capital structure remains quite healthy. At the end of 2021, the firm had a manageable total debt load near $1.9 billion and $257 million in cash. Debt/EBITDA was near 1.6 times (versus 1.4 times in 2019 and 2020), and in line with management’s targeted range of 1.0-1.5 times. Interest coverage (EBITDA/interest expense) in 2021 was a comfortable 20 times. Importantly, as a well-managed asset-light 3PL, Robinson has a long history of consistent free cash flow generation, averaging more than 3.0% of gross revenue over the past five years (20% of net revenue). Note that truck brokers’ free cash flow tends to be lowest in strong years of growth by nature of the intermediary business model and related spike in accounts receivable. It is expected that free cash flow to approximate 3%-4% of gross revenue over our forecast horizon. Robinson is expected to have no issues servicing its long-term obligations, given its top-tier profitability, and the firm’s liquidity should be more than ample to weather cyclical demand pullbacks

Bulls Say’s

  •  C.H. Robinson enjoys a long history of impressive execution throughout the freight cycle, and it has thwarted a host of competitive threats over the years. 
  • It is estimated that C.H. Robinson has gradually increased its share of the truck brokerage industry to roughly 17% from 13% in 2004. 
  • Robinson’s non-asset-based operating model has generated average returns on capital near 27% during the past decade and 21% since 2017 (around 23% in 2021)–well above returns generated by most traditional asset-intensive carriers.

Company Profile 

C.H. Robinson is a top-tier non-asset-based third-party logistics provider with a significant focus on domestic freight brokerage (57% of 2021 net revenue), which reflects mostly truck brokerage but also rail intermodal. Additionally, the firm also operates a large air and ocean forwarding division (34%), which has grown organically and via tuck-in acquisitions. The remainder of revenue consists of the European truck-brokerage division, transportation management services, and a legacy produce-sourcing operation.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights

New Jersey Resources Starts Fiscal Year with Good Momentum

Business Strategy and Outlook

New Jersey Resources remains primarily a regulated gas utility even as it invests heavily in nonregulated energy businesses such as solar and natural gas midstream. NJR’s regulated utility business will continue to produce more than two thirds of earnings on a normalized basis for the foreseeable future as New Jersey’s need for infrastructure safety and decarbonization investments provide growth opportunities. 

NJR’s constructive regulation and customer growth has produced an impressive record of earnings and dividend growth. The expected NJR’s regulated distribution utility can grow earnings 6% annually based on 1% customer growth and planned infrastructure investments. NJR’s clean energy business should grow even faster, leading to consolidated earnings growth near the top half of management’s 7%-9% annual growth target.

 New Jersey’s historically constructive regulation allows NJR to support a high payout ratio and dividend growth in line with the utility’s earnings growth. That regulatory support was confirmed in November 2021 when regulators approved a settlement that raises rates to account for NJR’s infrastructure investments and maintains its 9.6% allowed return on equity from NJR’s 2016 and 2019 rate cases. Although this allowed ROE is lower than other utilities, NJR enjoys other rate mechanisms that support good cash flow generation. 

NJR’s gas distribution business faces a potential long-term threat from carbon-reduction policies. To address that threat, NJR plans to invest $850 million in its solar business in 2022-24 and pursue hydrogen and renewable natural gas projects. These projects support aggressive clean energy goals in New Jersey and other states. NJR’s $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage. However,  don’t expect windfalls like this to continue as management derisks its energy-services business, reducing the earnings sensitivity to volatile gas prices, basis spreads, and winter weather.

Financial Strength

NJR has maintained one of the most conservative balance sheets and highest credit ratings in the industry. We don’t expect that to change even with its large capital investment plans. The is forecast an average debt/total capital ratio around 55% and EBITDA/interest coverage near 5 times on a normalized basis after a full year of earnings contributions from its midstream investments. Management has a history of using large cash inflows during good years at its non-utility businesses to offset equity needs at the utility. NJR’s $260 million equity raise in fiscal-year 2020 will primarily go to fund the Leaf River acquisition and midstream investments. We don’t expect NJR will need any new equity through at least 2024. In mid-2019, it issued $200 million of 30- and 40-year first mortgage bonds at interest rates below 4%, among the lowest rates of any large U.S. investor-owned utility at the time. It has raised two low-cost green bonds to support solar investments. Up until 2020, NJR had been able to avoid issuing equity in part due to cash it has collected from its unregulated businesses. Extreme winter conditions in 2014 and 2018 provided a timely source of cash ahead of NJR’s uptick in utility and midstream investments. The success of the nonutility businesses and divesture of the wind investments also brought in cash to fund what is expected will be more than $2 billion of investment in 2022-24 without new equity. NJR’s board took a big step by raising the dividend 9% to $1.45 per share annualized in late 2021. The expected dividend growth to follow at least in line with earnings now that NJR has reached a pay-out ratio near 65%, which is reasonable for a mostly regulated utility.

