The Magnificent Seven stocks of Apple (APPL), Microsoft (MSFT), Google (GOOGL), Amazon (AMZN), Tesla (TSLA), Meta (META), and Nvidia (NVDA)are currently makingupnearly30%oftheS&P500.Specifically,Nvidia’s marketvaluehassurgedthrough2023,andhasnowreached $2 Trillion. The company produces GPUs which are computer chips or semiconductors for math operations to produce visuals and images. The increased market value is a result of the industry trends such as the wider usage of generativeAI.However,mostrecentlythestockhasdropped after investors were disappointed by rivals Advanced Micro DevicesandSuperMicroComputerearningsreleases.
IndustryChallenges:
Overall, markets have adapted to challenging dynamics due to economic conditions. 2023 was a year of rising inflation ratesandhighenergycosts.Manycompanieshaveresponded tothesechallengeswithcost-savingmeasures.Inthetelecom space, Vodafone, T-Mobile, and Telefonica, all announced workforcereductions.Additionally,2023sawaslowdownof M&Aactivity,andtherewasasignificantamountofindustry consolidations.
AlexaCooper April23,2024
Metrics and Graphs
Source: KPMG 2023 Report
Source: KPMG 2023 Report
Source: PWC 2024 Outlook
IndustryTrends:
Software continues to be an attractive opportunityforinvestors.Assubscriptionbased servicesappealtoprivateequityfirmseveninthe slowgrowthenvironment
GenerativeAIisrisinginenterprisesoftware.As the technology is introduced, there are varying approaches to pricing models and distribution. AI has been synthesizing a large amount of information, however there are criticisms in determiningtheaccuracyofthemodels.
Digitaladvertising iscontinuing togrow. Media companiesareabletomonetizeoffuserdataand patterns.Manymediacompaniesarecontinuing to enhance its digital offerings through platforms.
NotableDeals:
Although deals have declined within the technology,telecom,andmediaspace,therewere still large transactions over FY23. Walt Disney Co. acquired Hulu from Comcast for $8.6 billion.Thestrategicrationalebehindthedealis for Disney to increase market share in the streamingspaceandmergestreamingintoasingle platform.Additionally,NasdaqacquiredAdenza Group,IncfromThomasBravofor$10.5billion toimprovetheirtechnologies,riskmanagement, and softwaresystems.
Netflix (NASDAQ: NFLX) Outperforms Their Outperformance
Netflix is a leading streaming entertainment service offering a broad array of TV shows, movies, and original content accessible on internet-connected devices worldwide. The company has three primary segments: Domestic (in the U.S.) and International (outside the U.S.) Streaming.. Netflix's content can be watched directly on any internetconnected device that offers the Netflix app. The company also produces its own original content. Netflix's business model emphasises customer satisfaction, ease of access, and providing a diverse content library to meet varied consumer preferences.
Investment Thesis:
Netflix's strategic moves including a significant $5 billion World Wrestling Entertainment (WWE) streaming deal and a partnership with Skydance Animation signal a robust expansion strategy, diversifying Netflix’s content and revenue streams and enhancing its competitive stance in the global entertainment market. The WWE agreement marks Netflix’s entry into sports entertainment, a sector with considerable growth potential, while the Skydance collaboration positions Netflix to tap into the lucrative consumer products arena. Additionally, innovative advertising formats like Title Sponsorships and Binge Ads could redefine viewer engagement and ad revenue models. These strategic developments suggest a positive trajectory for Netflix’s market valuation, driving stock price up projected 21.9%, presenting a compelling investment case, highlighting the potential for significant stock appreciation in the medium to long term.
Valuation/Financial Modeling:
As of April 24, Netflix is trading at $611.15 per share. Based on my analysis, I project that the share price could reach $744.72 within the year. This valuation is derived from a detailed Discounted Cash Flow (DCF) analysis utlising an 8% WACC. I utilized an EV/EBITDA multiple and a product revenue/subscribers approach, reflecting sector norms and operational synergies, to arrive at the implied share price. This method ensures a robust comparison and aligns my valuation with current industry standards and expectations.
