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Global stocks Shares

Dr. Reddy’s Continues to Weather Generic Drug Erosion in Core Markets

Business Strategy and Outlook

Dr. Reddy’s Laboratories is a global pharmaceutical company based in Hyderabad, India. It manufactures and markets generic drugs and active pharmaceutical ingredients in markets across the world, but predominantly in the United States, India, and Eastern Europe. Indian pharmaceutical manufacturers have seen success over the past decade in penetrating the U.S. market, where regulatory hurdles are lower than in Western Europe. With competition on price in a commodified space, the entry of low-cost manufacturers has facilitated a deflationary price environment for generic drugs since 2015, putting substantial pressure on the margins of established manufacturers. Conversely, in India and other countries with lower generics adoption, so-called “branded” generics have seen notable success. 

Generic manufacturers have taken different approaches to combat margin pressure over the past few years. While some manufacturers have addressed competition by rationalizing their U.S. portfolio and discontinuing low-margin or unprofitable drugs, Dr. Reddy’s has remained focused on expanding its U.S. market share. While its U.S. portfolio has experienced marginally higher deflation compared with peers, its pipeline is increasingly leaning toward injectables and other complex generics that command higher margins and exhibit relatively more price stability.

Financial Strength

Overall, Dr. Reddy’s reported a relatively uneventful third quarter, with higher revenue across the board largely due to new product launches and market share gain. The company’s revenue grew 8% to INR 53.2 billion ($715 million) on a year-over-year basis driven by new product launches and higher sales volumes in the global generics business. North America generics, which represents the largest share of company revenue (35%), was positively affected during the quarter by launches for four new products but negatively impacted by erosion within in generic drug portfolio. On a sequential basis, revenue fell 8%, largely due to price erosion in generics and reduction of volume of COVID-19-related products.

As of the fourth calendar quarter of 2021, Dr. Reddy’s holds gross debt of INR 28 billion ($370 million), which is more than offset by the cash on the company’s balance sheet. With very low leverage, the company faces little liquidity risk. This compares favorably with other global generic manufacturers like Teva and Viatris, which are saddled with high leverage as a result of an aggressive acquisition strategy over the past decade. The company pays an annual dividend of $0.34 per share, which translates to a dividend yield of under 1%.

Bulls Say’s 

  • Dr. Reddy’s low-labor-cost operations based in India and vertical integration likely provide a low-cost edge. 
  • In the U.S. and Russia, Dr. Reddy’s has grown quickly in OTC generics, which is an attractive segment of the market with slightly higher barriers to entry than conventional retail pharmacy drugs. 
  • Dr. Reddy’s strong branded generic presence in emerging markets provides significant growth opportunities with less price competition than typically seen in developed markets.

Company Profile 

Headquartered in India, Dr. Reddy’s Laboratories develops and manufactures generic pharmaceutical products sold across the world. The company specializes in low-cost, easy-to-produce small-molecule generic drugs and active pharmaceutical ingredients. Its drug portfolio in recent years has included biosimilar drug launches in select emerging markets and has shifted toward injectables and more complex generic products. Geographically, the company’s sales are well dispersed across North America, India, and other emerging 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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Global stocks Shares

Demand for Construction Equipment Continue to Flourish, Benefiting Caterpillar

Business Strategy and Outlook

Caterpillar will continue to be the leader in the global heavy machinery market, providing customers an extensive product portfolio consisting of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. Caterpillar’s strong brand is underpinned by its high-quality, extremely reliable, and efficient products. Customers also value Caterpillar’s ability to lower the total cost of ownership. 

The company’s strategy focuses on employing operational excellence in its production process, expanding customer offerings, and providing value-added services to customers. Since 2014, Caterpillar has taken steps to reduce structural costs and its fixed asset base by implementing cost management initiatives and by either closing or consolidating numerous facilities, reducing its manufacturing floorspace considerably. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Caterpillar provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed. 

Caterpillar has exposure to end markets that have attractive tailwinds. On the construction side, the company will benefit from legislation aimed at increasing infrastructure spending in the U.S. The country’s road conditions are in poor condition, which has led to pent-up road construction demand. In energy, the improvement in the price of oil since COVID-19 lows will encourage exploration and production companies to increase oil and gas capital expenditures, leading to increased sales of Caterpillar’s oil-well-servicing products. That said, it is believed mining markets will have limited upside, as fixed-asset investment growth in China starts to slow, likely capping commodity price upside.

