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Fresenius Position as Top Dialysis Service Provider does remain Symbolic and Unique

Business Strategy and Outlook

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, it is likely for the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, top-line growth for Fresenius to be toward the top of that range after a very weak 2021 and even higher earnings growth compounded annually during the next five years, as the firm wrings out more efficiencies and repurchases shares. 

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita) gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers. 

With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

Financial Strength

Fresenius maintains a manageable balance sheet, despite its high lease-related obligations and capital-allocation strategy that includes acquisitions and significant returns to stakeholders. The company receives investment-grade ratings from the three major U.S. rating agencies, which should help it access the debt markets for any necessary refinancing. As of September 2021, Fresenius owed EUR 9 billion in debt and had lease obligations around EUR 5 billion. On a net debt/EBITDA basis, leverage stood at roughly 3 times, which appears manageable and in line with the firm’s previous long-term goal of 2.5-3.0 times, which excluded lease obligations. After generating over EUR 3 billion of free cash flow in 2020 including government aid, free cash flow looks likely to decline to about EUR 1.5 billion before rising to about EUR 2.0 billion by 2026. It is not held the firm will face any significant refinancing risks during the next five years even as it continues to push cash out to stakeholders and pursue acquisitions. While acquisitions remain difficult to predict, the company pays a dividend to shareholders (EUR 0.4 billion in 2020) and makes distributions to noncontrolling interests (EUR 0.4 billion in 2020). It also repurchased EUR 0.4 billion in shares in 2020, and it is alleged more repurchases going forward. With those expected outflows to stakeholders and significant debt maturities coming due in the foreseeable future, it is supposed Fresenius may be an active debt issuer going forward.

 Bulls Say’s

  • Diversified by geography and business mix, Fresenius should be able to benefit from ongoing growth in treating ESRD patients worldwide once the pandemic recedes. 
  • Increasing at-home treatment rates could raise demand for the company’s at-home systems and boost how long patients can continue to work and stay on commercial insurance plans, which can positively affect the company’s profitability. 
  • Through its venture capital arm, Fresenius is investing in new ways to treat ESRD patients, aside from more traditional dialysis tools, which should help keep it at the forefront of this market.

Company Profile 

Fresenius Medical Care is the largest dialysis company in the world, treating about 345,000 patients from over 4,100 clinics across the globe as of September 2021. In addition to providing dialysis services, the firm is a leading supplier of dialysis products, including machines, dialyzers, and concentrates. Fresenius accounts for about 35% of the global dialysis products market and benefits from being the world’s only fully integrated dialysis business. Services account for roughly 80% of firmwide revenue, including care coordination and ancillary operations, while products account for the other roughly 20%. Products typically enjoy a higher margin, making them a strong contributor to the bottom line. 

(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

Wynn’s Macao Gaming License to Be Renewed for 10 Years, Supporting Its Regulatory Intangible Asset

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Business Strategy and Outlook

COVID-19 continues to materially affect Wynn’s Macao operations (50% of estimated 2024 EBITDA), which we view as transitory. But the Macao government continues to heavily regulate VIP play, elevating long-term operational risk. Wynn has outsize exposure to the expected long-term shift away from VIP gaming revenue toward nongaming and mass play. Still, we see an attractive long-term growth opportunity in Macao, with Wynn’s high-end iconic brand positioned to participate.

Long term, we see solid visitation and gaming growth for Macao, aided over the next several years as key infrastructure projects to alleviate the region’s congested traffic (Pac On Terminal and Hong Kong Bridge opened in 2018, the light-rail transit at the end of 2019, reclaimed land, and development of Hengqin island) continue to come on line, which should expand constrained carrying capacity, thereby driving higher visitation and spending levels. Our forecast for annual mid-single-digit visitation growth over the next decade is supported by China outbound travel that we expect will average high-single-digit annual growth over the next 10 years. On Jan. 14, the Chinese government announced its intention to renew Wynn’s Macao gaming license (the source of the company’s narrow moat) for 10 years, which along with plans to develop further with its Crystal Pavilion project stands to benefit the company with regard to the region’s growth opportunity. Still, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government. We expect upcoming developments that add attractions and improve Macao’s accessibility will improve the destination’s brand, supporting our constructive long-term view on Macao.