WWE Deal:
On January 23, 2024, it was announced that a 10-year, $5 billion deal has been signed to bring WWE content exclusively to Netflix, starting in January 2025. This significant agreement includes the streaming of Monday Night Raw among other offerings. Over the past five years, WWE has experienced a Compound Annual Growth Rate (CAGR) of 19.4%. Additionally, WWE's YouTube channel boasts 99.4 million subscribers and has accumulated 12.4 billion views, underscoring its substantial presence in the streaming sector. WWE's dedicated, loyal fanbase, alongside the potential for securing long-term subscriptions, presents a valuable opportunity for Netflix. Furthermore, with 60% of WWE's viewership originating from outside the U.S. This deal also offers Netflix a chance to enhance its international reach and promotional efforts.The stock therefore saw an initial increase, indicating the market's positive reaction to the news resulting in the stock’s increase of ~24.19%. However, I believe the full extent of the increase has not yet been realised presenting an investment opportunity.
Kaleb Kavuma
What the Market is Missing:
This deal can act as a pathway to future sports streaming on Netflix with additional partnerships. Netflix has dramatically increased free cash flows net dividends, by ~311% since 2019 and 327% from last year, leaving ~$7 billion to be used to finance collaborations or acquisitions of other major sporting entities. Netflix’s strong earnings report is a sign of strong business performance, and the WWE deal shows management’s willingness to pursue. The industry has already shown an emerging trend of these deals with ESPN, Warner Bros, and Disney already trying to create a sports streaming platform that is scheduled for fall 2024. However, it is estimated to be $40/month on a new separate app, making it a costly alternative that Netflix can undercut. Netflix can capitalize by the end of the year to complete its own sports media deal leveraging its platform to undercut competitors providing a cheaper, easier alternative to enjoy movies and sports.
Stock Performance vs Competitors and Benchmark
The graph above shows NFLX’s performance relative to its major competitors Disney and Paramount, relative to the S&P BMI Media and Entertainment industry Index benchmark. This shows that while the top players in the streaming industry have been underperforming, Netflix is performing significantly better than its peers DIS and and PGRE. NFLX share price % change average over the last 5 years has been higher than both DIS and PGRE effectively for the two and a half years while having a higher % change than the other 2 since mid2023. Finally, NFLX is the only stock showing a positive long-run trend in 2024, and with the momentum created in early 2024, is expected to continue its upward trend, in contrast to the major competitors.
Source: Capital IQ
Kaleb Kavuma
Opportunities for Growth
Entry into the lucrative consumer products market:
In October 2023, Netflix entered into a multi-year agreement with Skydance Animation to develop animated feature films that will be released exclusively on Netflix. Skydance Animation is led by John Lasseter, the former head of Walt Disney Animation and co-founder of Pixar. Lasseter, who was the driving force behind mega-hit animations such as "Toy Story" and "Cars," brings a wealth of experience and a proven track record to the partnership. This collaboration comes at a pivotal time for Netflix, which recently won its first Oscar and Emmy in the animation category. The combination of producing proprietary animated content and leveraging Netflix’s extensive distribution network presents a significant opportunity for Netflix to establish itself as a formidable player in the animation industry.
What the market is missing:
The potential of launching Consumer Products (CP) through successful animation remains underappreciated. This strategic move allows Netflix to pivot towards introducing merchandising of fully owned intellectual property (IP), thereby opening up a high-growth revenue stream that mirrors the successful model established by Disney. For reference, consumer products generated $2 billion in income for Disney in both 2022 and 2023. By venturing into this area, Netflix not only stands to enhance its revenue streams but also cement its status as a household name. The integration of animation with consumer products provides Netflix with a dual opportunity to diversify and maximize its revenue, leveraging its growing library of animated content to create a more robust, multi-dimensional brand.
New Advertising Model: Title Sponsorships & Binge Ads:
Netflix is poised to revolutionize advertising in the streaming sector by adopting innovative advertising strategies such as Title Sponsorships and Binge Ads, leveraging its massive viewership. These strategies are expected to become key drivers of revenue per user in 2024.