Financial Strength

Caterpillar maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBTIDA ratio was relatively low at the end of 2021, coming in at 0.2. Total outstanding debt, including both short- and long-term debt was $9.8 billion. Caterpillar’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favours organic growth and returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $8.4 billion on its industrial balance sheet. It is comforting to find comfort in Caterpillar’s ability to tap into available lines of credit to meet any short-term needs. Caterpillar has access to $10.9 billion in credit facilities for the consolidated business (including financial services), of which, $2.9 billion is available to the industrial business. Caterpillar’s focus on operational excellence in its industrial operations and improved cost base has put the company on better footing when it comes to free cash flow generation throughout the economic cycle. The company can generate $6 billion in free cash flow in our midcycle year, supporting its ability to return nearly all its free cash flow to shareholders through dividends and share repurchases. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $28 billion in 2021, along with $27 billion in finance receivables and $826 million in cash. In our view, Caterpillar enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, substantially boosting Caterpillar’s sales growth. 
  • Higher fixed-asset investment growth in China strengthens support for increased investment in mining capital expenditures, benefiting Caterpillar. 
  • A continued recovery from the temporary demand shock in oil prices will lead to increased oil and gas capital expenditures, leading to more engine, transmission, and pump sales for Caterpillar.

Company Profile 

Caterpillar is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment with over 13% market share in 2021. The company is divided into four reportable segments: construction industries, resource industries, energy and transportation, and Caterpillar Financial Services. Its products are available through a dealer network that covers the globe with over 2,000 branches maintained by 168 dealers. Caterpillar Financial Services provides retail financing for machinery and engines to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Caterpillar product sales.

(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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Funds Funds

JPMorgan U.S. Large Cap Core Plus Fund performing well with solid philosophy and consistently applied bottom-up process

Process:

The strategy rests on a solid philosophy and a clearly designed and consistently applied bottom-up process. The ability to leverage the analysts’ insights through both long and short positions makes it distinctive, though small active bets make us somewhat cautious regarding its alpha potential. The strategy aims to capture temporarily mispriced opportunities through consistent use of the analysts’ long-term valuation forecasts. Those derive from an in-house dividend-discount model that is fed by the team’s earnings, cash flow, and growth-rate estimates. The analysts rank stocks in each industry based on their estimated fair value. The managers incorporate these rankings into their stock-picking, expressing modest sector preferences based on their macroeconomic view.

Portfolio:

This benchmark-aware and highly diversified fund held 289 stock positions per end of November 2021, of which 124 are shorts. The long leg of the fund is conservatively managed, with modest bets versus the Russell 1000 Index and an active share of 55%-60%. NXP Semiconductors, Alphabet, and Amazon.com were the largest active positions in the portfolio, with an overweight of around 200 basis points. Rivian was bought in 2021 for risk-management considerations to offset the underweight of Tesla, which the managers never held. Most stocks that are sold short in the 30/30 extension carry a weight of less than 25 basis points.

People:

Growing confidence in the two experienced portfolio managers and the large and seasoned analyst team supporting them leads to an upgrade of the People Pillar rating to Above Average from Average. Susan Bao is an experienced and long-tenured manager on this strategy and is well-versed in the firm’s hallmark investment process. Bao and Luddy have also managed this 130/30 strategy together since the start of the U.S.-domiciled vehicle in 2005 and since 2007 on its offshore counterpart. Steven Lee succeeded Luddy in 2018. Lee brings close to three decades of experience, but most of it was gained as an analyst. Since 2014, he has managed JPMorgan US Research Enhanced Equity, the firm’s analyst-driven long-short strategy, which serves as the blueprint for this strategy’s 30/30 extension. Although portfolio management is collegial, Bao concentrates on consumer, financials, and healthcare, while Lee is the lead for industrial/commodities, technology, and utilities/telecom. While their collaboration is still relatively short, it has already proved fruitful, and the managers have demonstrated their ability to generate alpha from both long and short ideas provided by the analyst team.