Bulls Say’s

  •  NJR’s customer base continues to grow faster than the national average and includes the wealthier regions of New Jersey. 
  • NJR raised its dividend 9% for 2022 to $1.45 per share, its 26th consecutive increase. It is expected that streak to continue. 
  • NJR’s distribution utility has received three constructive rate case outcomes and regulatory approval for nearly all of its investment plan since 2016.

Company Profile 

New Jersey Resources is an energy services holding company with regulated and nonregulated operations. Its regulated utility, New Jersey Natural Gas, delivers natural gas to 560,000 customers in the state. NJR’s nonregulated businesses include retail gas supply and solar investments primarily in New Jersey. NJR also is an equity investor and owner in several large midstream gas projects.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Expert Insights

Littelfuse is a small but differentiated electrical protection supplier with semiconductor exposure

Business Strategy and Outlook:
Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications. While the firm is a smaller player than other competitors in the components market under our coverage, it has aligned its portfolio toward secular themes of safety, efficiency, and connectivity to pursue growth. Littelfuse’s best organic growth opportunities will come from vehicle electrification; battery electric vehicles require five times
the circuit protection content of an internal combustion counterpart, and charging infrastructure presents a lucrative opportunity for the firm’s growing power semiconductor business.
Littelfuse’s passive components are small and inexpensive, yet vitally important to the safe and continuous function of mission-critical systems in end applications. Circuit protection products safeguard against
electrostatic discharge and overcurrent to prevent component failure and/or fire in cars, power grids, data centers, and manufacturing plants. Even though individual parts like fuses and relays don’t carry a hefty price
tag, Littelfuse’s application expertise helps the firm stave off commoditization and creates sticky customer
relationships.
Financial Strength:
Littelfuse is in good financial shape. As of Jan. 1, 2022, the firm held $637 million in total debt and $478 million in cash on hand. The firm is expected to satisfy its financial obligations with ease. Littelfuse has no more than $150 million coming due in a single year through 2026, and the firm averaged $226 million in free cash flow from 2017 to 2021. The firm has been forecasted to average $471 million in free cash flow per year over our explicit forecast. Littelfuse’s debt/adjusted EBITDA ratio of 1.29 times at the end of 2021 places it solidly at the low end of management’s long-term range of 1 times-2.5 times.
Bulls Say:
 Secular trends toward renewable energy and electric vehicles should boost demand for Littelfuse’s
products.
 Littelfuse has a foot in the door of the emerging silicon carbide semiconductor market, which could fuel
future rapid growth for the firm.
 Littelfuse’s sticky customer relationships have helped it earn excess returns on invested capital for 11
straight years, even in the face of cyclical downturns in 2019 and 2020.
Company Profile:
Littelfuse is a leading provider of circuit protection products (such as fuses and relays) and other passive
components, selling billions of units into the transportation, industrial, telecommunications, and consumer electronics end markets. The firm is also increasing its power semiconductor business, where it predominantly
serves industrial end markets and is breaking into electric vehicle charging infrastructure.
(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Returning to U.S. Bancorp After Q4 Earnings; Increasing Our FVE to $61 Per Share From $60

Business Strategy and Outlook

U.S. Bancorp is one of the strongest and best-run regional banks we cover. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. If we were to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. 

U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.

Financial Strength

The company’s balance sheet is sound, its capital investment decisions are exemplary, and its capital return strategy is appropriate. U.S. Bancorp is currently above management’s targeted common equity Tier 1 ratio of 8.5%-9%, with a ratio of 10% as of the fourth quarter of 2021, and we view the current goal as appropriate. Bancorp has avoided investing capital in value destroying products, such as GFC era MBS, while simultaneously pursuing value-adding acquisitions and organic growth. Over the last decade plus, U.S. Bancorp has generally maintained its position as the highest returning, most efficient franchise. 

On an EPS basis, wide-moat-rated U.S. Bancorp reported OK fourth-quarter earnings of $1.07 per share, roughly in line with the FactSet consensus of $1.10 and ahead of our estimate of $1.01. However, the trends for the bank’s payment-related fees were not the strongest. The beat was largely attributable to additional reserve releases, which is not a core earnings driver. On the other hand, payment fees, where U.S. Bancorp is more exposed as a percentage of revenue than any other bank we cover, were down across the board sequentially.

