Tag: US Market
The team still intends to balance a higher-yielding corporate-bond stake with securitized fare and U.S. Treasuries, yet the strategy’s high-yield sleeve is now capped at 5% of assets (compared with a previous sleeve of 10% to 20% of assets). Corporate credit still typically accounts for 60% to 65% of assets and drives returns, while high quality securitized fare (20% to 25%), U.S. Treasuries (10% to 15%), and cash are intended to provide stability. This stake stood at 35% of assets as of March 31, 2021, which was 17% larger than the typical intermediate core bond peer. This translates to more credit risk relative to peers.
- A new shift to higher quality is untested.
The managers employ a consistent, conventional investment process overseen by an adequately sized team. The strategy earns an Average Process Pillar rating. The team emphasizes corporate credit relative to Treasuries and securitized assets, with bottom-up analysis driving credit selection. Manager John Friedl and his team search for credits they believe will provide the best opportunities over a full market cycle; they have a stated preference for smaller offerings in energy, healthcare, utilities, and REITs buoyed by larger names in the financial sector. Prior to 2020, the team invested heavily in high-yield debt (usually 10% to 20% of assets). Now, the team is limited to a 5% sleeve in high yield after a mandate change in January 2020. The team does not make interest-rate calls and historically has kept the strategy’s duration within 15% of the Bloomberg Barclays U.S. Aggregate Bond Index.
- Still a barbell construct with heavy credit exposure.
The strategy’s barbell structure is composed of income-generating corporate bonds on one end and high-quality securitized fare and Treasuries for ballast on the other. As of March 2021, the strategy’s corporate credit allocation sat at 57% of assets, including a BBB rated stake (35%) and BB and below (4%) that was about 17 and 3 percentage points higher, respectively, than its typical intermediate core bond category peer. The team has historically focused on oilfield services and pipelines in its energy stake (about 4%), given their resilience in the face of commodity price drops. Financials have made up a consistent overweighting relative to the benchmark (11% versus 6%), with the team focusing on the debt of large banks with strong balance sheets. The ballast end of the barbell, composed of agency mortgage-backed security pass through (20%), U.S. Treasuries (15%), and asset backed securities (3%), has not seen major sector shifts since 2013.
(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.
Knights long-standing laser focus on network efficiency has served it well given the asset-intensive nature of trucking. Its legacy operating ratio (expenses/revenue, excluding fuel surcharges) averaged in the mid-80% range before the merger, versus an industry average that traditionally exceeds 90%. Within its legacy dry van truckload unit, Knight has long emphasized short- to medium-haul shipments (length of haul near 500 miles) and high-density lanes near its existing service centers. Regional freight is an attractive niche because shipments face less competition from intermodal and are seeing growth as shippers locate distribution centers closer to end customers.
In 2017, Knight Transportation and Swift Transportation merged. Following the transaction, Knight-Swift became the largest asset-based full-truckload carrier in the industry. Overall, we believe the merger structure was positive for previous shareholders because of meaningful cost and revenue synergy opportunities, which have proved to be within reach over the past few years.
Knight’s management has executed well in terms of applying its best-in-class operating acumen to Swift’s network. In fact, Swift’s adjusted truckload OR was roughly at parity with the Knight trucking division’s OR in first-quarter 2021. Pandemic lockdowns weighed on freight demand in early 2020, but retail shipments turned robust in the second half on strong inventory restocking, and industrial end markets are recovering off pandemic lows. Furthermore, truckload-market capacity has tightened materially and double-digit contract rate gains are likely this year.
Financial Strength
At the end of 2020, Knight-Swift held roughly $700 million of total debt on the balance sheet (including capital lease obligations, an accounts receivable securitization program, and a term loan), some of which stems from the former Swift operations. Recall truckload-industry giants Knight Transportation and Swift Transportation merged in September 2017. The firm held $157 million in cash on the balance sheet at year-end 2020, similar to 2019, with total available liquidity near $740 million. Management expects net capital expenditures of $450 million to $500 million in 2021, which we estimate will be around 10.4% of total revenue, compared with 9% in 2019.
Bull Says
- The 2017 Knight-Swift merger created meaningful opportunities for cost and revenue synergies that have thus far proved value accretive. The firm is also enjoying a demand surge from heavy retailer restocking that should last into the first half of 2021.
- The legacy Knight operations rank among the most efficient and profitable carriers in trucking, with an average operating ratio in the mid-80s prior to the merger.
- Knight has expanded its asset-light truck brokerage division at a healthy clip over the years, and these operations add incremental opportunities for long term growth.
Company Profile
Knight-Swift Transportation is by far the largest asset-based full-truckload carrier in the United States. About 80% of revenue derives from asset-based truckload shipping operations (including for-hire dry van, refrigerated, and dedicated contract). The remainder stems from truck brokerage and other asset-light logistics services (8%), as well as intermodal (8%), which uses the Class-I railroads for the underlying movement of the firm’s shipping containers and also offer drayage 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.
