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Global stocks

Cushman And Wakefield PLC To Post Healthy Growth Rates

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Business Strategy and Outlook

Cushman & Wakefield underwent a major business transformation after the combination of DTZ, Cassidy Turley and Cushman & Wakefield in 2015. The combination of these three firms expanded its geographical presence, added incremental capabilities, and gave the company adequate scale to effectively compete with its larger rivals CBRE and JLL for lucrative global contracts from multinational clients. The company has benefitted from the secular trends in the real estate services industry and has been able to grow strongly through organic growth opportunities, strategic in-fill acquisitions and by actively recruiting fee earning teams. M&A is a strategic pillar for the company in its quest to become a single source provider for the full spectrum of real estate related services on a global footprint and the company has demonstrated a track record of successful integrations and broker onboarding. 

The GAAP operating margin of the company has been negatively impacted by restructuring & integration related charges, and various efficiency related projects over the past several years. However, it is alleged that these investments were necessary for the firm and the enhanced scale and efficiency improvements from the prior initiatives will contribute positively toward margin accretion on a midcycle basis in the upcoming years. It is also anticipated non-recurring changes to normalize, resulting in positive earnings and cash flow generation that can be reinvested into the business. 

The leasing and capital market segments which make up about 38% of fee revenue provides full-service brokerage and has a higher cyclicality in revenue. By contrast, the property & facility management segment, which make up about 54% of fee revenue, represents the outsourcing business and provides a contractual stream of revenue. The valuation & other segment contributes 8% of fee revenue and provides solutions related to workplace strategy, digitization, valuation and so on. The company should be able to post healthy growth rates as it continues to take share from its smaller competitors and benefits from rising capital flows into real estate, increasing corporate outsourcing and growth in urbanization.

Financial Strength

Cushman & Wakefield has somewhat concerned financial health. The company had a total debt of $3.2 billion and net debt of $2.0 billion as of the end of third quarter in 2021. This resulted in a net debt/adjusted EBITDA ratio of about 2.8 times. Management has repeatedly stated that debt reduction is not a strategic priority, and they are comfortable with a debt/adjusted EBITDA ratio in mid 2s. Debt maturity timeline is not an issue for the company as most of the debt matures after 2024. The company is also in a comfortable position with respect to liquidity with a total liquidity of $2.2 billion consisting of cash and a revolving credit facility. This gives the firm enough flexibility to fund its operations, pursue M&A and invest in organic growth opportunities. The company has used leverage for in-fill acquisitions in the past to achieve adequate scale and capabilities to compete with its larger rivals. The company is currently using approximately 40% debt to fund its capital structure, which makes it significantly more leveraged than its larger competitors CBRE and JLL, which are currently using approximately 5.0% debt. Additionally, it has not been able to consistently generate positive operating cash flows since 2015 because of the significant investments in integration and efficiency related projects. This makes the company vulnerable to macroeconomic downturns and the cyclicality in the commercial real estate. It is likely the cash flow generation capacity of the business to improve in the upcoming years as it achieves scale and the nonrecurring expenses normalize. Although it isn’t viewed, the company’s high level of debt as an immediate liquidity concern, a prolonged downturn could call its underlying financial stability into question. While it is anticipated the firm to benefit from various secular tailwinds, it is alleged that management should err on the side of caution and refrain from taking too much incremental debt, given the cyclical nature of the industry.

Bulls Say’s

  • As one of the largest of only a few truly international one-stop shops, Cushman & Wakefield is poised to continue taking share from competitors in a growing industry that increasingly rewards scale. 
  • The trend of corporate outsourcing represents a significant opportunity and area of growth for Cushman & Wakefield. 
  • Increased scale and the recent efficiency initiatives should help the company achieve material margin accretion in the upcoming years.

Company Profile 

Cushman & Wakefield is the third largest commercial real estate services firm in the world with a global headquarters in Chicago. The firm provides various real estate-related services to owners, occupiers and investors. These include brokerage services for leasing and capital markets sales, as well as advisory services such valuation, project management, and facilities management. 