Title Sponsorships involve partnerships where advertisers gain exclusive advertising rights aligned with Netflix's most popular series. With 13.1 million net subscription additions and a total of 230 million subscribers, Netflix stands as the largest streaming platform, providing it with significant leverage to attract major advertisers like PepsiCo, T-Mobile, and Nespresso. High-profile series such as "Squid Game: The Challenge" and the final season of "The Crown," both slated for release in 2024, are already moving towards incorporating specific sponsors.
Binge Ads introduce a new format for viewers on the “Standard with ads” subscription, allowing them to watch three consecutive episodes with ads and then a fourth without commercial interruption. This model is designed to enhance the viewing experience for the 15 million users (30% of subscribers in regions where available) subscribed to this plan. By improving content consumption and viewer satisfaction, Netflix aims to increase the Average Revenue Per User (ARPU).
What the Market is Missing:
These strategies are not merely marketing tactics; they represent a significant shift in how advertising is integrated within streaming platforms. Netflix's approach could redefine advertising norms, potentially redirecting global ad spending towards models that prioritize viewer engagement and satisfaction. By strategically grouping ad placements to reward consistent viewership and facilitate large-scale firm collaborations, Netflix is positioning itself not only as a pioneer in this new advertising market but also as a leader that maximizes its brand and scale. This is in stark contrast to the traditional advertising models seen in cable TV, which often include up to 17 minutes of unrelated ads per hour and may disincentivize consumers, leaving competitors reliant on an outdated revenue model.
Risk Overview
Kaleb Kavuma
Market Saturation & Competitor Response:
Despite holding a substantial 60% market share, Netflix faces challenges from major competitors making strategic moves to counter its dominance. For instance, Disney's acquisition of Hulu is a direct effort to mitigate Netflix's market control. Additionally, with consumer purchasing power having declined by 16% since 2020, there is a trend towards consumers limiting their subscriptions, which could impact Netflix’s net subscription totals as consumers explore alternative services.
Nevertheless, Netflix remains committed to retaining and growing its user base. The company has managed to sustain its Average Revenue Per User (ARPU) with approximately 1% annual growth and is expected to retain its position as the preferred choice for most consumers, positioning it to be resilient to consumers holding multiple streaming services looking to cut one or more.
Quality of Netflix Originals:
While Netflix aims to emulate Disney's model of creating unique intellectual property and beloved movies and shows, success heavily relies on the consistent quality and variety of these offerings. Unlike Disney, which has created numerous pop culture classics, Netflix has faced challenges in producing originals that consistently resonate well with audiences, which could hinder the effectiveness of this strategy.
Be that as it may, Netflix is not standing still; it has prioritized creating compelling hooks in the first few minutes of its shows to retain viewers’ attention. Furthermore, a significant increase in focus on high-quality production, evidenced by winning 22 Academy awards, and forming partnerships with established companies like Skydance Animation, is set to enhance the quality of Netflix’s offerings.
Risk of Entry into Consumer Products:
Venturing into the consumer products sector presents a learning curve for Netflix, involving mastering new distribution channels, developing appropriate organizational capabilities, and adapting to a different cost structure. This move introduces materially more volatile revenue streams with higher risks and uncertainties compared to its streaming business.
However, Netflix can streamline these costs by utilizing online distribution platforms rather than physical retail outlets. With a continued focus on high-quality production and strategic partnerships, the hit rates of its offerings should be higher, and revenue volatility could be reduced. Extending merchandising across a wider range of intellectual property products will also help mitigate these risks, capitalizing on its well-established brand and diverse content library.
Sources: Netflix Investor Relations | Yahoo Finance | Disney Investor Relations | Bloomberg | Capital IQ | Financial Times | yaragura.co | Statista
David Wu| May 15, 2024
Rating: Hold
Current Price: $946.32
Price Target: $938.42
Company Updates / News
● Market Cap: $2.32T
● 52 Week Range: $298.06-$974.00
● P/E: 79.39
● EPS: 11.93
● Beta: 1.75
● Revenue: $60,922M
● Gross Margin: 72.7%
● Accelerated supercomputer and quantum computing efforts for cutting-edge scientific research
● Purchased its current Bay Area headquarters for $326 million, becoming its own landlord
● Jensen Huang, the CEO, realized a 60% pay raise amid strong FY 2024 financial performance
Competitor Statistics
from FY 2023
Revenue: $22.680M
Gross Margin: 50.3%
Revenue: $54,228M
Gross Margin: 40.0%
Revenue: $35,820M
Gross Margin: 55.7%
NVIDIA Corporation Proven Leader Too Hot?