Performance:

It has outperformed the Russell 1000 Index on a total return and alpha basis since inception and over shorter time horizons. Since Susan Bao and Steven Lee have comanaged the strategy, a more relevant period to consider, the strategy also outperformed its average peer and the index. However, results were a bit mixed during that period, with a disappointing performance in 2018 offset by successful stock-picking predominantly in 2020 and 2021. The strategy had a good year in 2021, as stock selection in the long-leg and in the market-neutral component contributed positively. Positions in semiconductors, banks, and energy helped.

Table Description automatically generated

(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg resided sibling JPM U.S. Select Equity Plus, and the considerable resources they have effectively utilised, lead to an upgrade of the strategy’s People Pillar rating to Above Average from Average. The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. Short exposure generally stands at 20%-30%, with the portfolio’s net exposure to the market kept at 100%. The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding. 

(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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Global stocks

Improved near-term outlook for Eastman; shares slightly undervalued

Business Strategy and Outlook:

Through acquisition and internal development, Eastman owns a solid portfolio of specialty chemicals. Eastman’s specialty chemicals include plastics and components used in safety glass, window tinting, and specialty plastics, which offer a solid growth profile. To increase its specialty portfolio, the firm invests roughly 4% of sales from its additives and functional products and advanced materials segments into research and development, which is in line with its specialty chemical peers. Eastman is well positioned to meet growing demand for auto window interlayers, including heads-up displays, and specialty plastics.

Eastman also holds a solid position in acetate tow, which is primarily used to make cigarette filters. The acetate tow industry has experienced falling prices due to overcapacity in China over the past several years. However, a handful of players dominates the industry, a factor that led to disciplined capacity shutdowns by all of the major companies during the industry downturn. To offset some of the decline, Eastman has been investing in capacity for other uses for its fibers, including fabrics and apparel.

Financial Strength:

Eastman is in good financial health. As of Dec. 31, 2021, Eastman carried around $4.7 billion in net debt on its balance sheet. Management reported net debt/adjusted EBITDA was a little less than 2.2 times. With strong free cash flow generation and the sale of its adhesive resins portfolio for $1 billion in cash in 2022, it is assumed that Eastman will have no trouble meeting its financial obligations, including dividends. Assuming no major acquisitions are made, the company will be able to maintain leverage ratios within management’s long-term target of 2.0-2.5 times over a number of years. However, the cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year.

Bulls Say:

  • Eastman is well positioned to meet evolving chemical demands in auto window interlayers and tires through its best-in-class patented products. 
  • Eastman’s investments in plants that use sustainable based feedstocks, including recycled chemicals and wood pulp, should benefit from growing demand for specialty plastics made from these feedstocks. 
  • As Eastman continues to develop new patented products, it should expand its specialty chemicals business, which generates higher margins and commands some degree of pricing power.

Company Profile:

Established in 1920 to produce chemicals for Eastman Kodak, Eastman Chemical has grown into a global specialty chemical with manufacturing sites around the world. The company generates the majority of its sales outside of the United States, with a strong presence in Asian markets. During the past several years, Eastman has sold noncore businesses, choosing to focus on higher-margin specialty product offerings.

(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

Celanese shares fall as company reports strong 2021 results; shares fairly valued

Business Strategy and Outlook:

Celanese is the world’s largest producer of acetic acid and its chemical derivatives, including vinyl acetate monomer and emulsions. These products are used in the company’s specialized end products and also sold externally. Celanese produces the chemical in its core acetyl chain segment (roughly 70% of 2021 EBITDA), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. It produces acetic acid from carbon monoxide and methanol, a natural gas derivative. Celanese produces its own methanol at its Clear Lake, Texas, plant, which benefits from access to low-cost U.S. natural gas. The company recently announced that it will expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower average unit production costs

The engineered materials segment (around 25% of 2021 EBITDA) produces specialty polymers for a wide variety of end markets. The automotive industry accounts for the largest portion at around one third of segment revenue; other key end markets include construction and medical devices. This segment uses acetic acid, methanol, and ethylene to produce specialty polymers. Celanese and other specialty polymer producers have benefited in recent years from automakers light weighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also benefit from increasing electric vehicle and hybrid adoption, as the company makes battery separator components.