(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

Trane’s Record Backlog Positions the Narrow-Moat Firm for Another Strong Year in 2022

Business Strategy and Outlook:

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand’s climate segment was renamed Trane Technologies. It has been viewed legacy Ingersoll Rand’s climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.

Trane Technologies is a leading supplier of climate control products and services; it is a dominant player in commercial and residential heating, ventilating, and air conditioning systems (approximately 80% of sales) with its Trane and American Standard brands, as well as in transportation refrigeration (20% of sales) with its Thermo King brand. The leading HVAC manufacturers have all embraced a pure-play model. Johnson Controls sold its automotive battery business and Carrier spun off from United Technologies. Lennox is already a pure-play climate control company, although it has rid itself of some underperforming domestic and foreign refrigeration businesses.

Financial Strength:

Trane Technologies has a sound balance sheet, and its consistent free cash flow generation supports its debt service obligations, capital expenditure requirements, and dividend, while also providing financial flexibility for opportunistic share repurchases and acquisitions. Trane Technologies ended its fourth-quarter 2021 with $4.8 billion of outstanding debt and $2.2 billion of cash, which equates to a net debt/2021 adjusted EBITDA ratio of about 1.1. Besides its 4.25% senior notes ($700 million) due in 2023, the 3.75% senior notes ($545 million) due in 2028, and the 3.8% senior notes ($750 million) due in 2029, no more than $500 million is due in any one fiscal year. In 2021, Trane Technologies generated almost $1.4 billion of free cash flow.

Bulls Say:

  • Trane should benefit from secular trends in global urbanization and increased demand for energy efficient building solutions. 
  • With a company mission to address climate change and energy efficiency challenges with its products and services, Trane Technologies has become a popular ESG play. 
  • Trane Technologies generates significant aftermarket and replacement sales on its large installed base, which helps damp cyclicality.

Company Profile:

Trane Technologies manufactures and services commercial and residential HVAC systems and transportation refrigeration solutions under its prominent Trane, American Standard, and Thermo King brands. The $14 billion company generates approximately 70% of sales from equipment and 30% from parts and services. While the firm is domiciled in Ireland, North America accounts for over 70% of its revenue.

(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

Carnival’s Return to Full-Year Profitability Postponed Until 2023 as Omicron Dampens Demand

Business Strategy and Outlook:

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships at 2021 fiscal year-end. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon.

As consumers have slowly resumed cruising since the summer of 2021 (after a year-plus no-sail halt), it is suspected that the cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. On the yield side, it is expected Carnival to see some pricing pressure as future cruise credits continue to be redeemed in 2022, a headwind partially mitigated by the return of capacity via full deployment of the fleet. And on the cost side, higher spend to maintain tighter cleanliness and health protocols should keep expenses inflated. Aggravating profits will be staggered reintroduction of the fleet through the first half of 2022, crimping near-term profitability and ceding previously obtained scale benefits. As of Jan. 13, 2022, 67% of capacity (50 ships) was already deployed and around 96% of the fleet should be sailing by the end of February.

Financial Strength:

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with $9.4 billion in cash and investments at the end of November 2021. This should cover the company’s cash burn rate over the ramp-up, which has run around $500 million or more per month recently due to higher ship start-up costs. The company has raised significant levels of debt since the onset of the pandemic closing fiscal 2021 with $28.5 billion in long-term debt, up from less than $10 billion at the end of 2019. The company has less than $3 billion in short term and $2 billion in long-term debt coming due over the next year versus $33 billion in total debt. The company is focused on reducing debt service as soon as reasonably possible, as evidenced by the refinancing of over $9 billion in debt, which reduced future annual interest by around $400 million per year. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term.

