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Despite Recent Litigation Headwinds on Zantac, GSK Remains Well Positioned for Earnings Growth

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Business Strategy & Outlook: 

As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat. The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. It is expected GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade. On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and the immune system, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. It is expected this focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers. From a geographic standpoint, GSK is strategically branching out from developed markets into emerging markets. Its vaccine segment positions the firm well in these price-sensitive markets. While this strategy is likely to create some challenges, like the potential legal violations that arose in early 2013 in China, it is believed the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets. GSK’s decision to divest its consumer business will likely unlock value over the long run. GSK divested its consumer group (called Haleon) in July 2022. Given the strong valuations of consumer healthcare companies, it is expected this unit will yield a stronger valuation than what is implied within the GSK structure before the divestment.

Risk and Uncertainty: 

Like all drug companies, GSK faces risks of drug delays or non approvals from regulatory agencies, an increasingly aggressive generic industry, and competition in the pharmaceutical industry. Overall, given all the diversification the company has across its platforms offsetting the variable outcomes for drug development and competitive challenges to the firms’ leading products. GSK is not materially affected by environmental, social, and governance risks, although it is seen access to basic services (tied to drug pricing) as the biggest ESG risk that the firm needs to manage. GSK generates close to one half of total sales from U.S. prescription drug sales, so additional major pricing reforms could weigh on sales and margins. Additionally, it is assumed a more than 50% probability of GSK seeing future costs related to product governance ESG risks (such as off-label marketing or litigation related to side effects) and model base case annual legal costs at 2% of non-GAAP net income (at the midrange relative to peers based on GSK’s product portfolio having average exposure to future potential litigation). As part of these costs, litigation expenses have been factored in for the increasingly concerning Zantac litigation.

Bulls Say:

  • GSK’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • GSK faces relatively minor near-term patent losses, setting up steady long-term growth. 
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Description:

In the pharmaceutical industry, GSK ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines. GSK uses joint ventures to gain additional scale in certain markets like HIV.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Global stocks

Used-Vehicle Industry Problems Crush CarMax’s Fiscal Q3, but We See Issues as Temporary

Business Strategy & Outlook: 

CarMax’s revenue has increased at a compound annual rate of about 13% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets a 12%-19% annual growth rate for fiscal 2021-26. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, creates a narrow economic moat. Management has said repeatedly that it will give any further improvements in operating expenses back to the customer as a price decrease instead of seeking higher gross margins. This strategy is admired by professionals; CarMax’s scale allows it to price below smaller dealerships, and lowering prices should increase comparable-store sales while keeping competitors away, though some large dealers are copying CarMax’s shopping experience. The company can often make up any lost margin via its highly profitable finance arm, CarMax Auto Finance. CAF finances about 41% of unit sales. The company’s omnichannel program, which finished rolling out in the second quarter of fiscal 2021, enables consumers to shop in any combination of digital and in store that they like and should allow for fewer store openings over time. These factors should keep the company growing for many years, despite more competition from franchised dealers and online-only startups. Omnichannel is just over half of retail volume. 

Risk and Uncertainty: 

CarMax operates in the cyclical auto industry, and any downturn brings uncertainty as to the timing and extent of a recovery in demand for used vehicles. Also, nothing stops a competitor from trying to emulate CarMax; Lithia Motors’ and Asbury’s now-defunct L2 and Q Auto used-car stores are proof of that, as are AutoNation USA, Sonic’s EchoPark, and Penske’s CarShop stores. In 2013, franchise vehicle dealer Sonic announced plans to open its EchoPark standalone used-vehicle stores, which it did in 2014. Sonic wants to have a lot of stores over time and made it clear how much it admires CarMax. The industry is so fragmented that all these firms may find success, though it is thought competitors will need at least a decade to rival CarMax in size and expertise. When used-vehicle prices rise, management will likely keep the same target for gross profit dollars, which can hurt margin and cash flow as in fiscal 2022. It is thought highly of CarMax’s management and business model, so it is considered macroeconomic variables as the highest risk for the firm rather than company specific risk factors. Any major environmental, social, and governance concerns for CarMax are not viewed, provided that autonomous vehicles do not someday eliminate demand for used vehicles. It is believed that is highly unlikely, due to vehicle affordability for all Americans, and even if it occurred, it’s likely a very long way off. The company does get sued from time to time for accusations of unpaid wages or unfair labor practices, but any of these matters ever receiving a judgment that would reduce fair value estimate reduction is not seen. CarMax will need to ensure that its data security measures are ironclad as it moves into the omnichannel space with its customers sharing more personal information. Governance improvements in the past are that the board allowed the shareholder rights plan to expire in 2012 and removed the staggered board of director terms in 2013