Financial Strength:

Celanese is currently in excellent financial health. As of Dec. 31, 2021, the company had around $4 billion in debt and $0.5 billion in cash. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase its engineered materials portfolio, such as the Santoprene business from ExxonMobil, which resulted in slightly higher debt. However, it is generally expected that the company’s balance sheet and leverage ratios to remain healthy as Celanese should generate enough free cash flow to meet its financial obligations. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, Celanese should still generate positive free cash flow well in excess of dividends.

Bulls Say:

  • Celanese built out its core acetic acid production facilities at a significantly lower capital cost per ton than its competitors thanks to the scale of its facilities (1.8 million tons versus average 0.5 million tons).
  • Celanese should benefit from producing an increasing proportion of its acetic acid in the U.S. to take advantage of low-cost natural gas. 
  • The engineered materials auto business should grow more quickly than global auto production because of greater use of these products in each vehicle.

Company Profile:

Celanese is one of the world’s largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters.

(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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Funds Funds

The Hartford Capital Appreciation Fund Class C Soaring High, But a Little Safety Won’t Hurt

Process:

Lingering uncertainty about this factor-oriented fund’s potential for sleeve manager and style changes keeps its Process rating at Below Average. 

Between March 2013 and the end of 2017, Wellington Management’s investment strategy and risk group altered this fund from a wide-ranging, single-manager offering to its current form. Six managers now run separate sleeves of the portfolio. The sleeves vary in size, but each is concentrated in 50 or fewer stocks and has distinct emphases, whether value or growth, market cap, or domicile. Gregg Thomas, who took over the investment strategy and risk group in late 2018, controls the aggregate portfolio’s characteristics by adjusting the size of Thomas Simon’s sleeve, which uses a multifactor approach to complement the five other sleeves, and by shifting assets among or even swapping managers to match the Russell 3000 Index’s risk profile. The idea is to let the stock-pickers rather than size, sector, or factor bets drive performance. 

Although regular line-up changes have made it difficult to assess the strategy, there could be more stability in the future. Thomas now envisions making a manager change every three to five years, on average, down from every two years when he took over in 2018. The current roster has been stable only since late 2019, however, when Thomas changed two managers, including replacing a veteran global manager with a relatively inexperienced mid-cap value manager.

Portfolio:

A rotating cast of six sleeve managers has had collective charge of the portfolio since the late 2017 retirement of long-time sole manager Saul Pannell. His departure concluded a transition that started in March 2013 when Wellington Management’s investment strategy and risk group began apportioning 10% of the fund’s assets to different managers–a total that hit 50% by mid-2014 and stayed there until early 2017, after which the group gradually redirected Pannell’s remaining assets. 

The transition to a multimanager offering beginning in 2013 ballooned the portfolio’s number stocks to 350- plus before falling to around 200 since April 2017. The fund’s sector positioning versus the Russell 3000 Index began to moderate in 2013 and has since typically stayed within about 5 percentage points of the benchmarks. Its tech underweighting dipped to nearly 10 percentage points in November 2020 but was back to around 5 percentage points by late 2021. 

Industry over- and underweighting’s tend to stay within 4 percentage points. In late 2021, however, the portfolio was 5.6 percentage points light in tech hardware companies, entirely because it did not own Apple AAPL. The fund’s non-U.S. stock exposure neared 30% of assets in 2014 but has been in the single digits since late 2019, when a domestic-oriented mid-cap value sleeve manager replaced a sleeve manager with a global focus. 

People:

The fund earns an Above Average People rating because its subadvisor’s multimanager roster includes veterans who have built competitive records elsewhere at sibling strategies where they also invest alongside shareholders. Those managers, however, serve this fund at the behest of Wellington Management’s Gregg Thomas. He took over capital allocation and manager selection duties at year-end 2018, when he became director of the investment strategy and risk group. Between March 2013 and year-end 2017, this group changed the fund from a wide-ranging single-manager offering to a multimanager strategy. Six managers now oversee separate sleeves of the portfolio. Growth investor Stephen Mortimer, dividend-growth stickler Donald Kilbride, and contrarian Gregory Pool each run 15%-25% of assets; mid-cap specialists Philip Ruedi and Gregory Garabedian 10%-20% each; and Thomas Simon uses a multifactor approach on 5%-20% assets to round out the whole portfolio’s characteristics. Thomas monitors those characteristics and redirects assets or even swaps managers to match the Russell 3000 Index’s risk profile, leaving it up to the stock-pickers to drive outperformance. That’s led to considerable manager change here. Of the original seven sleeve managers the investment strategy and risk group installed in March 2013, only Donald Kilbride remains; and the current six-person roster has been in place only since Sept. 30, 2019.