Investment Thesis:
NVIDIA Corporation has positioned itself on the frontiers of the semiconductor industry, riding the waves of the heightened attention of AI’s indisputable role in all industry verticals. The company’s GPUs are critical infrastructure for AI algorithms and machine learning applications, indicating that NVIDIA and its semiconductor peers will play an indispensable role in AI’s significant growth for the next decade. NVIDIA’s leadership in AI hardware, data center performance, and industrial manufacturing market expansion are the underpinning rationales for investment. Nonetheless, due to the considerable investor (institutional and retail) attention of AI, the stock has experienced volatility, and, understandably, high valuation and potential near-term market fluctuations. Due to this, I personally believe the hold rating is more prudent, inviting the investors to benefit from the long-term growth prospects while mitigating the short-term equity value uncertainties influenced by higher trading volumes.
Valuation/Financial Modeling:
As of May 15, 2024, NVIDIA traded at $946.32 on the NASDAQ. To provide the most effective valuation, I conducted a DCF and comparable company analysis. The WACC (after un-levering and re-levering beta) yielded 11.05%, and the median EV/EBITDA, in comparison to other companies, was 29.8x. Most of my revenue projections were in-line with the analysts’ expectations; however, data center revenue was more conservative but the automotive was more aggressive.
Competitive Strength:
NVIDIA’s GPUs are the golden standard for the AI and machine learning industry; the CUDA programming model and Tensor Core are unmatched by NVIDIA’s competitors. The most important aspect of NVIDIA’s strength is its comprehensive product packages that offer full enterprise AI deployment from software to hardware to platforms (chips to CUDA to DGX) includes everything for comprehensive AI utilization, creating substantial barriers to entry to firms aiming to match similar levels of product line. NVIDIA’s strategic partnerships, a mirror of the loyal customer base and technological edge, include key players in the TMT industry (Microsoft, Google, Amazon); new partnerships with automotive companies such as Mercedes Benz demonstrate diversification.
Organic Growth Potential:
Data centers continued to be the driver of growth, especially with AI’s soaring demand for GPUs; however, the growth story expands to new industry verticals, such as industrials, finance, and healthcare - something new that’s heavily mentioned in the company’s earnings transcripts. High performance computing in these unique verticals is most decorated through the self-driving developments in the automotives space; NVIDIA has effectively entered markets for automotive manufacturing and frontier research for driving, demonstrating future potential.
David Wu| May 15, 2024
NVIDIA Valuation Comparison & Revenue Projection
Source: Bloomberg, Refinitiv, and Institutional Results
Risk Potential
Backlogs and Demand Challenges: Customers’ demands are constantly evolving in response to the rapid development of AI and emerging technologies; although NVIDIA’s technological competitiveness mitigates parts of this risk, the demand has exceeded the company’s supply capacities. Extreme demand hikes for the GPUs at unseen magnitudes (driven by machine learning algorithms) has led to supply chain constraints. Because of the demand and supply imbalance, the company may experience challenges converting backlogs to revenue in a timely manner; furthermore, delivery delays in these scenarios may affect customer retention rates and loyalty.
Asia Geopolitical Risk: NVIDIA sources most of its production from Asia-Pacific; semiconductor wafers are sourced from TSMC & Samsung; memories are originated from Micron, SK Hynix, and Samsung; assembly & packaging are outsourced to Hon Hai and numerous other Asian independent contractors. Due to political sensitivity of Taiwan, China’s foreign policy uncertainties, and US trade restrictions affect both sales to Asia and costs associated with the Asia-Pacific dominant supply chain.
Short-Term Price Volatility: The stock price, as of late, has been driven by higher volumes of trading, especially from retail investors. These activities are often driven by market trends, social media, and other nonfundamental factors. As such, price fluctuations detached from the company’s fundamental valuation happen more frequently; speculative trading can create an unpredictable market condition.
