Tag: US Market

Powered by store openings and retail expansion in the 2010-15 period, Michael Kors became one of the largest American handbag producers in sales and units. However, over the past five years, growth has stalled due to markdowns of bags at third-party retail and declining sales at company-owned stores. While Capri has reduced distribution to limit discounting of Michael Kors bags, competition in the American handbag market is fierce and growth is limited. Moreover, the company is in the process of closing more than 100 Michael Kors stores.

Capri spent a steep $3.4 billion to purchase Jimmy Choo and Versace to boost its status as a luxury house and reduce its dependence on Michael Kors. However, we do not think these deals have changed Capri’s no-moat status as the acquired brands have more fashion risk, less profitability, and narrower appeal than Michael Kors. Capri is investing in store remodels, store openings, and expanding the set of accessories for both Jimmy Choo and Versace, but we don’t think these efforts will yield the intended gains, particularly given the severe interruption we expect from COVID-19. 

We believe Michael Kors lacks the brand strength (and ultimately pricing power) to provide an economic moat for Capri, rating poorly on the criteria that Morningstar uses to evaluate luxury brands, in contrast to others such as narrow-moat Tapestry’s Coach.

Financial Strength

Capri has debt, but it is very manageable. At the end of June 2021, it had total shortand long-term debt of $1.3 billion, but it also had more than $350 million in cash. Capri, though, has $1.3 billion in available borrowing capacity it amended its revolving and term loan credit agreement.Thus, Capri has no significant debt maturities prior to 2023. Capri has also recently modified its debt covenants, allowing a maximum leverage ratio of 3.75 times. Its debt/adjusted EBITDA was 2.3 times at the end of fiscal 2021, and we forecast this will decline to 1.2 times at the end of fiscal 2022. The firm averaged more than $500 million in annual buybacks in fiscal 2015-20. We now forecast its share repurchases at an annual average of about $630 million over the next decade. However, Capri does not pay dividends. We forecast its fiscal 2021 capital expenditures will rise to $205 million (3.9% of sales) from just $111 million (2.7% of sales) last year. Long term, we forecast Capri’s annual capital expenditures as a percentage of sales at 4.3% as management works to improve the performance at Jimmy Choo and Versace.

Bulls Say

• Michael Kors is one of the largest brands in terms of units and sales in the high-margin handbag market, and we think this positioning should aid its prospects as it looks to grow in complementary categories like footwear.
• Michael Kors has reduced its dependence on wholesale customers, which we view favorably as increased direct-to-consumer sales allow for better pricing and control over marketing.
• The acquisitions of Jimmy Choo and Versace afford diversification opportunities by bringing two luxury brands that maintain products with high price points into the fold.

Company Profile

Michael Kors, Versace, and Jimmy Choo are the brands that comprise Capri Holdings. Capri markets, distributes, and retails upscale accessories and apparel. Michael Kors, Capri’s largest and original brand, offers handbags, footwear, and apparel through more than 800 company-owned stores, third-party retailers, and e-commerce. Milan-based Versace (acquired in 2018) is known for its ready-to-wear luxury fashion. Jimmy Choo (acquired in 2017) is best known for women’s luxury footwear. John Idol has served as CEO since he was part of a group that acquired Michael Kors in 2003.

 (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.

The emerging biotech’s first commercial vaccine, for COVID-19, received its first authorization in December 2020, and its early-stage pipeline and mRNA technology platforms have caught the eye of several large pharmaceutical companies, resulting in collaborations and partnerships.

Further, the company has a burgeoning vaccine pipeline for infectious diseases. In partnership with the Bill & Melinda Gates Foundation, BioNTech is developing vaccines for HIV and tuberculosis, and the company’s COVID-19 program in partnership with Pfizer and Fosun Pharma was built off an existing partnership with Pfizer for an influenza vaccine. The COVID-19 vaccine, Comirnaty (BNT162b2), quickly progressed through human trials, culminating in authorization in the United States and Europe in December 2020. 

Company’s Future Outlook

We think the vaccine’s excellent efficacy, strong supply, and early leadership on the market all support $35 billion in Comirnaty sales in 2021 and $43 billion in 2022 (BioNTech books half of Pfizer’s gross profits, profit share from other smaller partners, and direct sales in Germany and Turkey). However, the long-term market for coronavirus vaccines is uncertain, and even if there is demand for continued vaccination in the long run, we expect the market to be competitive.

BioNTech’s COVID-19 Vaccine Success Could Help It Build a Moat on mRNA Technology

We believe BioNTech has a positive moat trend due to strengthening intangible assets in its pipeline. Over the next five years, we expect several data readouts, assets progressing through trials, and even the company’s first potential approval. Further, testing new combinations of treatments, which tends to improve efficacy in cancer treatment, will also strengthen the competitive position of BioNTech’s platforms. 

