Tag: US Market
even when omitting its poor-performing Kyndryl business to be spun off soon. As IBM nears the spinoff of its managed infrastructure business, to be known as Kyndryl, we think that the real drivers for the remaining company lie in IBM’s consulting and software businesses. While consulting revenue surpassed our expectations (and consensus’), IBM’s software revenue missed—leaving us wary of the remaining company’s performance after the spin-off.
IBM reported revenue of $17.6 billion in the quarter, marking flattish year-over-year growth. While IBM’s global business services segment was a standout, growing at 12% year over year, the rest of IBM’s businesses disappointed. The cloud & cognitive software segment grew only 3% year over year. And while global technology services, part of which will be spun off as Kyndryl, with revenue down by 5% year over year.
IBM reported operating margins of 9% in the quarter, down 310 basis points from the prior year period. Non-GAAP earnings per share for the quarter was $2.52.
It is expected that Kyndryl will continue its downward top line trajectory as mass migration of workloads to the cloud have enterprises opting for cloud vendors to manage their cloud infrastructure, rather than traditional IT services providers, like IBM. This makes the worst performance in the quarter a matter of only acceleration of such decline. For software, on the other hand, we believe it, along with consulting (known as global business services) are the main growth drivers for IBM post spinoff. . We formerly expected a stronger relation between consulting and software sales—with the former driving the latter.
We’re maintaining our fair value estimate of $125 per share for narrow-moat IBM. Shares are down 4% upon results, which has moved IBM into fair value territory. As a reminder, IBM plans to spin off shares of Kyndryl after market close on Nov. 3, so our $125 fair value estimate reflects the value of IBM’s stock pre spin-off.
Company profile
IBM looks to be a part of every aspect of an enterprise’s IT needs. The company primarily sells infrastructure services (37% of revenue), software (29% of revenue), IT services (23% of revenue) and hardware (8% of revenues). IBM operates in 175 countries and employs approximately 350,000 people. The company has a robust roster of 80,000 business partners to service 5,200 clients–which includes 95% of all Fortune 500. While IBM is a B2B company, IBM’s outward impact is substantial. For example, IBM manages 90% of all credit card transactions globally and is responsible for 50% of all wireless connections in 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.
The global cruise market has historically been underpenetrated, offering long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing tactics.
However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers slowly resume cruising after a year-plus no-sail halt, cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. On the yield side, Carnival is expected to see some pricing pressure as future cruise credits are redeemed in the year ahead, a headwind partially mitigated by a measured return of capacity. And on the cost side, higher spend to implement tighter cleanliness and health protocols could initially inflate spending. Aggravating profits will be the fact that the entire fleet will likely have staggered reintroductions, crimping profitability over the 2021-22 time frame, ceding scale benefits. For reference, as COVID-19 continues to wane, 61% of capacity (50 ships) is expected to be deployed by November.
Financial Strength:
The fair value of Carnival is USD 26.50 which has been raised by the analysts from USD 25 with a view that more than half the fleet (50 ships, 61% capacity) is expected to be deployed by the end of fiscal 2021, giving the better visibility on the return to profitability.
Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with $7.8 billion in cash and investments at the end of August 2021. This should cover the company’s cash burn rate over the ramp-up, which is set to increase from the roughly $500 million per month experienced in the first half of 2021 as ship start-up costs arise. Carnival has raised $5.9 billion in debt, $1 billion in equity, and has repriced its $2.8 billion term loan (2025), bolstering financial flexibility. Additionally, Carnival eliminated its dividend ($1.4 billion in 2019), freeing up cash to support operating expense. An additional $3 billion in current customer deposits were on the balance sheet. The company has renegotiated much of its debt, with less than $4.5 billion in short term and current maturities of long term debt coming due over the next year versus $30 billion in total debt.
Bulls Say:
- As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate if capacity limitations are repealed.
- A more efficient fleet composition (after pruning 19 ships during COVID-19) may help contain fuel spending, benefiting the cost structure to a greater degree than initially expected, once sailings fully resume.
- The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.
Company Profile:
Carnival is the largest global cruise company, set to deploy 50 ships on the seas by the end of fiscal 2021 as the COVID-19 pandemic wanes. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Assets under custody or administration grew to $43.3 trillion versus $42.6 billion in the previous quarter and $36.6 in the year-ago period, driven by market appreciation as well as new business wins.
Fee revenue grew 9% from the year-ago period with servicing fees growing 7%. We attribute the bulk of the servicing fee growth to market appreciation with the remainder from net new business partially offset by fee compression. Assets under custody or administration grew 18% to $43.3 trillion with new servicing wins contribution $1.7 trillion, a healthy number in our view. Management fees grew 10% year over year and 4% sequentially. Money market fee waivers continue to be a headwind but appear to be moderating. Charles River Development, which the firm acquired in 2018, saw annualized recurring revenue growth of 12%.
The firm continues to manage expenses well with expenses down 1% sequentially and flat year-over-year excluding notable items and foreign exchange effects. Looking ahead, we think low-single-digit expense growth is more realistic as productivity growth is balanced with the need to invest in its business and some inflationary pressures.
