Tag: US Market

Categories
Dividend Stocks Shares

Dividend of BCE Inc. has been increasing 5% each year since 2015 and is expected to be the norm through 2026

Business Strategy and Outlook

BCE has been investing heavily to upgrade its wireline network by extending fiber to the home, or FTTH, which positions the firm to take share over its footprint. BCE also remains a leader in providing wireless service throughout Canada and has a formidable media business. 

BCE is the biggest Canadian broadband provider, with nearly 4 million high-speed Internet customers at the end of 2021 and a footprint that reaches three fourths of the nation’s population. Its two biggest competitors, cable companies Rogers (in Ontario), and Videotron (in Quebec) have about 2.5 million and 1.8 million subscribers, respectively. As a legacy phone provider, BCE has historically had an inferior network, contributing to better penetration rates for Rogers and Videotron. FTTH will meaningfully reduce operating costs, allow BCE to offer speeds comparable to or better than competitors, and charge higher prices. 

BCE is second to none in Canadian wireless and expects it to remain atop the market with Rogers and Telus. However, it is expected the wireless market to remain competitive and believe pricing will remain under pressure for the incumbents, even if the Shaw merger with Rogers is completed, due to regulatory scrutiny. Long term, average revenue per user will be stagnant, which will limit the firm’s ability to expand wireless margins. 

BCE also distinguishes itself from competitors with a high-quality and diversified media unit (Rogers is the only other Canadian telecom firm with media exposure, and BCE has superior assets). Crave is BCE’s over-the-top video-on-demand service available throughout Canada with a wealth of content, including from HBO, Showtime, and Starz. BCE is also the exclusive provider of HBO Max content in Canada and owns Canada’s top network (CTV) and top sports station (TSN). In total, BCE owns or has exclusive Canadian rights to 30 television channels, over 100 radio stations, an out-of-home advertising business, and broadcast rights for a multitude of sports teams, leagues, and even

Financial Strength

Although BCE ended 2021 with a net debt/EBITDA ratio of 3.0, above the 1.75-2.25 that it targets, and is expected the leverage ratio to stay above the firm’s target range throughout our five-year forecast, the firm’s financial position as strong and likely to improve. At the end of 2021, the company had CAD 207 million in cash, and an interest coverage ratio (adjusted EBITDA to interest expense) of over 9.0. BCE has CAD 1.5 billion to CAD 2.6 billion maturing each year between 2022 and 2025, but it is not anticipated it will have difficulty rolling the obligations over. BCE also had about 3.5 billion of available liquidity at the end of 2021 thanks to its committed credit facility. Higher debt levels in recent years are attributable to acquisitions (the biggest of which was the acquisition of a portion of MTS’ business for close to CAD 1.5 billion in cash), spectrum purchases, its fiber-to-the-home network buildout, and cash needs for pension funding. BCE will continually participate in spectrum auctions, it is not foreseen any upcoming auctions that will be as big as 2021’s 3500 MHz auction, where BCE spent CAD 2 billion. It is also expected capital spending to come down significantly after 2022, as the firm passes the accelerated portion of its fiber buildout, and any big mergers or pension contributions is not expected, as the company has eliminated its pension deficit. These should result in higher free cash flow that can go toward paying down debt. The company has sufficient flexibility should opportunities arise. BCE has increased its dividend by at least 5% each year since having to cut it during the financial crisis in 2008. The increase has been right at 5% each year since 2015, and is expected to be the norm through 2026. 

Bulls Say’s

  • The immense network improvement that will result from BCE’s fiber-to-the-home buildout will lead to wireline share gains and margin improvement. 
  • With the Canadian wireless market far less penetration than the U.S. and Europe, a long growth runway exists. As an industry leader, BCE is well positioned to take advantage. 
  • BCE’s fiber-to-the-home buildout leaves it well positioned for a transition to 5G, which will require significant fiber capacity.

Company Profile 

BCE is both a wireless and Internet service provider, offering wireless, broadband, television, and landline phone services in Canada. It is one of the big three national wireless carriers, with its roughly 10 million customers constituting about 30% of the market. It is also the ILEC (incumbent local exchange carrier–the legacy telephone provider) throughout much of the eastern half of Canada, including in the most populous Canadian provinces–Ontario and Quebec. Additionally, BCE has a media segment, which holds television, radio, and digital media assets. BCE licenses the Canadian rights to movie channels including HBO, Showtime, and Starz. In 2021, the wireline segment accounted for 54% of total EBITDA, while wireless composed 39%, and media provided the remainder.

(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
Global stocks

Raising FMC’s Fair Value Estimate to $135 on Improved Outlook; Shares Slightly Undervalued

Business Strategy and Outlook

FMC is a pure play crop chemicals producer. The company is one of the five largest patented crop protection companies globally. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding its portfolio of crop chemicals. In late 2017, FMC acquired DuPont’s divested crop chemicals portfolio, which included blockbuster insecticide Rynaxypyr. At the same time, the company divested non-crop chemicals businesses. FMC is fairly balanced from a geographical standpoint among North America; Latin America; Asia; and Europe, the Middle East, and Africa. Latin America is the largest region, contributing over 30% of revenue, while the remaining regions typically account for 20% to 25% each. The company is also balanced from a crop exposure standpoint, with soybeans being the largest at nearly 20% of total revenue.