Bulls Say:

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate if capacity limitations are repealed. 
  • A more efficient fleet composition (after pruning 19 ships during COVID-19) may help contain fuel spending, benefiting the cost structure to a greater degree than initially expected, once sailings fully resume. 
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Profile:

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with 98% of its capacity set to be redeployed by May 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(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

BlackRock Will Continue to Thrive in a More Difficult Environment for Active Asset Managers

Business Strategy and Outlook

With wide-moat-rated BlackRock crossing the $10 trillion mark in assets under management at the end of 2021, concerns about the firm being too large to grow have emerged again. It seems that this complaint come up when the company had just over $1 trillion in AUM back during the 2008-09 financial crisis, as well as just about every time the firm has passed another trillion-dollar marker during the past decade. While one of our key bear points on BlackRock is that the sheer size and scale of its operations would end up eventually being the biggest impediment to the firm’s longer-term growth, we don’t believe we are quite there yet.

BlackRock is at its core a passive investment shop. Through its iShares exchange-traded fund platform and institutional index fund offerings, the wide-moat firm sources two thirds of its managed assets (and close to half of its annual revenue) from passive products. And unlike many of its competitors, BlackRock is currently generating solid organic growth with its operations, primarily driven by its iShares platform, which is the leading domestic and global provider of ETFs, riding a secular trend toward passively managed products that began more than two decades ago.

Financial Strength

BlackRock has been prudent with its use of debt, with debt/total capital averaging just over 15% annually the past 10 calendar years. The company entered 2022 with $6.6 billion in long-term debt, composed of $750 million of 3.375% notes due May 2022, $1 billion of 3.5% notes due March 2024, EUR 700 million of 1.25% notes due May 2025, and $700 million of 3.2% notes due March 2027, $1 billion of 3.25% notes due April 2029, $1 billion of 2.4% notes due April 2030, and $1.25 billion of 1.9% notes due May 2031. The company also has a $4.4 billion revolving credit facility (which expires in March 2026) but had no outstanding balances at the end of September 2021.

BlackRock has historically returned the bulk of its free cash flow to shareholders via share repurchases and dividends. That said, the firm did spend $693 million on two acquisitions in 2018, $1.3 billion on eFront in 2020, and $1.1 billion for Aperio Group in early 2021, so bolt- on deals look to be part of the mix in the near term. As for share repurchases, BlackRock expects to spend $375 million per quarter on share repurchases during 2022 but will increase its allocation to buybacks if shares trade at a significant discount to intrinsic value. The company spent $1.2 billion on share repurchases during 2021. BlackRock increased its quarterly dividend 18% to $4.88 per share early in 2022.

Bulls Say’s 

  • BlackRock is the largest asset manager in the world, with $10.010 trillion in AUM at the end of 2021 and clients in more than 100 countries. 
  • Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much more stable set of assets than its peers. 
  • BlackRock’s well-diversified product mix makes it fairly agnostic to shifts among asset classes and investment strategies, limiting the impact that market swings or withdrawals from individual asset classes or investment styles can have on its AUM.

Company Profile 

BlackRock is the largest asset managers in the world, with $10.010 trillion in AUM at the end of 2021. Product mix is fairly diverse, with 53% of the firm’s managed assets in equity strategies, 28% in fixed income, 8% in multi-asset class, 8% in money market funds, and 3% in alternatives. Passive strategies account for around two thirds of long-term AUM, with the company’s iShares ETF platform maintaining a leading market share domestically and on a global basis. Product distribution is weighted more toward institutional clients, which by our calculations account for around 80% of AUM. BlackRock is also geographically diverse, with clients in more than 100 countries and more than one third of managed assets coming from investors domiciled outside the U.S. and Canada. 

(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

Strong Revenue Growth Continued in Pentair’s Fourth Quarter, but Cost Inflation Pressured Margins

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Business Strategy and Outlook

Pentair is a pure play water company manufacturing a wide range of sustainable water solutions, including energy-efficient swimming pool pumps, filtration solutions, as well as commercial and industrial pumps. Pentair’s business is organized into two segments: consumer solutions and industrial & flow technologies. Consumer solutions (58% of Pentair’s sales in 2021) concentrates on business-to-consumer sales and includes aquatic systems as well as residential and commercial filtration. 