The Las Vegas region (50% of estimated 2024 EBITDA) doesn’t offer the long-term growth potential or regulatory barriers of Macao, so we do not believe it contributes to Wynn’s moat. Still, its Wynn Interactive sports betting and iGaming brand, Boston property Encore (opened June 2019), and Vegas project (convention centre plus room and golf renovations) are set to provide incremental growth.

Financial Strength

Wynn’s financial health is more stressed than that of peers Las Vegas Sands and MGM, but the company has taken steps to lift its liquidity profile, including suspending its dividend, cutting discretionary expenses, tapping credit facilities, and issuing debt. As a result, the company has enough liquidity to operate at near-zero revenue through 2022. Should the pandemic’s impact last longer, we expect the company’s banking partners will continue to work with Wynn, given its intact regulatory intangible advantage (the source of its narrow moat), which drives cash flow generation potential. This view is supported by narrow-moat Wynn Macau surviving through 2014-15 when its debt/EBITDA temporarily rose to around 8 times, above the 4.5-5.0 covenants in those years. Finally, we believe the Chinese government could aid Macao operators if necessary, given that the nation wants the region to become a world destination resort. Wynn entered 2020 with debt/adjusted EBITDA of 5.7 times, but the metric turned negative in 2020 and was elevated in 2021 (estimated at 15.4), as demand for leisure and travel collapsed during the this period due to the COVID-19 outbreak. As demand recovers in the next few years, we expect leverage to reach 9.9 times, 7.7 times, and 6.5 times in 2022, 2023, and 2024, respectively.

Bulls Say’s

  • Wynn is positioned to participate in the long-term growth of Macao (76% of pre-pandemic 2019 EBITDA) and has room share of 9% with the opening of its Cotai Palace property in 2016.The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital.
  • Wynn has a narrow economic moat, thanks to possessing one of only six licenses awarded to operate casinos in China.
  • A focus on the high-end luxury segment of the casino industry allows the company to generate high levels of revenue and EBITDA per gaming position in the industry

Company Profile 

Wynn Resorts operates luxury casinos and resorts. The company was founded in 2002 by Steve Wynn, the former CEO. The company operates four megaresorts: Wynn Macau and Encore in Macao and Wynn Las Vegas and Encore in Las Vegas. Cotai Palace opened in August 2016 in Macao, Encore Boston Harbour in Massachusetts opened June 2019. Additionally, we expect the company to begin construction on a new building next to its existing Macao Palace resort in 2022, which we forecast to open in 2025. The company also operates Wynn Interactive, a digital sports betting and iGaming platform. The company received 76% and 24% of its 2019 pre-pandemic EBITDA from Macao and Las Vegas, respectively

(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

BlackRock: Largest AUM, Backed by iShares Platform

Business Strategy and Outlook

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 annual revenue) from passive products. In an environment where retail-advised and institutional clients are expected to seek out providers of passive products, as well as active asset managers that have greater scale, established brands, solid long-term performance, and reasonable fees, it is apprehended that BlackRock is well-positioned. The biggest differentiators for the firm are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands, and reasonable fees. It is alleged that the iShares ETF platform as well as technology that provides risk management and product/portfolio construction tools directly to end users, which makes them stickier in the long run, should allow BlackRock to generate higher and more stable levels of organic growth than its publicly traded peers the next five years. 

With $10.010 trillion in total assets under management, or AUM, at the end of 2021, BlackRock is the largest asset managers in the world. Unlike many of its competitors, the firm is currently generating solid organic growth with its operations, with 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. This has helped the company maintain above average levels of annual organic growth despite the increased size and scale of its operations. Although it is held the secular and cyclical headwinds to make AUM growth difficult for the U.S.-based asset managers over the next five to 10 years, it is still perceived BlackRock generating at least 3%-5% average annual organic AUM growth, driven by its commitment to passive investing, ESG strategies, and geographic expansion, with slightly higher levels of revenue growth on average and stable adjusted operating margins (range-bound between 46% and 48% of revenue) during 2022-26.

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. Expecting the firm to fully repay the notes due this year, and assuming that BlackRock matches analyst’s earnings projections for 2022, the firm should enter next year with a debt/total capital ratio of less than 15%, debt/EBITDA (by our calculations) at 0.8 times, and interest coverage of more than 30 times. 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.