Bulls Say:

  • CarMax has increased revenue and profitability at a remarkable rate, and it is thought that the company is positioned to gain market share in any environment. Omnichannel helps this story, as it lets consumers have maximum flexibility in their experience. 
  • In April 2022, CarMax announced aggressive growth plans to reach about $33 billion-$45 billion of revenue in fiscal 2026 and be the online leader in used-vehicle retailing. 
  • No competitors have successfully duplicated CarMax’s business model, providing the company with a considerable head-start on would-be imitators

Company Description:

CarMax sells, finances, and services used and new cars through a chain of over 230 used retail stores. It was formed in 1993 as a unit of Circuit City and spun off into an independent company in late 2002. Used-vehicle sales typically account for about 83% of revenue and wholesale about 13%, with the remaining portion composed of extended service plans and repair. In fiscal 2022, the company retail and wholesale 924,338 and 706,212 used vehicles, respectively. CarMax is the largest used-vehicle retailer in the U.S. but still estimates that it has only about 4% U.S. market share of vehicles 0-10 years old in 2021. It seeks over 5% share by the end of calendar 2025 and revenue of $33 billion-$45 billion by fiscal 2026. CarMax is based in Richmond, Virginia.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Strong Outlook for CRISPR Therapeutics’ Gene Editing Technology, $119 FVE, Shares Undervalued

Business Strategy & Outlook: 

CRISPR Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. The company’s proprietary platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR’s emerging technology has led to a new class of therapies, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations. CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. It is believed the company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available. CRISPR Therapeutics currently has no approved drugs and a largely early-stage pipeline, so awarding the company an economic moat is refrained. CRISPR Therapeutics is focused on developing and commercializing novel therapies to treat severe, genetic diseases and currently possesses a sizable, yet mostly early-stage pipeline. Its lead candidate, CTX001, is being developed in collaboration with narrow-moat Vertex Pharmaceuticals for the treatment of transfusion-dependent beta-thalassemia (TDT) and sickle cell disease (SCD). CRISPR Therapeutics and Vertex plan to file for regulatory approval by the end of 2022. The rest of CRISPR Therapeutics’ pipeline is either in early (Phase 1) or pre-clinical stages of development. While CRISPR Therapeutics does not currently have approved products, the company provides long-term investors with pure play exposure to gene editing

Risk and Uncertainty: 

There is significant uncertainty related to regulatory approvals for the company’s early-stage pipeline candidates and a range of potential outcomes. Product governance is an ESG risk for CRISPR Therapeutics, as failure to adhere to extensive regulations can lead to expensive recalls, increased regulatory scrutiny, and lawsuits from affected customers. Additionally, lawsuits related to patent rights and potential patent infringements are another risk. It is anticipated gene editing companies like CRISPR Therapeutics will operate under cross licensing agreements with the Broad Institute as many of the gene editing technology platforms are interrelated. Access to basic services is another ESG risk the company will face if its drugs receive approval since its sales will depend on reimbursements from third-party payers, such as Medicaid or Medicare, private insurers, and national healthcare systems. Attempts by governments to contain healthcare costs could result in pricing pressure and lead to reduced profit margins. 