The aquatic systems business, which offers a full line of energy-efficient equipment for residential and commercial swimming pools (including pumps, filters, heaters, and other equipment and accessories), is the crown jewel in Pentair’s portfolio, as it is both its fastest-growing and most profitable business. Industrial & flow technologies (42% of sales in 2021) focuses on business-to-business sales and consists of industrial filtration (including the food and beverage end market), residential irrigation flow, and commercial and infrastructure flow.

Financial Strength

Pentair ended the fourth quarter of 2021 with $894 million of long-term debt while holding $95 million in cash and equivalents. Debt maturities are reasonably well laddered, with only about $88 million maturing in 2022. Furthermore, the company has an additional $764 million available under its revolving credit facility. The company is bound by a debt/EBITDA covenant that requires that the ratio not exceed 3.75 times.

Narrow moat-rated Pentair reported solid fourth-quarter results, as its full-year sales of $3,765 million and adjusted EPS of $3.40 both surpassed our previous estimates ($3,709 million and $3.35, respectively). For full-year 2022, management expects sales growth of 6% to 9% and adjusted EPS in the range of $3.70 to $3.80. After rolling our model forward one year, we’ve modestly bumped our fair value estimate for Pentair to $70 from $69, mostly due to time value of money as well as reversing the implementation of a probability-weighted change in the U. S. statutory tax rate in our model.

Bulls Say’s 

  • Pentair is a pure play water company poised to benefit from demand for sustainable and energy-efficient water solutions. 
  • The pool business continues to deliver solid revenue growth, consistent market share gains, and lucrative operating margins. 
  • Recent acquisitions of Pelican Water and Aquion will bolster Pentair’s portfolio of water solutions in the residential and commercial markets.

Company Profile 

Pentair is a global leader in the water treatment industry, with 10,000 employees and a presence in 25 countries. Pentair’s business is organized into two segments: consumer solutions and industrial & flow technologies. The company offers a wide range of water solutions, including energy-efficient swimming pool equipment, filtration solutions, and commercial and industrial pumps. Pentair generated approximately $3.8 billion in revenue and $686 million in adjusted operating income in 2021.

(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

Vanguard Energy Fund Investor Shares: An energy hybrid sensible

Approach

In late 2020, Vanguard changed this strategy’s prospectus benchmark from the MSCI ACWI Energy Index to the MSCI ACWI Energy + Utilities Index (a custom benchmark that splices the MSCI ACWI Energy and MSCI ACWI Utilities indexes). The firm made the change so this strategy could capitalize on the evolution away from fossil fuels and toward renewable energy sources by investing significantly more in electric and other utilities.

Portfolio

The MSCI ACWI Energy + Utilities Index is a dynamic benchmark, and its sector weights vary based on the performance of energy stocks versus utilities stocks. Meanwhile, the MSCI ACWI Energy Index gained 36% in 2021, whereas the MSCI ACWI Utilities Index returned 10% last year. The MSCI ACWI Energy + Utilities Index’s energy stake increased to 56% as of Dec 31, 2021, as result, while its utilities position decreased to 44% (per Vanguard data).

People

Tom Levering has good credentials for picking utilities stocks as well as energy equities. For starters, he spent several years as a utilities consultant before joining Wellington in 2000, and he served as an energy and utilities analyst for roughly two decades–and led Wellington’s combined energy/utilities team for a few years–before he took charge of this fund in early 2020.

Performance

The Investor share class of this strategy recorded a 27.7% gain in 2021. That’s significantly less than the 36.0% and 44.8% returns posted by the MSCI ACWI Energy Index and the average fund in the energy equity Morningstar Category, respectively. But this strategy is an energy/utilities hybrid that began 2021 with roughly 48% of its assets in utilities stocks and ended the year with roughly 44% of assets in such names, and the MSCI ACWI Utilities Index produced a gain of just 10.1% last year. The Investor share class’ 27.7% gain is significantly better than the 23.6% return of a 50/50 MSCI ACWI Energy/Utilities custom index and better than the 23.0% return of the strategy’s custom prospectus benchmark.