Given the strong business momentum and equity market tailwinds, State Street raised its full-year outlook with just one quarter left. State Street now expects fee revenue to be up 5% for the year with servicing fee growth of 7.5%-8.5%. Net interest income is expected to be in the range of $475 million-$490 million for the fourth quarter, which implies $1.90 billion-$1.91 billion for the full year. The firm’s tax rate is expected to be on the low end of the 17%-19% range.
Company Profile
State Street is a leading provider of financial services, including investment servicing, investment management, and investment research and trading. With approximately $38.8 trillion in assets under custody and administration and $3.5 trillion assets under management as of Dec. 31, 2020, State Street operates globally in more than 100 geographic markets and employs more than 38,000 worldwide
(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.
international corporate banking, and card operations. It’s truly global presence differentiates the bank from all of its U.S.-based peers. With significant revenue coming from Latin America and Asia, the bank is poised to ride the growth of these economies through the coming decade. Because of its wide geographical footprint, Citigroup should remain a bank of choice for global corporations, due to its ability to provide a variety of services across borders. Developing economies should offer an attractive combination of high margins and rapid credit growth over time, especially in comparison with the low rates and declining leverage that is expected to persist in the United States and other Western economies.
On the downside, it’s still difficult to see how some of Citigroup’s lines of businesses fit together. There isn’t any material value creation seen by having multiple retail franchises in different countries, which is the case for Citi, with material operations in the U.S., Latin America, and Asia. Unsurprisingly, the bank’s global consumer franchise has underperformed peers. Citigroup also arguably remains the most complex of the Big Four and still has operational issues to solve, which the Revlon payment fiasco and resultant regulatory scrutiny highlighted once again. Overall, the bank continues to be on a path to improved returns and efficiencies.
Financial Strength:
The fair value estimate has been increased by the analysts from $78 to $83 as it incorporates a 100% chance of a statutory tax rate of 26% and also the rate hikes starting in late 2022.
Citigroup is in sound financial health. Its common equity Tier 1 ratio stood at 11.7% as of September 2021. As of the end of 2020, the bank reports that $545 billion of its roughly $2 trillion balance sheet takes the form of high-quality liquid assets, giving it a liquidity coverage ratio of 118%, in excess of the minimum of 100%. The bank’s supplementary leverage ratio was 5.9% (excluding relief), in excess of the minimum of 5%. Citigroup’s liabilities are prudently diversified, with just over half of its assets funded by deposits and the remainder of liabilities made up of long-term debt, repurchase agreements, commercial paper, and trading liabilities. Just over $19 billion in preferred stock was outstanding as of December 2020.
Bulls Say:
- Citigroup is leveraged to the rise of Asia, Latin America, and other emerging markets, while its competitors may struggle with lacklustre loan demand in the U.S. and Western Europe.
- A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher.
- Citigroup still has room for self-help, particularly around better optimizing current operations, and room to release excess capital, both levers to improve returns.
Company Profile:
Citigroup is a global financial services company doing business in more than 100 countries and jurisdictions. Citigroup’s operations are organized into two primary segments: the global consumer banking segment, which provides basic branch banking around the world, and the institutional clients group, which provides large customers around the globe with investment banking, cash management, and other products and services.
(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 firm has long benefited from semiconductor firms around the globe transitioning from integrated device manufacturers to fables designers. The rise of fabless semiconductor firms has been sustaining the growth of foundries, which has in turn encouraged increased competition.
To prolong the excess returns enabled by leading-edge process technology, or nodes, TSMC initially focuses on logic products, mostly used on central processing units, or CPUs, and mobile chips, then focuses on more cost-conscious applications. The firm’s strategy is successful, illustrated by the fact it’s one of the two foundries still possessing leading-edge nodes when dozens of peers lagged.
The two long-term growth factors for TSMC: First, the recent consolidation of semiconductor firms is expected to create demand for integrated systems made with the most advanced nodes. Second, organic growth of AI, Internet of Things, and high-performance computing, or HPC, applications may last for decades. AI and HPC play a central role in quickly processing human and machine inputs to solve complex problems like autonomous driving and language processing. Cheaper semiconductors have made integrating sensors, controllers and motors to improve home, office and factory efficiency possible.
TSMC Q3 Profits Beat Our Expectations. Strong LongTerm Outlook Trump Near-Term Supply Chain Woes
During the third-quarter revenue was TWD 415 billion, up 11.4% from the previous quarter and in line with our forecasts. Gross and operating profit rebounded 1.2 and 2.1 percentage points respectively to 51.3% and 41.2%. We think this set of results is commendable, especially amid the market’s concerns of weak smartphone and PC outlook for the second half of 2021.
For the fourth quarter of 2021, TSMC anticipates top line to range between USD 15.4 and 15.7 billion, or 3.5-5.5% sequential growth.Gross and operating margins are guided to range between 51% and 53% and 39%-41% respectively, up 1.5 and 0.5 percentage points against third quarter.