Bulls Say:

  • Partnerships allow CRISPR Therapeutics to receive milestones and economic benefits from drug candidate progression while offsetting some of the clinical development costs. 
  • CRISPR Therapeutics’ CRISPR/Cas9 platform has the potential to develop highly efficacious and potentially curative treatments for rare, genetic diseases with high unmet needs, which will likely lead to pricing power. 
  • It is viewed the company’s pipeline as possessing strengthening intangible assets and assign it a positive moat trend

Company Description:

CRISPR Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/CRISPR-associated protein 9 (Cas9), which is a revolutionary technology for precisely altering specific sequences of genomic DNA. The company is focused on using this technology to treat genetically defined diseases. CRISPR’s most advanced pipeline candidate, CTX001, is in collaboration with Vertex Pharmaceuticals and targets sickle cell disease and transfusion-dependent beta-thalassemia, which have high unmet medical needs. The company is progressing additional gene editing programs for immuno-oncology, as well as a stem cell-derived therapy for the treatment of Type 1 diabetes.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Consumer Products Derailed Hasbro’s Holiday Season, Business Currently in Transition CRI

Business Strategy & Outlook: 

Hasbro continues to hold a leadership position in the nearly $40 billion domestic toy industry (NPD), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, factors that have been enhanced with the 2019 tie-up of Entertainment One (EOne). Additionally, production capabilities support Hasbro’s multimedia presence, as does Discovery Family, a joint venture with Discovery that brings Hasbro’s brands to television, bolstering the firm’s brand blueprint strategy. Furthermore, Hasbro has historically dominated the big-screen arena, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). It is believed Hasbro and the toy industry have a decent runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of small, strategic players that fit into Hasbro’s portfolio (most recently D&D Beyond).  Hasbro’s moat is rated as narrow, as a market leader with a differentiated niche in the entertainment space. It also has robust exposure to games through the Wizards of the Coast line, where peers have failed to erode share given the loyal history of players in the category. However, strong returns on invested capital that Hasbro can generate will continue to attract competition, which will force it to continuously innovate to maintain its leadership position, resulting in elevated development costs. However, it is not believed that investments to protect the brands will hurt cash flow potential, as cash flow rises from catalysts like strong film launches, new licences, and expense leverage (with a $250 million-$300 million cost savings initiative underway through 2025). This will allow investors to be rewarded through rising dividends (4% yield) and a share-buyback program, along with a return to 2-2.5 times forecast debt/EBITDA by the end of 2023.

Risk and Uncertainty: 

A number of risks may affect Hasbro’s enterprise value. First, customer concentration raises the risk that changes to ordering patterns could affect profits. Its top three channels for distribution (Walmart, Target, and Amazon) accounted for nearly 32% of sales in 2021. Cooperation among retailers could affect the amount of promotional spending demanded and hamper Hasbro’s margin. Additionally, the ecommerce avenue (comprising more than $1 billion in sales) remains a key channel for the distribution model. While Hasbro has risen to become a top toy seller on Amazon, a concern that remains is that as Amazon represents a larger part of the total mix of sales, it could change the profitability profile of Hasbro over time, depending on concessions the toy maker may have to offer. Over the near term, Hasbro still faces risks around COVID-19 (supply chain and production delays if closures ensue). New toy marketers can incorporate and attempt to take share from Hasbro. Although trademarks exist on Hasbro’s brands, there aren’t structural barriers to prevent a competitor from developing a new toy or capturing a licensing relationship with a partner. It is believed Hasbro is in a slightly protected position, as its sheer size allows it to allocate significant capital to marketing, a luxury likely not available to a new market entrant. This leads some licensing partners to pair up with leading players in the industry that have already proven partnership success through the performance of its existing licensing contracts. Also, while Hasbro faces some environmental, social, and governance risks, it is not expected any particular issue to be material, and as such, exposure to these concerns doesn’t influence the fair value estimate. The most likely risk stems from weak product governance, which could lead to quality and safety issues, something that is not seen as imminent in the prognosis. 

Bulls Say:

  • Opportunities exist from entertainment, bolstered by the Discovery Family network, EOne, and film tie ins, supporting demand growth.
  • Stock ownership is compelling for income investors. The firm has a 4% yield and has paid out around $1.7 billion in dividends in the past five years. The dividend payout ratio should remain around 40% over the long term as free cash flow rises
  • The firm enjoys a stable expense base and should be able to leverage operating margins to around 19% as higher margin games become a larger percentage of the total mix.