The positive results and subsequent authorization of BNT162b2, BioNTech’s vaccine against SARS-CoV-2, support our positive moat trend rating. While the long-term profit outlook for BNT162b2 remains uncertain, we believe its success demonstrates the potential of the company’s mRNA vaccine platform.

Financial Strength 

BioNTech has historically burned through cash to fund research and development of its pipeline. The company has minimal debt on its balance sheet, as it has funded discovery and development with equity issues,collaboration payments from partnerships with large pharmaceutical firms as well as a large inflow of cash from Comirnaty gross profits in 2021 and 2022 and believe this will continue for long term basis.Outside of BioNTech’s COVID-19 vaccine candidates, we think the earliest approval could arrive in 2023, which would put the company on a path toward steady profitability. Management has taken advantage of a couple of opportunities to acquire early-stage assets and expand its geographic footprint to establish a U.S. research hub at low prices. We expect the near-term focus for capital allocation to remain on its pipeline of vaccines and other therapies.

Bull Says

• BioNTech’s pipeline, which relies on expertise in mRNA and bioinformatics, will be difficult to replicate by competitors. 
• BioNTech will be able to command a premium price with its personalized cancer therapies, if successful. 
• The rapid development of COVID-19 vaccine Comirnaty bodes well for the rest of BioNTech’s pipeline and the future of its mRNA research platform.

Company Profile

BioNTech is a Germany-based biotechnology company that focuses on developing cancer therapeutics, including individualized immunotherapy, as well as vaccines for infectious diseases, including COVID-19. The company’s oncology pipeline contains several classes of drugs, including mRNA-based drugs to encode antigens, neoantigens, cytokines, and antibodies; cell therapies; bispecific antibodies; and small-molecule immunomodulators. BioNTech is partnered with several large pharmaceutical companies, including Roche, Eli Lilly, Pfizer, Sanofi, and Genmab. Comirnaty (COVID-19 vaccine) is its first commercialized product.

 (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.

power, and connection needs. Along with Equinix, we think this makes Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the pack.

Before its acquisition of Telx in 2015, Digital Realty garnered almost 95% of its total revenue from wholesale data centers and had virtually no interconnection revenue. At the end of 2020, a year in which Digital Realty also acquired Interxion, a firm with almost exclusively co-location and interconnection revenue, we estimate that annualized rent from the largest customers–those taking greater than 1 megawatt of power–made up only about half of total annualized revenue, and interconnection revenue was about 9% of the total.

In Digital Realty’s data centers, tenants can directly connect to their cloud providers or other partners, resulting in reduced latency and superior security. Even when in different Digital Realty locations, customers can bypass the public Internet to connect with other Digital Realty data centers via direct fiber connections within cities or through a software-defined network between cities. 

Steady Performance in Q3 for Digital Realty as It Continues Pursuing New Opportunities 

Digital Realty’s third-quarter results were consistent with recent performance, with a solid level of new bookings and re-leasing spreads that remain sluggish. 

The firm’s 11% year-over-year revenue growth was significantly boosted by higher utilities revenue, which simply reflects higher energy costs that Digital passes on to its customers.Rental revenue, which excludes pass-through revenue, was up 6%. Renewal spreads remain under pressure as the firm continues working off below-market contracts with its larger deployments, but this quarter’s negative 6% cash re-leasing spread was misleading, as it was the result of a 30- megawatt renewal combined with a very large new lease.

New bookings totaled $113 million in annualized revenue, with space and power bookings just over $100 million for the third straight quarter, and interconnection bookings in the $12 million-$13 million range for the fifth straight quarter-every quarter since Digital acquired Interxion. While this level of bookings is solid, it is believed that the moves the firm is making will lead them to pick up in the future. Key moves Digital made during or after the third quarter include entries into both India and Nigeria, both through joint ventures. The firm also made an investment in AtlasEdge data centers in Europe to propel its edge ambitions.

Bulls Say 

• Digital Realty’s shift toward connection and colocation exposes it to the most attractive parts of the data center business and the growth tailwinds of cloud providers and data connectivity. 
• Digital Realty’s global offering and high exposure to cloud providers gives it an advantage over competitors that operate in more narrow geographies or can only offer retail colocation space.
• Internet of Things, artificial intelligence, and other innovations that increase the public’s demand for data and connectivity require more hardware and connections in data centers.

Company Profile

Digital Realty owns and operates nearly 300 data centers worldwide. It has more than 35 million rentable square feet across five continents. Digital’s offerings range from retail colocation, where an enterprise may rent a single cabinet and rely on Digital to provide all the accommodations, to “cold shells,” where hyperscale cloud service providers can simply rent much, or all, of a barren, power-connected building. In recent years, Digital Realty has de-emphasized cold shells and now primarily provides higher-level service to tenants, which outsource their related IT needs to Digital. Digital Realty has also moved more into the co-location business, increasingly serving enterprises and facilitating network connections. Digital Realty operates as a real estate investment trust.

 (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.