Management confirmed a fab in Japan, subject to board approval. The fab will focus on specialty applications based on 22nm and 28nm processes, which we believe to be mainly image sensors and high-end automotive microcontrollers. Management treaded carefully regarding price hikes by only saying customers are willing to pay more for the additional value that TSMC can offer in both legacy and leading-edge processes. We are not worried about TSMC hitting physical limits for now, as its suppliers ASML and Tokyo Electron have outlined innovations to sustain performance improvements up to 2030.
Financial Strength
TSMC has maintained a net cash position for the last 10 year-ends, and together with its low cost of debt, demonstrates the success of its strategy to focus on premium products. The company has issued about TWD 97.9 billion (USD 3.5 billion) in domestic debt at less than 0.7% yield and USD 4.5 billion in overseas debt at less than 3.1% yield year to date in 2021, which is small relative to its balance sheet. We estimate TSMC to maintain a net cash position for the next five years. The annual gross margin has fluctuated between 45% and 51% for the past decade. TSMC has never stopped paying dividends since its first distribution in 2004 with only one minuscule 1% cut in 2008. The company is committed to not cutting dividends. We forecast dividends to increase to TWD 12 per share by 2024.
Bull Says
- TSMC should consistently earn higher gross margins than competitors because of its economies of scale and premium pricing justified by cutting-edge process technologies.
- TSMC wins when customers compete to offer the most advanced processing systems using the latest process technologies.
- TSMC will benefit from more semiconductor firms embracing the fabless business model.
Company Profile
Taiwan Semiconductor Manufacturing Company, or TSMC, is the world’s largest dedicated chip foundry, with over 58% market share in 2020 per Gartner. TSMC was founded in 1987 as a joint venture of Philips, the government of Taiwan, and private investors. It went public as an ADR in the U.S. in 1997. TSMC’s scale and high-quality technology allow the firm to generate solid operating margins, even in the highly competitive foundry business. Furthermore, the shift to the fabless business model has created tailwinds for TSMC. The foundry leader has an illustrious customer base, including Apple and Nvidia, that looks to apply cutting-edge process technologies to its semiconductor designs.
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.
efficient operations, and savvy acquisitions. The bank’s main stronghold is its commercial real estate operations in the northeast. M&T has a history of good underwriting and deep, on the ground relationships. M&T has also recently announced it will acquire People’s United Bank, further expanding its geographical reach in the northeast and its product offerings. We like the pricing of the deal and expected cost savings, and hope the acquisition will lead to some added organic growth in the future as well.
M&T derives about two thirds of its income from net interest income, and with the bank’s cheaper deposit base, it is more sensitive to movements in interest rates. The remaining one third of revenue comes from non banking businesses like wealth management or deposit service fees. Much of the company’s loan book is composed of commercial loans.
The bank has an especially strong position within its commercial real estate operations in the northeastern United States. M&T has one of the largest CRE exposures under our coverage, and this has come under more scrutiny as the pandemic has developed. While certain CRE assets have come under unique pressure, M&T’s underwriting remains solid, and we expect losses to be very manageable.
M&T Bank reported solid third quarter earning; the acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank
M&T Bank reported solid third-quarter earnings. The bank beat the FactSet consensus estimate of $1.64 per share with reported EPS of $1.90. This equates to a return on tangible common equity of 17.5%. M&T Bank benefitted from a provisioning benefit once again as chargeoffs remain exceptionally low and the bank released some additional reserves.
Nonperforming assets remained stable. Expenses, however, came in a bit hotter than expected, up roughly 9% year over year during the quarter. Management attributed most of this to higher incentive based compensation, which is understandable. On the positive side, fees have done quite well. Net interest income, meanwhile, was essentially in line with our expectations.
The acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank.
Key attraction of the transaction
- Unique strategic position and enhanced platform for growth: The merger will create the leading community-focused commercial bank with the scale and share to compete effectively.
- Shared commitment to local communities: Both companies have been long recognized for their community commitments and longstanding support of civic organizations.
- Compelling financial impacts: M&T expects the transaction to be immediately accretive to its tangible book value per share. It is further expected that the transaction will be 10-12% accretive to M&T’s earnings per share in 2023, reflecting estimated annual cost synergies of approximately $330 million.
Financial Strength
We think M&T is in good financial health. The bank withstood the crisis better than peers and has maintained a credit cost advantage over the current economic cycle. Deposits fund roughly three fourths of total assets. We believe the bank is adequately capitalized, with a common equity Tier 1 ratio over 10% as of September 2021.
Bull Says
- M&T’s acquisition of People’s United was at a good price and should drive additional future growth.
- A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher.
- M&T has loyal customers, and good management, and investors shouldn’t have to worry much about being burned by bad underwriting.
Company Profile
M&T Bank is one of the largest regional banks in the United States, with branches in New York, Pennsylvania, West Virginia, Virginia, Maryland, Delaware, and New Jersey. The bank was founded to serve manufacturing and trading businesses around the Erie Canal.
(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.