Company Description:

Hasbro is a branded play company providing children and families around the world with entertainment offerings based on a world-class brand portfolio. From toys and games to television programming, motion pictures, and a licensing program, Hasbro reaches customers by leveraging its well-known brands such as Transformers, Nerf, and Magic: The Gathering. Ownership stakes in Discovery Family, which offers programming around Hasbro brands, and owned production capabilities from Entertainment One help bolster Hasbro’s multichannel presence. The firm acquired Entertainment One in 2019, bolting on popular properties like Peppa Pig and PJ Masks, and has plans to tie up with Dungeons & Dragons Beyond in 2022, offering the firm access 10 million digital tabletop players

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Intellia Therapeutics’ Gene Editing Technology Looks Promising; FVE $85, Shares Undervalued

Business Strategy & Outlook: 

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. Intellia’s technology platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR/Cas9 has created a new class of medicines, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations. CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. Intellia is utilizing this gene knockout approach to remove unwanted proteins using its proprietary lipid nanoparticle delivery system. Intellia has leveraged its expertise in CRISPR/Cas9 gene editing to advance a pipeline of in vivo and ex vivo therapies for diseases with high unmet medical needs. It is believed that the company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available. Intellia currently has no approved drugs and a largely early stage pipeline.

Risk and Uncertainty: 

A significant uncertainty related to regulatory approvals for the company’s early-stage pipeline candidates and a range of potential outcomes. Product governance is an ESG risk for Intellia, as failure to adhere to extensive regulations can lead to expensive recalls, increased regulatory scrutiny, and lawsuits from affected customers. Additionally, lawsuits related to patent rights and potential patent infringements are another risk. It is anticipated gene editing companies like Intellia will operate under cross licensing agreements with the Broad Institute as many of the gene editing technology platforms are interrelated. Access to basic services is another ESG risk the company will face if its drugs receive approval since its sales will depend on reimbursements from third-party payers, such as Medicaid or Medicare, private insurers, and national healthcare systems. Attempts by governments to contain healthcare costs could result in pricing pressure and lead to reduced profit margins.

Bulls Say:

  • Intellia’s partnerships allow it to receive milestones and economic benefits from drug candidate progression while offsetting some of the clinical development costs. 
  • Intellia’s CRISPR/Cas9 platform has the potential to develop highly efficacious and curative treatments for rare, genetic diseases with high unmet needs, which will likely lead to pricing power if approved. 
  • The company’s pipeline is viewed as possessing strengthening intangible assets and assign it a positive moat trend.

Company Description:

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/CRISPR-associated protein 9 (Cas9), which is a revolutionary technology for precisely altering specific sequences of genomic DNA. Intellia is focused on using this technology to treat genetically defined diseases. It’s evaluating multiple gene editing approaches using in vivo and ex vivo therapies to address diseases with high unmet medical needs, including ATTR amyloidosis, hereditary angioedema, sickle cell disease, and immuno-oncology. Intellia has formed collaborations with several companies to advance its pipeline, including narrow moat Regeneron and wide-moat Novarti

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Circling Back on CIBC After Q4 Earnings; Lowering Fair Value Estimates to CAD 73/USD 54

Business Strategy & Outlook: 

Canadian Imperial Bank of Commerce is the fifth-largest bank in Canada by assets and one of six that collectively hold almost 90% of the nation’s banking deposits. CIBC is more Canadian-focused than some of its more international peers, although this is changing after the acquisition of PrivateBancorp. The bank plans to eventually have up to 25% of revenue coming from the U.S. Despite having one of the larger domestic branch networks, CIBC’s products haven’t typically had top share in Canada, though the bank had made significant strides in multiple categories for years starting in 2011, as the bank increased share in multiple categories and increased product numbers per customer. This improvement has admittedly slowed down recently. CIBC has encountered its own issues over the years, including multibillion-dollar write-downs in the aftermath of the global financial crisis. The bank had hit its stride since 2011, improving consumer satisfaction ratings, re-optimizing branches, improving internal processes, and expanding wealth operations. The bank is also seeing improved growth from its U.S. operations, which now contribute over 20% to earnings.