As emerging-market food consumption rises, demand for patented crop chemicals should rise to facilitate yield improvements. FMC’s pipeline of new premium products should generate sales growth above the general crop chemical industry. Both acquisitions greatly enhanced FMC’s research and development pipeline, which should allow the company to continue producing new crop chemicals as older products roll off patent. The company plans to launch 10 new molecules over the next decade that feature new modes of action. FMC also plans to launch new biologicals, or environmentally friendly pesticides. These new products should help farmers fight resistant pests, which are increasingly rendering older crop chemicals ineffective and require new crop chemicals.

Financial Strength

FMC is in good financial health. FMC’s leverage ratios fluctuate throughout the year as the company is subject to seasonality. However, unless the firm makes a transformative acquisition, It is expected that leverage ratios will generally remain healthy. With no large planned capital additions, the company should maintain its financial health and should be able to meet all its financial requirements, including dividends, going forward. FMC reported solid fourth-quarter results as adjusted EBITDA was up 30% year on year versus the prior-year quarter driven by higher volumes, a mix shift toward premium products, and increased prices.

On a qualitative basis, the results were in line with our thesis that FMC will continue to benefit from an increased proportion of new premium products that will drive revenue growth and margin expansion. FMC shares rallied on the company’s strong results and solid guidance for further profit growth in 2022. At current prices, we view shares as slightly undervalued, with the stock trading slightly below our updated fair value estimate but in 3-star territory. A major driver of our improved outlook comes from FMC’s growth of its Biologicals portfolio. Biologicals are pesticides, fertilizers, and other plant health inputs that are made from living or naturally occurring materials, versus traditional synthetic crop chemicals.

Bulls Say’s

  • FMC has transformed its portfolio to focus on crop chemicals, which should see strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.
  • FMC has a large presence in Brazil, one of the few places with meaningful growth potential in arable land.
  • FMC’s pipeline should allow the company to continue expanding profits as the patents expire for its two largest molecules over the next decade.

Company Profile

FMC is a pure-play crop chemical company. The company has diversified its sales to create a balanced crop chemical portfolio across geographies and crop exposure. Through acquisitions, FMC is now one of the five largest patented crop chemical companies and will continue to develop new products through its research and development pipeline.

(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
Global stocks Shares

Paylocity Wins Amid the War for Talent and a Bounce-Back in Labor Markets

Business Strategy and Outlook:

Paylocity delivered strong second-quarter fiscal 2022 results underpinned by a continued normalization of employment levels and growing demand for solutions to attract, manage, and retain employees amid fierce competition for labor and dispersed workforces. Amid tight labor markets and an intensifying war for talent, businesses are seeking solutions to attract and retain employees, which is creating industry tailwinds for all payroll and human capital management (HCM) players. Additionally, a sustained shift to dispersed workforces in a post-COVID-19 world is driving demand for HCM software that helps employers connect and manage remote employees or employees across multiple jurisdictions. Paylocity is expected to have capitalized on these tailwinds over the quarter through the appeal of the platform’s unique complimentary collaboration features such as social collaboration platform Community, and video and survey functionality. As with payroll and HCM peers, it is expected to uptake of these features aimed at driving higher employee engagement will entrench the software further into the client’s business and strengthen the customer switching.

Paylocity’s target market has naturally skewed upmarket in recent years as the platform and its embedded modules have evolved. Recent acquisitions including software integration tool Cloudsnap in January 2022 and global payroll provider Blue Marble in September 2021 position Paylocity well to cater for the needs of larger clients. To reflect this shift, the company has formally raised the upper limit of its target client to 5,000 employees, from 1,000 employees previously. At this stage, analysts maintain our longterm forecasts and take the announcement as a formalization of the current client mix, instead of a strategic shift upmarket.

Financial Strength:

The revenue growth estimated at a compound annual growth rate of 23% over the five years to fiscal 2026, driven by mid-single-digit industry growth, market share gains, and mid-single-digit revenue per client growth on greater uptake and monetization of modules. Over the same period, operating margins are expected to increase to about 20% from 9% in a COVID-19-affected fiscal 2021. This uplift is anticipated to be driven by operating leverage from increased scale, greater uptake of high margin modules, higher interest on client funds, and operating efficiencies from increased digital sales and service. Paylocity’s revenue increased an impressive 34% on the prior year. Following strong sales activity during the quarter and robust client retention, analysts have marginally lifted their full-year revenue and adjusted EBITDA forecasts 1% and 4%, respectively, to align with updated near-term guidance. EPS is expected to increase 14% to $1.48 in fiscal 2022, before growing at a CAGR of 32% to fiscal 2031 as Paylocity continues to grow scale and achieves operating leverage. 

