Tag: US Market

Nevertheless, while not capable of sustaining the frothy valuation of yesteryear, the firm produced record results (largely in line with our expectations on both the top and bottom lines) that continue to inspire confidence in the sustenance of its growth profile and brand equity. We don’t plan to materially change our $48.50 fair value estimate, as time value and better-than-expected commercial execution should be offset by higher taxes, as we incorporate Morningstar’s probability-weighted house expectation of an increase in the U.S. statutory rate to 26%. Despite being well off their highs, we don’t see a sufficiently compelling margin of safety in the shares at current levels, and suggest prospective investors remain on the sidelines.

Revenue for the fiscal year came in at $1.1 billion, up 7% year over year. Anchor brand La Croix remained the preeminent driver of growth, though we suspect the firm’s energy and carbonated soft drinks brands also grew nicely. As pandemic-besieged sales channels where LaCroix is underindexed–like food-service and vending–continue to rebound, we don’t see much adverse impact manifesting on the top line; if anything, there could be incremental upside given management’s ambition to broaden the aperture of its sales and consumption occasions. These efforts, together with attractive sparkling water category dynamics, should facilitate mid-single-digit growth longer term, supported by ongoing reinvestment in innovation

Operating margins were stellar, up 460 basis points to 21.2%. While operating leverage always plays a role in quarters with top-line strength (given that it owns most of its production/distribution apparatus), lower advertising and corporate expenses remain anomalous contributors that should become headwinds longer term as the competitive landscape re-intensifies post-pandemic.

Company Profile

National Beverage is one of the top 10 non-alcoholic beverage companies in the U.S. Its portfolio skews toward functional drinks (i.e. those purporting to offer health benefits) and is anchored by the popular LaCroix sparkling water trademark. Other offerings include Rip It energy drinks, Ever fresh juices, and soda brands like Shasta and Faygo. The firm controls most of its production and distribution apparatus, with very little outsourcing. In terms of go-to-market, it uses warehouse distribution for big-box retailers, direct-store-delivery for convenience stores and other small outlets, and food-service distributors for the food-service channel (schools, hospitals, restaurants). It is controlled by chairman and CEO Nick Caporella, who owns over 73% of the common stock.

(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.

Celanese produces the chemical in its core acetyl chain segment (roughly 50% of EBITDA), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. It produces acetic acid from carbon monoxide and methanol, a natural gas derivative. Celanese produces its own methanol at its Clear Lake, Texas, plant, which benefits from access to low-cost U.S. natural gas. The company recently announced that it will expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower average unit production costs.

The engineered materials segment (around 40% of EBITDA) produces specialty polymers for a wide variety of end markets. This segment uses acetic acid, methanol, and ethylene to produce specialty polymers. Celanese and other specialty polymer producers have benefited in recent years from automakers lighweighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also benefit from increasing electric vehicle and hybrid adoption, as then company makes battery separator components. By 2030, we forecast two thirds of all new global auto sales will be EVs or hybrids. Additionally, Celanese sells products used in electronics and “Internet of Things” technologies, which provides another area of growth for the company.

With growing EV adoption and increased sales of Internet of things technologies, Celanese is well positioned for outsize engineered materials’ volume growth over the next several years. Acetate tow, which is Celanese’s smallest segment, produces acetate tow primarily for cigarette filters. Cigarette sales are in secular decline across most countries, and so we expect Celanese’s acetate tow sales will slightly decline over the long term.

Financial Strength

Celanese is in good financial health. As of March 31, 2021, the company had $3.6 billion in debt and around $0.8 billion in cash. A net debt/operating EBITDA ratio of 1.8 times. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase the company’s engineered materials portfolio, such as the Santoprene business from ExxonMobil. The company will increase its debt as a part of this acquisition. However, we generally expect the company’s balance sheet and leverage ratios to remain healthy as Celanese should generate enough free cash flow to meet its financial obligations. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, Celanese should still generate positive free cash flow well in excess of dividends in 2021.

Core Acetic Acid Production

• Celanese built out its core acetic acid production facilities at significantly lower capital cost per ton than its competitors thanks to the scale of its facilities (1.8 million tons versus average 0.5 million tons).
• Celanese should benefit from producing an increasing proportion of its acetic acid in the U.S. to take advantage of low-cost natural gas.
• The engineered materials’ auto business should grow more quickly than global auto production because of greater use of these products in each vehicle.

Company Profile

Celanese is one of the world’s largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters.

(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.

Near-term sales face headwinds outside the United States, with ongoing store closures in Europe and Canada (roughly 300 units as of May 1). However, we still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (high-20s average over the next decade).

TJX’s value proposition should resonate even as retail competition intensifies. While digital retailers are a factor (particularly if the pandemic durably increases e-commerce adoption), we see the off-price channel as relatively well protected, as the low-frills buying experience and 20%-60% discounts relative to the full-price channel result in competitive prices and superior economics after considering shipping and return costs. Vendors’ desire for discretion also favors physical stores that can discreetly sell merchandise without diluting top brands’ cachet.