Sources: NVIDIA Investor Relations | AMD Investor Relations| Intel Investor Relations| Bloomberg | LSEG Refinitiv | Capital IQ Bank of America Global Research | Evercore ISI |UBS Global Research | Morgan Stanley Research | HSBC | SEC.gov |
Griffin Murphy| April 24, 2024
Rating: Hold
Current Price: $29.60
Price Target: $32.22
Company Updates / News
● Market Cap: $435.32M
● Beta: 1.34
● LTM EPS: 0.85
● EV/Rev: 1.4x
● EV/ EBITDA: 14.0x
● 52 Week High: $50.82
● 52 Week Low: $22.91
● Clearfield sets Q2 2024 Earnings Call for Thursday, May 2
● Roger Harding, Independent Director, recently bought 28% more shares in Clearfield
● Clearfield Q1 2024 earnings beat expectations
Competitor Statistics from Q1 2024
EV/Rev: 2.3x
Revenue: $217.6M
EV/Rev: 0.8x
Revenue: $1,149.1M
EV/Rev: 1.2x
Revenue: $357.3M
Clearfield Inc (CLFD) The Bottom?
Investment Thesis:
Clearfield is a designer and manufacturer of fiber optic connectivity and management products for the broadband service provider industry. During the COVID-19 pandemic fiber optic saw a surge in demand, shooting Clearfield’s stock price into the triple digits and pricing for perfection. In 2023, however, the company was hit with a reality check, and as demand came down so did the company’s share price While the company’s revenue is expected to decline in 2024 due to short term headwinds, the fiber industry still has a strong long term outlook, and Clearfield is attractively priced. The risks are not to be understated and Clearfield’s management team has faced difficulties in the past, but the long term outlook looks cautiously optimistic.
Valuation/Financial Modeling:
As of April 24th , 2024, Clearfield Inc is trading at $29 60 per share To value this company I conducted a discounted cash flow analysis, using a weighted average cost of capital (WACC) of 10.9% and a terminal growth rate of 3.0%. My revenue and FCF assumptions are in line with analyst and management projections of Clearfield’s revenue declining in 2024, rebounding in 2025, and growing at around the industry’s projected rate of growth in the years after. Using these assumptions, I came to a valuation of around $32 22, implying a slight upside of around 9 5%
BEAD Program:
The Broadband Equity Access and Deployment (BEAD) Program aims to expand high-speed internet access by funding planning, infrastructure deployment, and adoption programs, and is endowed with $42 billion Projects are to begin receiving funding in 2025, which is expected to lead to an increase in demand for fiber optics and grow Clearfield’s revenues. However, customers significantly increased orders throughout 2022 and 2023 to account for both the high demand for fiber optics during this time as well as the expected demand from the BEAD program. Consequently, many customers find themselves with excess inventory As such, there is lowered current demand for fiber optics, which has led to a poor 2024 projected revenue outlook. Management remains optimistic about the long term growth potential from the BEAD program.
Nestor Cables Acquisition:
In July 2022, Clearfield acquired Nestor Cables, a manufacturer of fiber optic cable solutions. The acquisition serves not only to generate revenues but also to bolster Clearfield’s manufacturing capacity, which is crucial especially considering the potential for future demand increases. In 2023, the Nestor Cables segment provided 16% of the company’s revenue. At the same time, the acquisition along with industry headwinds have begun squeezing Clearfield’s profit margins, with a current gross profit margin of 27.34% and EBITDA margin of 11.34%. This acquisition may serve to be extremely useful if demand does surge in 2025 and the years after, but could also create complications if short term industry headwinds continue to persist.
Griffin Murphy| April 24, 2024
Clearfield 5 Year Stock Chart
Source: S&P Capital IQ
Risk Potential
Excess Inventory:
One of the risks facing Clearfield is that, due to high anticipated demand, they have significant amounts of inventory on hand. If they are unable to recover from the decrease in sales in recent quarters, they could have difficulties emptying their inventory, leading to higher expenses and decreased cash flow from operations. Clearfield also may need to consider reducing their workforce to avoid unabsorbed labor costs in the face of weak demand.