We are pleased with Facebook’s continuing enhancement of its platforms as it improves e-commerce functionality, increases video content, and introduces more audio content, which support the firm’s network effect moat source on the user and advertiser sides, increasing overall ad inventory. Facebook is also investing in innovation for the long-run, including Metaverse, which we view as the next stage of growth and development in virtual reality. While Metaverse is likely to require more interoperability between many platforms and may slowly erode Facebook’s walled garden, the firm’s current network effect moat source should maintain more users on the Facebook side of the Metaverse.
Management guided for significant deceleration in revenue growth during the second half of this year, which we had already modeled in. Total revenue of $29.1 billion was up 55.6% year over year due to higher ad prices and an increase in users. Facebook benefited from ongoing strong demand for direct response and the resurgence of brand advertising. Monthly active users increased 7% and 2% year over year and from last quarter, respectively, to nearly 2.9 billion. Engagement remained at around 66% as daily active users increased to 1.9 billion (also up 7% from last year and 2% sequentially).
Strong Revenue Growth
Strong revenue growth during the quarter created operating leverage for Facebook resulting in 42.5% operating margin, compared with 31.9% last year. Management expects yearover- year revenue growth during the second half to “decelerate significantly.” The firm provided a bit more color by stating that the slowdown will be modest when comparing the second quarter 2021 with the same period in 2019 (revenue up 72.2%). The firm still expects full-year operating expense between $70 billion and $73 billion and capital expenditures of $19 billion-$21 billion.
Metaverse to take hold and attract billions of users, the virtual world needs to be more interoperable, like the physical world where users can easily experience many different environments and interact with different individuals and groups. Allowing interoperability may represent a risk to the network effect of platforms like Facebook. However, in our view, given Facebook’s 2.9 billion users and strong network effect moat source, the firm’s Horizon will be a step ahead of competitors in attracting users and quickly building the virtual environments, which should attract more users, content creators, businesses, and advertisers.
Company Profile
Facebook is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe. With gross margins above 80%, Facebook operates at a 30%-plus margin.
(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.
On July 2, Xcel filed a $343 million rate increase request that we think will be one of its most important and hotly debated rate requests ever in Colorado, its largest jurisdiction. The proceedings during the next six months will test whether regulators are willing to raise customer rates to pay for Xcel’s clean energy and safety investments along with supporting Colorado law that requires Xcel to supply 100% carbon-free electricity by 2050.
Rate settlements in Xcel’s
The Colorado outcome could affect Xcel’s five-year, $24 billion investment plan and management’s 5%-7% annual earnings growth target in the near term. That difference accounts for about 15% of Xcel’s rate increase request. Rate settlements in Xcel’s three smallest jurisdictions are in line with our estimates. In New Mexico, Xcel settled for a $62 million rate increase ($88 million request) and 9.35% allowed ROE (10.35% request). In Wisconsin, Xcel settled for a $45 million combined electric and gas rate increase in 2022 and a $21 million combined rate increase in 2023 based on a 9.8% allowed ROE in 2022 and 10% allowed ROE in 2023. In North Dakota, Xcel settled for a $7 million rate increase ($13 million revised request) and 9.5% allowed ROE (10.2% request).
Company Profile
Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with one third of its electricity sales coming from renewable energy.
(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.
Our fair value increase reflects Colfax’s strong results, an improved near-term outlook, and time value of money, partially offset by the implementation of a probability-weighted change in the U.S. statutory tax rate in our model.
Colfax delivered stellar 59% year-over-year revenue growth, as sales rebounded strongly from last year’s depressed levels due to initial pressure from the coronavirus outbreak. Colfax’s revenue was also up 9% from prepandemic levels in the second quarter of 2019, with improvement in both segments. On an organic sales-per-day basis, second-quarter sales increased 44% year over year in fabrication technology and 54% year over year in the medical technology segment.
Colfax continues to grow its reconstructive business through M&A, aiming to grow the platform to $1 billion in revenue within the next five years. The company announced the acquisition of Mathys Bettlach for roughly $285 million. Mathys is a Swiss-based orthopedics company whose portfolio includes products for artificial joint replacement and synthetic bone replacement. Colfax expects the business to generate roughly $150 million in sales and $15- $20 million in EBITDA in 2022.
Company Profile
Colfax is a diversified technology firm that produces welding equipment and medical devices. Following the sale of its air and gas handling business in 2019, Colfax’s remaining portfolio is organized into two segments: fabrication technology and medical technology. Fabrication technology is a leading manufacturer of equipment and consumables used in welding, cutting, and joining applications, mostly marketed under the ESAB brand name. The medical technology segment makes medical devices, including orthopedic braces, reconstructive implants, and other products used for rehabilitation, physical therapy, and pain management. The company generated roughly $3.1 billion in revenue in 2020.
(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.