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Funds Funds

BlackRock Advantage International Fund K: Fund which aims to outperform the MSCI EAFE Index

BlackRock Advantage International Fund K seeks long-term capital appreciation, with a focus on risk management.Powered by innovation and technology driven investment process having exposures to international portfolio at a low cost.

Approach

The strategy aims to outperform the MSCI EAFE Index by combining bottom-up and top-down factors into a stock-selection model that uses roughly 40-60 signals that fall into three broad buckets: fundamentals, sentiment, and macro themes. Fundamental signals include factors such as management quality, valuation, and profitability; sentiment signals include analyst-, investor-, and broker-sentiment indicators; and macro signals include factors specific to industries, countries, and investment styles. The model weights the signals roughly evenly between the three buckets.

The team keeps a tight lid on the 375- to 715-stock portfolio’s tracking error (the volatility of its relative performance) by keeping its sector and industry weights within 4 percentage points of the index’s, generally. It mitigates stock-specific risk by typically keeping individual positions within 1-1.5 percentage points of the benchmark’s.

The systematic approach has a short time horizon of six to 12 months, which can lead to portfolio churn and higher trading costs. The strategy’s annual portfolio turnover has ranged from 106% to 247% during the past four years, much higher than the average foreign large-blend category peer’s 43%-51%.

Portfolio

In contrast to other foreign large-blend funds, the managers here allocate the strategy’s assets across positions that stick, deviated most at around 0.9 percentage points larger than the index’s share, as of November 2021. While the portfolio mostly invests in benchmark constituents, 5%-15% of assets are in stocks unique to the portfolio. Indeed, close to the MSCI EAFE Index’s weights. Its 1.1% stake in the world’s third-largest tobacco company, Japan Tobacco 10.1% of assets were invested across roughly 150 offbenchmark stocks such as Rexel SA RXL, Rightmove PLC RMV, and Électricité de France EDF.

The strategy typically has a bit more exposure to mid-cap stocks than does the index. As of November, the portfolio’s allocation to mid-caps stood at 15% versus the index’s 10%. As a result, the portfolio’s $41 billion average market cap was slightly below the index’s $47 billion.

Performance

The fund has earned mixed results since BlackRock’s Systematic Active Equity team took over in mid-2017. From July 1, 2017, through Dec. 31, 2021, the Institutional shares posted a 7.3% annualized return, which beat the foreign large-blend category’s 7.1% but trailed the MSCI EAFE Index’s 7.5%. Its risk-adjusted results don’t look much better. 

The fund has fared worse than the index during severe market drawdowns but has outperformed the benchmark during prolonged rallies. The strategy’s calendar 2021 results were solid: The fund’s 13.0% gain beat the average peer’s 9.8% return as well as the index’s 11.3%. The portfolio benefited from good stock selections in the financial services and industrials sectors, namely Nordea Bank and Recruit Holdings, respectively.

Top 10 Holdings

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About the fund

BlackRock Advantage International’s experienced and well-resourced research team plies a suitable quantitative approach and earns the strategy’s share classes Morningstar Analyst Ratings of Bronze or Neutral, depending on fees.

The team’s quant-driven approach has a lot of moving parts. It analyzes 40-60 signals that fall into three broad buckets–fundamentals, sentiment, and macro themes–that collectively consider both bottom-up and top-down factors. The strategy aims to outperform the MSCI EAFE Index by combining bottom-up and top-down factors into a stock-selection model that uses roughly 40-60 signals that fall into three broad buckets: fundamentals, sentiment, and macro themes. Fundamental signals include factors such as management quality, valuation, and profitability; sentiment signals include analyst-, investor-, and broker-sentiment indicators; and macro signals include factors specific to industries, countries, and investment styles. The model weights the signals roughly evenly between the three buckets. The team keeps a tight lid on the 375- to 715-stock portfolio’s tracking error (the volatility of its relative performance) by keeping its sector and industry weights within 4 percentage points of the index’s, generally. It mitigates stock-specific risk by typically keeping individual positions within 1-1.5 percentage points of the benchmark’s.