(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

Norfolk Southern’s Intermodal a Key Long-term Growth Opportunity

Business Strategy and Outlook

Norfolk Southern is a well-managed enterprise, and from the start of the rail renaissance in 2004 through 2008, it posted the highest margins among U.S. Class I railroads. However, its operating ratio (expenses/revenue) deteriorated to 75.4% in 2009 and remained stuck between 69% and 73% from 2010 to 2015. This pales in comparison to progress made by peers Union Pacific and Canadian Pacific, which lack Norfolk’s exposure to Appalachian coal. However, by 2017 the rail was back on track, and it has achieved record ORs in each year since, including an adjusted 60.1% in 2021. In recent years, Norfolk renewed its commitment to pricing discipline and margin gains, particularly via precision railroading initiatives, which have driven more efficient use of locomotive assets, labor, and fuel. It is anticipated incremental gains as the firm continues to refine its PSR playbook. Of note, in late 2019, former Canadian National CEO Claude Mongeau (2010-16) joined Norfolk’s board of directors in part to help bolster the rail’s PSR efforts. 

Norfolk hauls coal directly from Illinois and Appalachian mines, and transfers Powder River Basin coal eastward from the Western rails. Thus, coal-demand headwinds and changes in environmental regulations will probably remain a factor over the long run, despite near-term improvement off lows posted in 2020. That said, coal runs in unit trains hauling exclusively coal (often using customers’ cars), thus it is believed that the rail can continue to adjust its train and crew starts to match demand conditions. 

Norfolk generated healthy volume growth near 5% on average within its intermodal franchise over the past decade. In fact, intermodal revenue surpassed coal in 2014 and is now the highest-volume segment (roughly 60% of 2020-21 carloads versus 9% for coal). Capital projects targeting capacity and velocity improvement have helped the rail capitalize on net positive truck-to-rail conversion activity over the years. Norfolk’s domestic intermodal volume may face congestion-related constraints lingering into early 2022, but it is still seen as intermodal as a key long-term growth opportunity.

Financial Strength

At year-end 2021, Norfolk Southern held an ample $839 billion of cash and equivalents compared with $13.8 billion of total debt ($12.1 billion in 2020). Historically, the rail generates steady free cash flow, despite investing heavily in its network (capital expenditure averaged 16% of revenue over the past five years). Norfolk deploys this cash on dividends and share repurchases, and occasionally borrows to boost these returns to shareholders. Share repurchases eased briefly 2020 due to pandemic risk to cash flow, but they ramped back up by year-end, and it is held, repurchase activity to remain active in the years ahead. Norfolk Southern operates with a straightforward capital structure composed mostly of senior notes. In terms of liquidity, the rail also has an $800 million revolving credit facility and a $400 million accounts receivable securitization program for short-term needs–both programs are fully available and undrawn as of third-quarter 2021. In 2021, Norfolk’s total debt/adjusted-EBITDA came in near 2.5 times (2.7 times in 2020). It is projected 2.2 times in 2022. The historical five-year average is 2.4 times. Interest coverage (EBITDA/interest expense) was a comfortable 9 times in 2021, versus 7 times in 2020. Overall, Norfolk’s balance sheet is healthy and it is anticipated the firm will have no issues servicing its debt load in the years ahead.

 Bulls Say’s

  • Norfolk Southern reignited operating ratio improvement in 2016 after stagnating over the preceding six years. With help from precision railroading, the rail reached OR records in each of the past four years.
  • Norfolk Southern runs one of the safest railroads in the U.S., as measured by injuries per hours worked; this boosts service levels and helps to keep costs down. 
  • Compared with trucking, shipping by rail is less expensive for long distances (on average) and is four times more fuel-efficient per ton-mile. These factors should help support longer-term incremental intermodal growth.