High Customer Concentration:
In 2023, 16% of net sales were provided by the company’s largest customer. This indicates high customer concentration, and a decrease in orders from this customer or a cessation of their relationship could significantly impact Clearfield’s top line.
Uncertainties With BEAD Program:
The success of Clearfield relies heavily on the success of the BEAD Program creating demand within the fiber optic industry. Clearfield should be able to overcome the short term headwinds facing the industry and macroeconomy due to their strong balance sheet, but need their revenues to rebound in 2025 if they want to remain a growing and profitable company. The impacts of the BEAD Program are difficult to measure, and it is unclear how Clearfield and the broader fiber optic industry will respond once funding is allocated and put to use.
Sources:
Clearfield Investor Relations| CFRA Equity Research| Yahoo Finance | S&P Capital IQ | The Wall Street Journal | Nestor Cables Company Website
Vasu Patel| Apr 22, 2024
Rating: Buy
Current Price: $1 0.40
Price Target: $12 .50
Company Updates / News
● Market Cap: $2.14B
● 52 Week Range: 5.22 – 12.50
● EPS: 0.29
● Revenue: $325.1M
● Gross Margin: 87.3%
● Hired Marketing Veteran David Gee as Chief Marketing Officer
● Launched FedRAMP
Authorization Process to Provide Federal Customers with Enhanced Cloud Security
Competitor Statistics from FY 2023
Revenue: $4.48B
Gross Margin: 76.8%
Revenue: $910.39M
Gross Margin: 70.3%
Revenue: $448.8M
Gross Margin: 70.9%
Cellebrite DI Ltd. (CLBT)
Accelerating Justice Through Digital Security
Investment Thesis:
Cellebrite is a key player in digital intelligence, offering advanced solutions for data analysis crucial for law enforcement and intelligence agencies.
My buy recommendation for Cellebrite is based on its innovative edge, solid financials, and growth potential. The company's focus on automation, AI, and advanced data analytics drove a 26% year-over-year increase in ARR, which reached a record $315.7 million. With a strong balance sheet and a growing market, I believe Cellebrite is well-positioned for future success.
Valuation/Financial Modeling :
As of April 22nd, Cellebrite (CLBR) is trading at $10.40. I believe it's undervalued and expected to rise to $12.50 within the next twelve months. This conclusion stems from comparable analysis using historical and peer revenue data. Cellebrite’s shares trade at an Enterprise Value of less than 5 times annualized revenue, a discount compared to its peers and recent acquisitions in the sector. Based on my analysis, Cellebrite has a low enterprise value/EBITDA multiple of 7.6x, while the peer average is 15.1x.
Strategic Edge:
Cellebrite stands at the forefront of the digital intelligence market, offering stateof-the-art technology that revolutionizes productivity and efficiency. Their innovative solutions, infused with automation and artificial intelligence, cater to a wide range of industries, simplifying the investigative process for both public and private sectors. Through continuous investment in advanced technologies, Cellebrite delivers a comprehensive suite of services, ensuring seamless integration and optimal performance.
The company’s strong financial performance, including a durable top -line expansion and a healthy balance sheet, supports further profitability improvements. Strategic investments and innovation have expanded the Total Addressable Market (TAM), ensuring it remains well-positioned to capitalize on the powerful tailwinds driving the digital intelligence sector forward.
Fast & Consistent Growth:
Cellebrite stands out as an appealing investment with a robust business model that is on track for a 25% growth rate. The company has demonstrated its ability to innovate and has the potential to increase prices, which could significantly boost operational efficiency.
For FY23, Cellebrite reports a record ARR of $315.7 million, marking a 26% year-over-year increase. The fourth quarter alone saw a revenue of $93.0 million, up 27% year-over-year, primarily driven by a 30% growth in subscription revenue, alongside a record adjusted EBITDA of $22.7 million.
Vasu Patel| Apr 22, 2024
Cellebrite Quarterly Revenue Growt h
Source: Deutsche Bank Securities Inc.