 (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

Wells Fargo: One of The Top Deposit Gatherers In USA

Business Strategy and Outlook

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve, and it’s not seen as if, this restriction coming off in 2022. Wells Fargo has years of expense savings related projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. It is also seen a multiyear journey of repositioning and investing in the firm’s existing franchises, including growing its capital markets wallet share, bringing an increased focus on cards, and revitalizing an advisory group that has lost advisors for years. It’s already started to be visible, that glimpses of the transition to offense from defence, as the bank released two new card products in 2021, the first attempt to do so that it can be thought of in years. However, it is anticipated the full transition to be a multiyear undertaking. 

Despite the bank’s issues, Wells Fargo remains one of the top deposit gatherers in the U.S., with the third most deposits in the country behind JPMorgan Chase and Bank of America. Wells Fargo has one of the largest branch footprints in the U.S., excels in the middle-market commercial space, and has a large advisory network. It is apprehended this scale and the bank’s existing mix of franchises should provide the right foundation to eventually build out a decently performing bank. Well Fargo may not reach the types of returns and efficiency that peers like JPMorgan and Bank of America have achieved, but it is foreseen for Wells Fargo to remain larger than any other regional bank and stay competitive as such. It is also gaining confidence that CEO Charlie Scharf is guiding the bank in a new and positive direction. 

With all anticipated asset sales completed (WFAM, corporate trust, international wealth, student lending), results should be less noisy. For now, the bank needs to consistently hit the expense targets it is laying out. Wells Fargo achieved them in 2021, and it is likely to do so again in 2022, achieving another year of net expense reductions while peers see expenses rise. Wells Fargo is also one of the most rate sensitive names under analysts’ coverage, which should help to offset some of the growth pressure from being unable to grow its balance sheet.

Financial Strength

It is perceived Wells Fargo is in sound financial health. Its common equity Tier 1 ratio stood at 11.4% as of December 2021. Given its history of prudent underwriting and current economic developments, it is alleged the bank arguably holds excess capital. 

As of December 2021, the bank estimates its liquidity coverage ratio was 118%, in excess of the minimum of 100%. The bank’s supplementary leverage ratio was also 6.9%, well in excess of the minimum of 5%. Wells Fargo’s liabilities are prudently diversified, with over 70% of assets funded by deposits. Roughly $20 billion in preferred stock was outstanding as of the end of last year. 

Wells had to cut its dividend during the height of the COVID-19 pandemic and is still in the process of bringing its dividend payout ratio back up. Over the long run, it is foreseen, the bank to return to a dividend payout ratio of roughly 30% through the cycle, a bit more conservative than what the bank has had in the past. 

In the meantime, as Wells Fargo produces plenty of capital, it is projected high share repurchase levels, projecting that 70% of earnings will be used for repurchases over the next several years. Barring other opportunities, buybacks should be outsized for the bank for the time being.

Bulls Say’s

  • Wells Fargo has some of the highest rate sensitivity among the big four U.S. banks, giving it an extra earnings boost as the next rate hike cycle occurs. 
  • Wells Fargo’s retail branch structure, advisory network, product offerings, and share in small and medium-size enterprises is difficult to duplicate, ensuring that the company’s competitive advantage is maintained. 
  • Wells Fargo hit its expense guidance in 2021, and the bank expects a net reduction in expenses in 2022 while peers are expected to see expenses increase. Wells should have several years left of net expense reductions.

Company Profile 

Wells Fargo is one of the largest banks in the United States, with approximately $1.9 trillion in balance sheet assets. The company is split into four primary segments: consumer banking, commercial banking, corporate and investment banking, and wealth and investment management. It is almost entirely focused on the U.S.

(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

PG&E on Path to Test California Wildfire Insurance Fund After Dixie Fire Report

Business Strategy and Outlook

PG&E emerged from bankruptcy on July 1, 2020, after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. Shareholders lost some $30 billion in settlements, fines, and costs, but PG&E exited with bondholders made whole and shareholders still in control.

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors

PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest $8 billion annually for the next five years, leading to 10% annual growth. After suspending its dividend in late 2017, PG&E should be positioned to reinstate it in 2024 based on the bankruptcy exit plan terms.

California’s core ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. California regulators are expected to support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizes its economy.

The $59 billion bankruptcy was PG&E’s second in 20 years and likely its last. The bankruptcy exits terms all but guarantee a state takeover if PG&E has any safety or operational missteps. PG&E is still under court and regulatory supervision following the 2010 San Bruno gas pipeline explosion. The  estimated fines and penalties from the San Bruno disaster and allegations of poor recordkeeping resulted in $3 billion of lost shareholder value.