Bulls Say’s 

  • Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity. 
  • The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders. 
  • As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Profile 

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Citrix Agrees To Be Taken Private for $104 Per Share; Reports Good Results; FVE Down to Deal Price

Business Strategy and Outlook

Citrix serves customers from enterprise-level to small and medium-size businesses and has come to dominate remote access and desktop virtualization while building a supportive portfolio of related networking solutions. A streamlined portfolio has allowed Citrix to focus on selling a holistic solution rather than endpoint products. This includes selling directly to CIOs, converting the installed base of point products to higher-priced and higher-value IT solutions, and winning new accounts. As if these changes were not enough of a challenge, the company is also in the midst of a model transition to subscriptions, which appears to be going well thus far.

While Citrix is strong in its core market, it is not a leader in other markets. In fact, Citrix remains one of a handful of competitors in each of the other markets it serves, including application delivery, endpoint management, software-defined wide-area network management, and web application firewalls, among other niches. The firm went through some turbulence in 2015-17. 2018 was a step in the right direction in terms of focus and execution, but Morningstar analyst believe management will have its hands full over the next several years executing its strategy. 

Morningstar analyst believe Citrix has established a narrow moat, as switching proven core software infrastructure components is something organizations try to avoid. Morningstar analyst  forecast mid single digit top-line growth over the next five years, with gradually improving operating margins. Morningstar analyst think Citrix is well positioned in the coming quarters to be an important partner as its customers expand their remote work strategies, especially with the addition of Wrike to the portfolio.

Citrix Agrees To Be Taken Private for $104 Per Share; Reports Good Results; FVE Down to Deal Price

Morningstar analyst  lowering  fair value estimate for narrow-moat Citrix to $104 per share from $116 after the company agreed to be taken private by Vista Equity Partners and Evergreen Coast Capital for $104 per share. Citrix has been hampered over the years by questionable acquisitions and a lack of operational discipline by previous management teams and was the target of Elliott Management’s activist involvement in 2015. Concurrent with this announcement, Citrix also reported surprisingly strong fourth-quarter results. Fourth-quarter revenue grew 5% year over year to $851 million, which topped the high end of the $825 million to $835 million guidance range. 

Bulls Say

  • Citrix dominates the desktop virtualization (broadly defined) market. 
  • A streamlined portfolio and optimized footprint from a period of major restructuring should help Citrix drive both revenue and margins over the next several years. 
  • The recent release of Citrix Cloud has helped jumpstart the business model transition to subscriptions.

Company Profile

Citrix Systems provides virtualization software, including Virtual Apps and Desktops for desktop virtualization and Citrix Virtual Apps for application virtualization. The company also provides Citrix Endpoint Management for mobile device management and Citrix ADC for application delivery and Citrix SDWAN for routing, security, and WAN monitoring.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Cerner to Be Acquired by Oracle for $95 Per Share in 2022

Business Strategy and Outlook

Cerner is a leading healthcare IT-services provider, offering an electronic health record platform to hospitals and health networks. Along with rival Epic, a privately owned peer, the two represent more than half of acute care EHR market share. While the market for acute care EHR is mature and offers little growth, the firm has been able to expand into other areas, such as ambulatory (outpatient) care and secure clients in the federal space, notably with the Department of Defense and Department of Veterans Affairs. Additionally, Cerner has started to cross-sell incremental analytics services to fortify retention rates. Incremental services are largely recurring in nature and include analytics, telehealth, and IT outsourcing.

Beyond EHR, Cerner has been investing in areas of strategic growth, in particular population health management and data-as-a-service, where it can use its domain expertise and intangible assets stemming from provider and patient data in other offerings. Cerner’s HealtheIntent is a cloud-based vendor-agnostic population health management tool that can aggregate and reconcile EHR data from any vendor and other sources (PBMs, insurance companies), for individuals across the continuum of care to create a longitudinal health record that can then score and predict risks to improve outcomes and lower costs for patients. The platform has approximately 200 clients and has been steadily growing in recent years. Cerner is also developing a data business, organically through utilizing the company’s leading market share and depth of EMR data and inorganically through tuck-ins acquisitions. In early 2021, Cerner acquired Kantar Health for $375 million, a life sciences research company providing real world evidence, data, and analytics for life science companies.

Cerner to be Acquired by Oracle in All-Cash Deal; Shares Valued at $95 20

 On Dec. 20, Oracle and Cerner jointly announced an agreement for Oracle to acquire Cerner through an all-cash deal, valuing Cerner at $95 per share. The deal is expected to close in 2022, rewarding Cerner shareholders with a 20% premium over the company’s market valuation earlier last week. The deal values Cerner at a 46% premium to our $65 fair value estimate. Morningstar analysts have a very high degree of certainty the transaction will go through without any regulatory pushback, as the combination of the two companies is unlikely to stir antitrust controversy. Morningstar analysts are raising the fair value estimate for Cerner to $92 per share, reflecting the sale price discounted half-a-year at the weighted average cost of capital.