Company Profile 

Class-I railroad Norfolk Southern operates in the Eastern United States. On roughly 21,000 miles of track, the firm hauls shipments of coal, intermodal traffic, and a diverse mix of automobile, agriculture, metal, chemical, and forest products. 

(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
Dividend Stocks

L3Harris Technologies Growth Drivers: Tactical Radios Replacement Cycle, National Security Satellite Asset Decentralization, International Sales Expansion

Business Strategy and Outlook

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, was made from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies. 

Defense primes are implicitly a play on the defense budget, which is thought to be ultimately a function of a nation’s wealth and its perception of danger. The fiscal stimulus used to support the U.S. economy during the COVID-19 pandemic dramatically increased U.S. debt, and higher debt levels are usually a forward indicator of fiscal austerity. But it is alleged, a flattening, rather than declining, budgetary environment as is seen, that heightened geopolitical tensions between great powers are likely to buoy spending despite a higher debt burden. It is thought contractors will be able to continue growing despite a slowing macroenvironment due to sizable backlogs and the national defense strategy’s increased focus on modernization, and it is believed defense budget growth is likely to return to its long-term trend. 

Broadly, it is probable, with management’s thesis on the merger. Cost synergies to a large extent drove the 30-year wave of consolidation across the defense industry, which has largely generated shareholder value. Both L-3 and Harris had high revenue exposure to the defense sensors business and operated reasonably similar businesses, so it isn’t seen major execution risks in the merger. Arguably, L-3 was an ideal partner for a merger of equals because L-3 operated as a holding company and there are quite a few potential efficiencies from consolidating the firm into a more integrated firm. The three biggest firm-specific growth opportunities which are seen for L3Harris Technologies are the tactical radios replacement cycle, national security satellite asset decentralization, and international sales expansion.

Financial Strength

It is held, L3Harris is in solid financial shape. The firm increased debt by about $4.5 billion in 2015 to fund the acquisition of Exelis, a sensor-maker that was spun off from ITT and had been paying down debt since. The firm’s all-stock merger of equals with L-3 Technologies did not dramatically increase debt relative to size, and it is projected, a 2022 gross debt/EBITDA of roughly 2.0 times, which is quite manageable for a steady defense firm. The company is using the proceeds of portfolio divestitures for share repurchases, so it is anticipated EBTIDA expansion will be the driving force behind a decreasing debt/EBITDA over Analysts’ forecast period. While it is cherished the desire to compensate shareholders, it is likely that paying down debt may be more value accretive, as it would make more comfortable for analysts in decreasing their cost of equity assumption for the firm. While L3Harris has some exposure to commercial aviation (depending on definitions, roughly 5%-15% of sales), it is not anticipated the firm will be materially affected by the downturn in commercial aviation. As demand for defense products has remained resilient, it is not foreseen, for the firm needing to raise capital any time soon. That noted, L3Harris produces a substantial amount of free cash flow and is not especially indebted, so it is awaited that the company would be able to access the capital markets at minimal cost if necessary.

 Bulls Say’s

  • There is substantial potential for cost synergies from the merger with L-3 due to the decentralized organizational structure of the pre-merger entity. 
  • L3Harris is at the base of a global replacement cycle for tactical radios, which is likely to drive substantial growth. 
  • Defense prime contractors operate in an acyclical business, which could offer some protection as the U.S. is currently in a recession.

Company Profile 

L3Harris Technologies was created in 2019 from the merger of L3 Technologies and Harris, two defense contractors that provide products for the command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) market. The firm also has smaller operations serving the civil government, particularly the Federal Aviation Administration’s communication infrastructure, and produces various avionics for defense and commercial aviation.

(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

Charter Claims More Than 70% Of Internet Access Market Across Territory

Business Strategy and Outlook

It is impressive, Charter’s aggressive effort to drive customer penetration by limiting price increases, improving customer service, and expanding its offerings to appeal to a variety of preferences. It is likely the firm will successfully navigate growing competition from the phone companies, though growth will likely slow in the coming years. Charter’s aggression extends to its capital structure, where heavy share repurchases have bolster shareholder returns but have also kept debt leverage high, which will likely add volatility to the share price and could limit financial flexibility. 