With a global presence, TJX leverages an extensive merchandising operation and proprietary inventory management system to maintain a fast-changing assortment at significant discounts. We believe TJX’s ability to deliver a high-value lineup while maintaining strong returns is driven by its difficult-to-replicate sourcing and distribution agility. By accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (preserving labels’ conventional-channel pricing power by avoiding the stigma of a consistent discount presence), TJX is a valued partner for its more than 21,000 vendors, in our view. As a result, TJX can opportunistically offer a fast-changing, high-value assortment in a treasure-hunt format that is hard to replicate digitally.         

Financial Strength

TJX’s financial health is sound, and we expect it to weather the COVID-19 crisis. The firm drew $1 billion from its revolver and subsequently issued $4 billion in long-dated notes to bridge the crisis, and, with the worst of the pandemic seemingly passed, has since repaid the revolver and nearly $3 billion of other indebtedness. The firm has a historically conservative approach to debt that we do not expect to change. Management states that its maximum store count potential is 3,000 units at Marmaxx (from 2,450 at the end of fiscal 2021), 1,500 at HomeGoods (from 855), 650 in Canada (from 525), and 1,125 in its existing other international markets (from 742).

Bulls Say

• With an agile merchandising and distribution network, TJX keeps store inventory fresh, spurring traffic while minimizing risks associated with fashion trends and freeing capital.

• We believe digital retailers will have a more difficult time in encroaching on the off-price channel, particularly given the sector’s already-low prices and vendors’ demand for discretion.

• TJX’s international operations should offer ample runway for growth and associated incremental cost leverage, with the store banners and off-price concept translating well abroad.

Company Profile

TJX is a leading off-price retailer of apparel, home fashions, and other merchandise. It sells a variety of branded goods, opportunistically buying inventory from a network of over 21,000 vendors worldwide. TJX targets undercutting conventional retailers’ regular prices by 20%-60%, capitalizing on a flexible merchandising network, relatively low-frills stores, and a treasure-hunt shopping experience to drive margins and inventory turnover. TJX derived 79% of fiscal 2021 revenue from the United States, with 11% from Europe (mostly the United Kingdom and Germany), 9% from Canada, and the remainder from Australia. The company operated 4,572 stores at the end of fiscal 2021 under the T.J. Maxx, T.K. Maxx, Marshalls, HomeGoods, Winners, Homesense, Winners, and Sierra banners.

(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.

With third-party cookies not blocked on Google’s Chrome browser, targeted advertising, which has used cookies for more than two decades, will remain effective longer than anticipated. The use of cookies allows for more effective targeting, increasing the return on ad spending and thus resulting in higher demand by advertisers. This type of targeting allows for an increasing role and revenue for adtech Criteo. Plus, Criteo, other ad-tech firms, and Google will have more time to develop and test replacements for cookies. We increased our projections and now expect Criteo’s top-line growth to average 9.5% annually through 2025 (higher than our previous assumption of 8%), which will also create operating leverage and expand average operating margin to 13.3% (compared with 15% prior to the pandemic, and higher than our previous 12.6% assumption).

In reaction to Google’s decision, Criteo stock jumped more than 12% and is trading at 1.3 times our fair value estimate. The firm’s current market capitalization of $2.7 billion is not far off from the $2.8 billion it hit in the second half of 2017, when the market expected 5-year average net revenue growth in the mid-teens off a higher base.

Criteo’s Future Outlook

We think today’s reaction clearly displays the firm’s dependency on Google’s digital advertising platform and supports our no-moat and very high uncertainty ratings for Criteo. In our view, uncertainties surrounding possible alternatives and their effectiveness remain, and they could force advertisers to allocate less toward targeting and retargeting as we approach the second half of 2023.

While we think Criteo is overvalued, we remain pleased with the firm’s efforts to minimize impact of cookie-less browsers. We are skeptical about the adoption and possible success of the Unified ID solution, but we do see possibly attractive ROIs generated from campaigns that combine first-party data (data from Criteo’s clients) with contextual marketing. We think with access to a large amount of its client’s first-party data, Criteo is well-positioned to leverage nearly any new solution. In addition, we applaud what appears to be the firm’s main strategy–to not invest in designing and creating another version of third-party cookies. Criteo continues to invest in solutions based on contextual advertising which we think will be welcomed by Google, publishers, and ad buyers now and in two years.

Lastly, we remain pleased with the firm’s efforts to diversify its revenue with the retail media segment, which represented 10% of total net revenue in the most recent quarter. The retail media business not only helps retailers market their products and services on other sites or apps (demand for ad inventory), but it also allows them to further monetize their own online properties by selling more ad inventory (supply of ad inventory).

Company profile

Headquartered in Paris, Criteo is one of the leading ad-tech companies in the growing digital ad market. Its technology, mainly the Criteo Engine, allows advertisers to launch multichannel and cross-device marketing campaigns in real time using retarget digital display ads. With real-time return on investment analysis of the ads, the firm’s clients can adjust their marketing strategies dynamically.

(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.