Performance:

This multimanager offering has struggled since Wellington Management’s Gregg Thomas took over capital allocation and manager selection duties at year-end 2018. Through year-end 2021, the A shares’ 22% annualized gain lagged the Russell 3000 Index and large-blend category norm by 3.8 and 0.8 percentage points, respectively, with greater volatility than each. The fund also has not distinguished itself since its current six-person sleeve manager stabilized on Sept. 30, 2019.

The fund was competitive in 2019’s rally and in 2020’s market surge following the brief but severe coronavirus-driven bear market. Of those two calendar years, the fund fared best against peers in 2020, with a top-quartile showing. But in neither year did it beat the index. 

Results in 2021 were then relatively poor. The A shares’ 15.2% gain trailed the index by 10.5 percentage points and placed near the peer group’s bottom. It was an off year for the sleeve managers’ stock picking. Especially painful were modest positions in biotechnology stocks Chemocentryx CCXI and Allakos ALLK, whose shares both tumbled after disappointing clinical trial data. 

The fund was lacklustre during its four-plus years of transition from a single-manager offering under Saul Pannell to its current format. From March 2013 to Pannell’s 2017 retirement, its 13.1% annualized gain lagged the index by 1.5 percentage points and placed in the peer group’s bottom half.

About Funds:

The firm maintains a long-standing relationship with well-respected subadvisor Wellington Management Company. Wellington has long run the firm’s equity funds–over half of its $116 billion in fund assets–and took the reins of Hartford Fund’s fixed-income platform beginning in 2012. In 2016, Hartford Funds began offering strategic-beta exchange-traded funds with its acquisition of Lattice Strategies and partnered with U.K.-based Schroders to expand its investment platform further. The Schroders alliance added another strong subadvisor to Hartford’s lineup, with expertise in non-U.S. strategies. Hartford Funds mostly leaves day-to-day investment decisions to its well-equipped subadvisors and instead steers product development, risk oversight, and distribution for its strategies. In 2013, the firm reorganized and grew its product-management and distribution effort. Since then, leadership has added resources to its distribution and oversight teams, merged and liquidated subpar offerings, introduced new strategies, evolved its strategic partnerships with MIT AgeLab and AARP, and lowered some fees. That said, fees are still not always best in class but have improved.

(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

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Business Strategy and Outlook

PTC operates in the high-end computer-assisted design software market, but Morningstar analyst view this market as mature and don’t foresee significant top-line growth in this area. PTC’s foray into growth areas such as “Internet of Things,” AR, and midmarket CAD, on the other hand, will significantly add growth to the top line, and as per Morningstar analysts view, PTC’s revenue mix to shift significantly to these areas over the next 10 years. 

PTC’s Creo software is considered a staple among many large assembly and complex product engineer teams, whether it’s in designing the efficient transportation of fluids or cabling. The small high-end CAD market compared with the mid-market has safeguarded PTC from new entrants to some extent. However, Morningstar analysts think the firm has largely been able to maintain its claim in the CAD industry based on its high switching costs, which as per Morningstar analysts apply not only to its core CAD offering but also its product lifecycle management software and new growth areas–like its Internet of Things and AR platforms. Still, switching costs alone aren’t enough to drive hefty growth in high-end CAD.

While Morningstar analysts expect a mix shift in the future for PTC, a shift to a subscription model from a license-based model is largely in the recent past. PTC has suffered only temporary declines in revenue, margins, and returns on invested capital, as per Morningstar analysts view. As per Morningstar analyst’s perspective, the company will be able to recover well from the transition as its converted subscribers mature.