Company Profile:

Paylocity is a provider of payroll and human capital management, or HCM, solutions servicing small- to mid-size clients in the United States. The company was founded in 1997 and targets businesses with 10 to 5,000 employees and services about 28,750 clients as of fiscal 2021. Alongside core payroll services, Paylocity offers HCM solutions such as time and attendance and recruiting software, as well workplace collaboration and communication tools.

(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
Funds Funds

One of the cheapest funds tracking the broadly diversified S&P 500.

Investment Objective

Vanguard 500 Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks.

Approach

This broadly diversified portfolio is representative of the opportunity set in the large-blend category. It relies on the market’s collective wisdom to size its positions and enjoys low turnover as a result. It earns a High Process Pillar rating. The index pulls in stocks of the largest 500 U.S. companies that pass its market-cap, liquidity, and profitability screens.An index committee selects constituents from this eligible universe, allowing for more flexibility around index changes compared with more-rigid rules based indexes. The index committee aims to avoid unnecessary turnover, and it reconstitutes the index on an as-needed basis. The committee may temporarily deviate from these rules. It may not delete existing constituents that violate eligibility criteria until an addition to the index is warranted.The portfolio managers reinvest dividends as they are paid and use derivatives to equitize cash and keep pace with the benchmark. They have also historically used securities lending to generate additional income for the fund, which has helped tighten the fund’s tracking difference and make up for some of its annual expense ratio.

Portfolio 

Market-cap weighting allows the fund to harness the market’s collective view of each stock’s relative value, and it keeps turnover low. As of January 2022, stocks representing around 90% of the portfolio enjoy either a narrow or wide Morningstar Economic Moat Rating. This weighting scheme pushes the work of sizing positions onto the market. Over the long term, this has been a winning proposition. But the market has manic episodes from time to time. Over shorter time frames, investors’ enthusiasm for a particular stock or sector can make the portfolio top-heavy as it tilts toward recent winners. This has been the case with technology stocks in recent years. The portfolio’s top 10 holdings represented approximately 29% of its assets as of January 2022, higher than its historical average but much lower than the category average. Nonetheless, the fund is still representative of the opportunity set available to its actively managed peers in the large-blend category, and its sector and style characteristics are similar to the category average. As of December 2021, the fund was slightly overweight in tech stocks and made up the difference with a smaller allocation to industrials.

Performance 

From its inception in 2010 through January 2022, the exchange-traded share class outperformed the category average by 2.35 percentage points annualized. Its annual returns consistently ranked in the category’s better-performing half. The fund’s risk-adjusted returns also held up well against category peers, while its Sharpe ratio maintained a top-quartile ranking in the category over the trailing one-, three-, five-, and 10-year periods. Most of this outperformance can be attributed to its low cash drag and competitive expense ratio.

The portfolio tends to perform as well as its category peers during downturns while outperforming during market rallies. It captured 96% of the category average’s downside and 106% of its upside during the trailing 10 years ending in 2022. During the initial coronavirus-driven shock from Feb. 19 to March 23, 2020, the fund outperformed the category average by 9 basis points. It then bounced back faster than peers during the recovery phase from late March through December 2020, gaining 3.29 percentage points more than the category average. 

Tracking performance has been solid. Over the trailing one-, three-, five-, and 10-year periods ended January 2022, the fund trailed the S&P 500 by an amount approximating its annual expense ratio.

Top 10 Holdings

About the fund

The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The 500 Index Fund is a low-cost way to gain diversified exposure to the U.S. equity market. The key risk for the fund is the volatility that comes with its full exposure to the stock market. Because the 500 Index Fund is broadly diversified within the large-capitalization market, it may be considered a core equity holding in a portfolio.

(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
Global stocks Shares

Grainger Shows Strong End Market Growth to Close out 2021; but We See Shares as Still Overvalued

Business Strategy and Outlook

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $13 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 287 in 2020 and added distribution centres in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019.

Grainger continues to expand its endless assortment strategy, albeit skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. Still, Grainger has distinct competitive advantages in its traditional business, such as its long-standing relationships with large customers and its inventory management solutions, which should help it earn excess returns over the next 10 years.

Financial Strength

As of the fourth quarter of 2021, Grainger had $2.4 billion of debt outstanding, which net of $241 million of cash, represents a leverage ratio of about 1.2 times our 2022 EBITDA estimate. Grainger’s leverage ratio is relatively conservative for the industry, in our view. We believe the company certainly has room to increase leverage if needed, but management looks to be committed to keeping its net leverage ratio between 1-1.5 times. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047.Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. By our midcycle year, we forecast the company to generate over $1 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Grainger exhibits strong financial health.

Bulls Say’s

  •  With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts. 
  • As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending. 
  • Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by nearly 45% over the last 20 years.

Company Profile 

W.W. Grainger distributes 1.5 million maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves about 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.

 (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.