Risk and Uncertainty: 

Canadian banks face two primary risks: macroeconomic risks and risks related to future acquisitions. Canada has some of the highest median housing prices/annual median household income ratios in several of its major housing markets, and mortgage debt levels have consistently increased for more than a decade. While low interest rates have kept debt servicing ratios under control, this puts the economy in a riskier position as rates rise. The leverage of the Canadian consumer as a risk, as they have slowly leveraged up for more than a decade. CIBC has the largest relative exposure to the domestic real estate market in Canada; however, it is viewed as a manageable risk for the bank. While there are uncertainties related to consumer debt levels and the mortgage market, it is viewed as a threat to future growth and not an existential risk to Canada’s banking system. Further, the Canadian banking system has historically been one of the more stable systems in the world, and the system is designed to protect industry profit levels and maintain this stability and promote economic stability. From an ESG perspective, commercial banks are expected to have strong product governance. Predatory or discriminatory lending practices are examples of poor product governance, and this can affect certain banks at times. It is viewed by most product governance and social risks as manageable and incorporates a steady level of operational expenses related to compliance and litigation in some models. Outside of the rare, headline-grabbing scandals, social risks are not seen as having a material effect on valuation. Banks also lend to certain sectors which can come under more scrutiny at times, like gun manufacturers, or energy, for example. Commercial banks do not directly have a large environmental footprint and governance practices are in line with most companies. 

Bulls Say:

  • CIBC has significantly improved multiple measures of core banking performance, such as customer perception surveys, promoter scores, and products per a customer. The bank is now operating at a higher level. 
  • CIBC is more Canadian-focused than most of its peers. Its consolidated returns on tangible equity remain some of the highest in the industry.
  • The government has kept the Canadian market attractive by placing barriers to entry, protecting high returns, and the government will continue to attempt to keep the housing market under control, limiting any future hits to profitability.

Company Description:

Canadian Imperial Bank of Commerce is Canada’s fifth largest bank, operating three business segments: retail and business banking, wealth management, and capital markets. It serves approximately 11 million personal banking and business customers, primarily in Canada.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Credit Suisse has some very good, profitable, and generally asset light business

Business Strategy & Outlook

Credit Suisse’s true underlying profitability has been masked for the better part of a decade by multiple restructuring charges and the cost of running down a legacy book of unprofitable assets. The new management team at the helm of Credit Suisse hoped that it addressed all issues during 2020, but new problematic exposures continue to crop up. This suggests a deeper risk management malaise at Credit Suisse. Credit Suisse has some very good, profitable, and generally asset-light business with good long-term secular growth prospects—especially in wealth management/private banking and the Swiss universal bank. The discount that the market has imposed on the rating of Credit Suisse relative to UBS and its other peers should, however, remain in place until Credit Suisse can convince investors that it has addressed its risk management deficiencies. We believe that Credit Suisse will have to report several quarters of results free from the large non-recurring items that have historically marred its results. 

There is a strong long-term secular trend that sees the wealth of high-net-worth individuals and families growing ahead of global nominal GDP. The ultra-high net worth and family office segment, where Credit Suisse has focused most of its attention, is a particularly attractive segment. The threat of digital disintermediation is reduced and the need for bespoke solutions and strong relationship between banker and client remains. The current negative interest rate environment obscures the benefits of Credit Suisse’s very strong deposit franchise that provides it with ample surplus liquidity. Currently, this is damaging to Credit Suisse’s net interest income—it needs to invest its excess liquidity in short-term risk-free assets that currently pays no or negative interest. Credit Suisse has, however, starting passing on these costs to selected clients.