Financial Strength

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did enter bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 22% and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust plans to sell its stake over time but had not sold any shares as of late 2021. It is expected that PG&E to maintain investment-grade credit ratings. Also, it is expected consolidated EBITDA/interest coverage will remain near 5 times on a normalized basis. State legislation in 2019 will help mitigate some of PG&E’s fire-related risks and support investment-grade credit ratings. Bankruptcy settlements with fire victims, insurance companies, and municipalities totalled $25.5 billion, of which about $19 billion was paid in cash upon exit. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. It is estimated that PG&E will invest up to $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should eliminate any equity needs at least through 2023. It is also estimated that PG&E’s bankruptcy exit plan restricts it from paying a dividend until late 2023. Before PG&E cut its dividend in late 2017, the anticipated 6% annual dividend growth, in line with earnings growth. In May 2016, PG&E’s board approved the first dividend increase since the 2010 San Bruno gas pipeline explosion.

Bulls Say’s

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting.
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies.
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liability.

Company Profile 

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.4 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

 (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

Normalizing Capital Markets Revenue Is a Theme for Goldman Sachs and Other Investment Banks

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Business Strategy and Outlook

Goldman Sachs is already making progress on the strategic plan that it laid out at the beginning of 2020. The company’s financial targets include a return on equity greater than 13% and a return on tangible equity greater than 14%. COVID-19 boosted revenue in 2020 and 2021 with high trading caused by economic uncertainty and companies issuing debt and equity to initially bolster capital and then later issuing debt and equity to take advantage of low interest rates and a strong stock market. Over the next five years, Morningstar analyst model Goldman Sachs achieving a normalized return on equity of around 12% and a return on tangible common equity of 13%.

Given Morningstar analyst forecast, Goldman Sachs should trade at about 1.4-times tangible book value. Its investment management business has become a priority. Assets under supervision exceeded $2.1 trillion at the end of 2020, while related investment management fees have exceeded 15% of net revenue compared with 11%-12% before 2008. Investment management is a relatively stable, higher return-on-capital business that is well suited to the current regulatory environment. Goldman has also built out a large virtual bank and had deposits of $260 billion at the end of 2020 compared with $39 billion in 2009. The deposit base and related net interest income will add more stability to the company’s revenue stream and balance sheet.

Normalizing Capital Markets Revenue Is a Theme for Goldman Sachs and Other Investment Banks

Goldman Sachs’ revenue remained relatively strong in the fourth quarter of 2021, but expenses, including compensation, seemed to be a bit higher than expected. The company reported net income to common shareholders of $3.8 billion, or $10.81 per diluted share, on $12.6 billion of net revenue. Net revenue of $12.6 billion in the fourth quarter was about 13% higher than the company’s 2020 quarterly average and 45% higher than its 2017 to 2019 quarterly average and cemented 2021 as a year of record revenue totaling $59 billion. Return on tangible equity was a very healthy 16.4% in the quarter and 24.3% for the year. With all that said, the fourth quarter’s revenue and net earnings were also the lowest of 2021 and determining a more normal level of revenue for the company will be primary theme for Goldman Sachs and other investment banks in 2022 and 2023. We don’t anticipate making a significant change to our $356 fair value estimate for narrow-moat Goldman Sachs.The recent record revenue at Goldman Sachs can roughly be broken down into two parts: more volatile capital markets-related and steadier client asset-based. The more capital markets-related revenue (such as underwriting, institutional trading, and equity investment gains) are over 70% of net revenue and contributed about $19 billion of the $23 billion of net revenue growth at the company since 2019, according to Morningstar analyst calculations. 

Bulls Say 

  • More-stable investment management and net interest income could cause investors to reassess Goldman’s earnings quality and increase their willingness to pay a premium for it. 
  • The company has a record of success with higher-volume, lower-margin businesses, and this capability could prove useful in adapting to over-the-counter derivatives reform and changes in fixed-income trading. 
  •  Several of the company’s primary U.S. and European competitors have been forced to restructure, which could give Goldman an opportunity to gain market share

Company Profile

The Goldman Sachs Group, Inc. is a leading global financial institution that delivers a broad range of financial services across investment banking, securities, investment management and consumer banking to a large and diversified client base that includes corporations, financial institutions, governments and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

 (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.