Financial Strength 

Cerner has a standard level of financial strength. Revenue is growing steadily as the rollout of Cerner’s EHR platform at the DoD and VA commence, and incremental services to existing customers and international expansion add to the muted growth of the mature domestic EHR market. Non-GAAP margins are already solid, and we believe they are likely to expand further with the active rationalization of services with lower profitability and cost-saving initiatives. As of fiscal 2020, the company had over $1 billion in cash, equivalents, and investments, offset by roughly $1.3 billion in debt, resulting in a net debt position of approximately $300 million. Cerner initiated a quarterly dividend of $0.18 per share in mid-2019, which it subsequently raised to $0.22 per share at the end of 2020.

Bulls Say

  • Cerner has been able to maintain a leading market share in the acute care EHR market due to high switching costs. 
  • Despite the maturity of the domestic EHR market, Cerner’s federal contracts provide modest revenue growth through 2028. 
  • Cerner’s leading EHR market share gives the company valuable RWE that can be packaged and sold to pharma companies, payers, and providers in a data offering.

Company Profile

Cerner is a leading supplier of healthcare information technology solutions and tech-enabled services. The company is a long-standing market leader in the electronic health record industry, and along with rival Epic Systems corners a majority of the market for acute care EHR within health systems. The company is guided by the mission of the founding partners to provide seamless medical records across all healthcare providers to improve outcomes. Beyond medical records, the company offers a wide range of technology that supports the clinical, financial, and operational needs of healthcare facilities

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

PerkinElmer renewed strategic focus on diagnostic product mix and life sciences business will drive growth

Business Strategy and Outlook:

With myriad acquisitions in the past few years, PerkinElmer has been in a constant state of evolution since 2016 when the company transitioned into two new business segments, Diagnostics and Discovery and Analytical Solutions (DAS), with life sciences being the most attractive segment of the DAS business.

The Diagnostics business makes up slightly over half of the company’s total revenue and is led by the immunodiagnostics business, followed by reproductive health, and finally applied genomics. The immunodiagnostics business is characterized by Euroimmun, the global leader in autoimmune testing, allergy testing, and infectious disease. The recent acquisition of Immunodiagnostics (IDS) and Oxford Immunotec has only extended product offering to PerkinElmer’s customer base. Although declining birth rates globally have negatively impacted growth in the reproductive health segment, the firm still holds leading positions in newborn testing worldwide. The U.S. market is characterized by stable profits and pricing power with opportunity to provide additional screenings for rare diseases. The firm should capitalize on the growth opportunities in newborn screening in China and India where there is opportunity to provide additional screening and expand reach. Finally, the applied genomics segment should see continued growth as the cost of sequencing goes down, increasing sequencing by genetic labs and a need for PerkinElmer products.

Financial Strength:

The fair value of the Perkin Elmer has increased to recognize recently generated cash flows, the company’s strong near- and long-term outlook including margin expansion (after a postpandemic reset), successful product mix shifts to diagnostics and life sciences, and recent acquisitions like BioLegend, IDS, and Oxford.

PerkinElmer carries a manageable debt load, but its history of consistent acquisitions tended to keep financial leverage elevated. At the end of September 2021, PerkinElmer held $0.5 billion in cash and $5.1 billion in debt with a leverage at the end of the quarter at 2.2 times net debt-to-EBITDA. Of said debt, $2.8 billion of new debt was added to fund the $5 billion BioLegend acquisition. Acquisitions remain the top capital allocation priority for excess cash flow. PerkinElmer does not tend to engage in significant share buybacks. The company pays a small quarterly dividend, amounting to about $31 million in 2020, and has not provided any recent updates to its payout ratio.

Bulls Say:

  • PerkinElmer possesses a well-entrenched niche in newborn screening and stands to benefit from growing menu expansion globally and expanding to emerging markets, particularly China and India. 
  • The Biolegend acquisition will accelerate new product growth in the Diagnostics and DAS business segments with high growth areas, including biologics, cell and gene therapy, and single cell analytics. 
  • Euroimmun is positioned to be a strong growth driver, especially since it is the largest player in autoimmune diagnostics and has more product offerings from the recent IDS and Oxford acquisitions.

Company Profile:

PerkinElmer provides instruments, tests, services, and software solutions to the pharmaceutical, biomedical, chemical, environmental, and general industrial markets. The company operates in two segments: diagnostics, which includes immunodiagnostics, reproductive health, and applied genomics, and discovery and analytical solutions, composed of life science, industrial, environmental, and food applications. PerkinElmer offers products and services ranging from genetic screening and environmental analytical tools to informatics and enterprise software.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.