Financial Strengths

Credit Suisse has a common equity Tier 1 ratio of 14.4% currently, ahead of its own internal capital target of a 14% common equity Tier 1 ratio. This is comfortably ahead of its regulatory minimum capital requirement of 10%. However, Credit Suisse’s leveraged ratio of 4.2% is more of a constraint, with a regulatory minimum requirement of 3.5% and an internal target of 4.5%. Credit Suisse intends to pay out 25% of its earnings as a dividend and it has not announced new share buybacks. We do not believe Credit Suisse will be able to return more than this to Both Credit Suisse’s liquidity coverage ratio and its net stable funding ratio are comfortably above 100%, which indicates sound liquidity. To assess, these ratios, while helpful, do not fully capture the quality of a bank’s funding. One should also consider the structure of a bank’s funding—where the relatively lower importance of wholesale deposits in Credit Suisse’s funding mix is a clear positive. However, private banking/wealth management clients will typically be more sophisticated than the average retail banking client and therefore more likely to withdraw funds in times of stress. We therefore do not believe that private banking deposits are as sticky as general retail deposits, although they remain stickier than wholesale funding.

Bulls Say

  • Credit Suisse looks set to emulate UBS and transform its business model into a wealth manager with a complementary investment bank, which would increase profitability and reduce earnings volatility. 
  • Credit Suisse has run down a massive book of EUR 126 billion to EUR 45 billion over the past four years, incurring pretax losses of EUR 16 billion in the process. This has obscured the performance and profitability of the core business. 
  • Credit Suisse generates the bulk of its earnings in stable and low-risk private banking/wealth management and Swiss commercial banking.

Company Description

Credit Suisse runs a global wealth management business, a global investment bank and is one of the two dominant Swiss retail and commercial banks. Geographically its business is tilted toward Europe and the Asia-Pacific.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Chubb and peers are experiencing a positive trend in underlying underwriting profitability

Business Strategy & Outlook

In January 2016, ACE acquired Chubb in a deal valued at about $28 billion and assumed its name. The deal looked fairly valued and there were meaningful cost benefits involved, with management eventually exceeding its initial targets. However, from a long-term perspective, the fact that the combination created a moaty international insurer with exposure across most insurance lines for the first time, marking Chubb as potentially the most attractive long-term core holding in the space from a fundamental point of view. In 2020, the coronavirus affected the industry’s and Chubb’s results, and the company’s COVID-19 losses were roughly in line with peers’ as a percentage of premiums. However, the impact at Chubb and peers was manageable and well within the range of events that the industry has successfully absorbed in the past. The future looks relatively bright. 

Pricing momentum picked up in primary lines in 2019, and this positive trend only accelerated in 2020. More recently, pricing has started to level off, but the industry has enjoyed the highest increases it has seen since 2003. While higher pricing is necessary to some extent to offset a rise in social inflation and other claims trends, pricing increases appear to be more than sufficient to offset these factors. As a result, Chubb and peers are experiencing a positive trend in underlying underwriting profitability, and the potential for a truly hard pricing market, similar to the period that followed 9/11. In this scenario, narrow-moat and highly disciplined operators such as Chubb are positioned to earn very attractive returns. However, the industry remains well capitalized, which could put something of a lid on the magnitude and duration of any excess returns.

Financial Strengths

Equity/assets was 30% at the end of 2021, and while the company has a large amount of goodwill on its balance sheet, its balance sheet structure is reasonable and roughly in line with peers on a tangible basis. Like all property and casualty insurers, the company’s earnings and capital in any particular year could take a material hit due to catastrophes or securities market movements that affect its investment portfolio. However, the company’s insurance operations are well diversified, and it has a history of superior underwriting profits, a large catastrophe year to significantly degrade its capital position is not expected. The firm also retains a fairly conservative investment portfolio, which is concentrated in government debt, municipal bonds, and highly rated corporate securities.

Bulls Say

  • Chubb is one of the few companies with the global footprint that large corporate insurance customers demand. Its network has created a barrier to entry for potential competitors. 
  • Chubb is a large insurer with leading positions in the most moaty areas of the P&C insurance industry. 
  • Chubb’s international operations benefit from significant growth opportunities.

Company Description

ACE acquired Chubb in the first quarter of 2016 and assumed the Chubb name. The combination makes the new Chubb one of the largest domestic property and casualty insurers, with operations in 54 countries spanning commercial and personal P&C insurance, reinsurance, and life insurance.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.