With this expected recovery, PTC’s growth areas will be able to contribute to a much greater portion of PTC’s business due to strong partnerships. While PTC’s mid-market SaaS CAD software, Onshape, is within the company’s growth segment, and Internet of Things will see better success as entering the mid-market will be a tough task. In contrast, partnering with Microsoft and Rockwell Automation, PTC’s Internet of Things platform, Thingworx, has been able to gain greater traction for its solution that is widely known as among the best of breed.

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Narrow-moat PTC kicked off its fiscal year 2022 by posting results slightly below Morningstar analyst top- and bottom-line expectations. Nonetheless, results weren’t discouraging, as PTC is accelerating its SaaS transition, which brings with it short-term growth headwinds–but worthwhile benefits in the long term. Despite slight earnings misses, Morningstar analysts are raising its fair value estimate to $105 per share from $97, in most part due to rosier long-term corporate tax rates that Morningstar analysts have baked in after updating in-house estimates. Shares remained flat after hours, trading around $113 per share, leaving PTC fairly valued.

Financial Strength 

PTC to be in good financial health. As of fiscal 2021, PTC had a balance of cash and cash equivalents of $327 million and long-term debt at $1.4 billion. This leaves PTC with a debt/EBITDA ratio of 2.77 at fiscal year-end 2021. We estimate PTC’s growing base of cash and cash equivalents will be more than enough to support mild acquisition spend going forward, at an average of $50 million per year. Despite the company’s financial health, we do not foresee the company starting to issue dividends given the relatively significant transition PTC will undergo over the next 10 years, as per Morningstar analysts view, and the consequent possibility of additional cash needs as a result.

Bulls Say

  • PTC’s revenue should be able to grow significantly as its Internet of Things solutions take off. 
  • PTC’s Onshape platform makes headway in the midmarket as Autodesk and Dassault Systèmes are slow to move to a fully SaaS-based model. 
  • PTC should be able to improve gross margins as its low-margin services business comes down as a percentage of total revenue

Company Profile

PTC offers high-end computer-assisted design (Creo) and product lifecycle management (Windchill) software as well as Internet of Things and AR industrial solutions. Founded in 1985, PTC has 28,000 customers, with revenue stemming mostly from North America (45%) and Europe (40%).

(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

Company books multiple records which results in increase of its fair value estimate

investment stockbroker risk analysis. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy and Outlook:

Stifel Financial, along with other investment banks, had relatively strong revenue in 2020 that has been sustained in 2021 as economic uncertainty led to strong trading volume. Additionally, an initial need for capital in the recession and then low interest rates and a strong stock market led to high capital-raising activity.

Stifel Financial has a long history of being an active acquirer. The company ended 2020 with a Tier 1 leverage ratio of about 12% compared with a previously targeted 10%. With several hundred million dollars of arguably excess capital, the company could make some decent-size acquisitions. Barring growth through acquisitions, as valuations may be too high for most investment banks and investment managers, the company may see some growth from a renewed commitment to its independent advisor business.

Financial Strength:

Stifel’s financial health is fairly good. At the end of 2020, the company had approximately $1.1 billion of corporate debt and over $2 billion of cash on its balance sheet. Its next large debt maturity is $500 million in 2024.The company’s total leverage is less than 8, which is fair considering the mix of its investment banking and traditional banking operations. At the end of 2020, Stifel was at its disclosed target of a 11.9% Tier 1 leverage ratio. Given that its Tier 1 leverage ratio is above management’s previously stated target of 10%, the company should resume more material share repurchases or pursue acquisitions. Stifel has a history of making opportunistic acquisitions.

Bulls Say:

  • Stifel’s string of acquisitions has increased operational scale and expertise. 
  • Stifel is an experienced acquirer and integrator. A recession could provide ample acquisition opportunities. 
  • Net interest income growth over the previous several years at the company’s bank materially expanded wealth management operating margins, and the increased size of the bank and wealth management business provides diversification with its institutional securities business.

Company Profile:

Stifel Financial is a middle-market-focused investment bank that produces more than 90% of its revenue in the United States. Approximately 60% of the company’s net revenue is derived from its global wealth management division, which supports over 2,000 financial advisors, with the remainder coming from its institutional securities business. Stifel has a history of being an active acquirer of other financial service firms.

(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.