Charter’s cable networks have provided a significant competitive advantage versus its primary competitors–phone companies like AT&T–as high-quality Internet access has become a staple utility. It is anticipated the firm now claims about 70% of the Internet access market across the territories it serves, up about 9 percentage points over the past five years and still marching higher. Charter has been able to upgrade its network to meet consumer demand for faster speeds at modest incremental cost while the phone companies have largely ignored their networks across big chunks of the country. Phone companies, notably AT&T, are starting to increase fiber network investment, which is projected will hit Charter at the margin–the firm has faced less fiber competition than its major cable peers. However, it is held Charter will remain a strong competitor even when faced with improved rival networks. 

Wireless technology has emerged as a potential new competitor to fixed-line Internet access. Analyst’s sceptical of wireless’ ability to meet network capacity on a wide scale for the foreseeable future. Also, it is likely dense fixed-line networks like Charter’s will play an increasingly important role in powering wireless networks in the future. Charter also faces declining demand for traditional television services, but here again it isn’t seized investors should be concerned. The amount of profit the firm earns from television service has been declining for several years. Internet access, now the bedrock of Charter’s customer relationships, delivers the vast majority of cash flow today.

Financial Strength

Charter operates under a fairly heavy debt load, with net leverage standing at 4.6 times EBITDA, by analysts’ calculation, a level that has held steady in recent quarters. Charter’s management team has run with a net leverage target of 4.0-4.5 times EBITDA over the past several years, typical of firms under the influence of Liberty and John Malone. By the firm’s calculation, net leverage was 4.4 times EBITDA at the end of 2021. This debt level is higher than its peer Comcast, which has typically targeted net leverage of around 2.0-2.5 times EBITDA. On the other hand, Charter’s leverage is more modest than Altice USA’s at roughly 5.5 times EBITDA. Charter typically directs free cash flow and the proceeds from incremental borrowing to fund share repurchases as a means of keeping leverage within its target range as EBITDA grows. The firm believes that it could reduce leverage quickly if its borrowing costs or business outlook change materially in the future. The firm generated free cash flow of about $8.7 billion in 2021 and spent $17.7 billion repurchasing shares and partnership units held by Advance/Newhouse. As a result, net debt increased to $91 billion from $82 billion at the start of the year. Importantly, free cash flow will face headwinds in the coming years as Charter begins paying federal taxes, which are likely to be meaningful starting in 2022. Charter has actively managed its debt load in recent years, trimming interest rates and pushing out maturities. About $7.5 billion of debt comes due through 2024 and its weighted average maturity stands at about 14 years at an average cost of 4.5%.

Bulls Say’s

  • Like its cable peers, Charter’s networks provide a platform to easily meet customers’ growing bandwidth demands, which should drive market share gains and strong recurring cash flow. 
  • As the second-largest U.S. cable company, Charter has the scale to efficiently adapt to changes hitting the telecom industry. The firm will be a force in the wireless industry eventually. 
  • Holding prices down to drive market share gains will pay huge dividends down the road, pushing costs lower and cementing Charter’s competitive position.

Company Profile 

Charter is the product of the 2016 merger of three cable companies, each with a decades-long history in the business: Legacy Charter, Time Warner Cable, and Bright House Networks. The firm now holds networks capable of providing television, Internet access, and phone services to roughly 54 million U.S. homes and businesses, around 40% of the country. Across this footprint, Charter serves 29 million residential and 2 million commercial customer accounts under the Spectrum brand, making it the second-largest U.S. cable company behind Comcast. The firm also owns, in whole or in part, sports and news networks, including Spectrum SportsNet (long-term local rights to Los Angeles Lakers games), SportsNet LA (Los Angeles Dodgers), SportsNet New York (New York Mets), and Spectrum News NY1 

(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.