Risk Potential
Cross-Sell and Upsell : To reach a $1 billion ARR by 2028, Cellebrite must focus on cross-selling and upselling to its existing customer base. The company has successfully completed its initial “land” phase, securing around 5,000 public sector customers, which represent approximately 90% of the target market for its offerings. Moving forward, Cellebrite’s growth largely hinges on its capacity to roll out innovative solutions and add-ons, enhancing the value proposition for these established clients.
Public Sentiment: Cellebrite’s financial reliance on law enforcement, with 90% of its revenue stemming from this sector, makes it vulnerable to shifts in public policy and sentiment, such as the “Defund the Police” movement. This advocacy for reallocating police funds could lead to budget cuts, affecting Cellebrite’s sales and contract renewals. Additionally, changes in spending priorities could result in decreased revenue for the company, as law enforcement agencies may reduce their investment in Cellebrite’s digital intelligence solutions.
Operating Expense Exposure:
Cellebrite’s exposure to the Israeli New Shekel (ILS) as a significant part of its operating expenses means that fluctuations in the currency can have a direct impact on the company’s financials. Approximately 40% of Cellebrite’s expenses, primarily payroll and rent, are paid in ILS. In the context of the Middle East, geopolitical tensions can lead to economic instability, which often results in currency volatility.
Sources: Cellebrite Investor Relations | Needham & Company | Everbridge Investor Relations | Bloomberg | Capital IQ | OpenText Investor Relations | Verint Investor Relations | Deutsche Bank Securities Inc | SEC.gov | JP Morgan |
1Q2024Recap-OzempicOlympics
Healthcare names generally underperformed theS&P 500in1Q24followingcalmersentimentsurrounding GLP-1sandotherweightlossdrugsandJanuaryCMS ratecuts,butupsideliesinhighlyanticipa drugdevelopmentsin2H24.
Weight loss drugs remain in the spotlight: Although analysts believe weight loss drugs have already peaked, the spotlight. As of April 2024, there are 11 FD medications for weight loss, with 14 more showing supporting data in clinical trials so far 1 Viking Therapeutics other challengers encroach on Ozempic and Weg leadership in the market, touting easier delivery methods with similar effectiveness Increased regulatory scrutiny of Medicaid/Medicare coverage of the drugs also limit addressable market for those in higher income brac drawbacks, LLY and NOVO remain key players in the market with highly anticipated pipeline products while also boosting the performance of smaller players in the space.
networks have vertically diversified, tapping into pharmacy and provider value pools” (McKinsey)
Payors re-examine the efficacy of new technologies: The year started off with UnitedHealth Group suffering a cybersecurity attack on subsidiary Charge Healthcare, which disrupted 94% of providers’ ability to be reimbursed by insurers and fill medication orders, disrupting hospital revenue cycles nationwide.2 This cyberattack not only impacted UNHs stock with a 6% drop on the announcement date, but the unprecedented magnitude of the attack may accelerate the adoption of cybersecurity measures in the healthcare payors and telehealth industries. This follows insurance giant Cigna’s $172M settlement in late 2023 where the Department of Justice investigated claims that Cigna's PxDx (procedure-to-diagnosis) algorithm wrongfully rejected over 300,000 payment claims.3 Large payors use technology to speed up day-to-day processes, but social and ethical directives are being left behind. Moreover, major payors are now 10x the size of the largest health systems, giving them a huge advantage when negotiating payments
“The Centers for Medicare & Medicaid Services (CMS) rate declined for the first time since 2015” (McKinsey)
Medicare spending cuts and 2024 Election Spotlight: Medicare spending cuts through revisions at the beginning of 2024. If these trends continue, many insurers are considering cutting benefits in 2025 if CMS proceeds with the cuts Medicare Advantage, a politically contested system, now covers over half of those eligible for Medicare, and is backed by many big payors, even when CMS overpaid Medicare Advantage organizations an estimated $16.6 billion in FY 2023.4 Although healthcare is not dubbed as a key issue during the election, both Democrats and Republicans are worried about the rising costs of social security and further cuts in public healthcare funding systems. The anticipated largest point of debate will surround the continuation of the 2010 Affordable Care Act (Obamacare), but both Trump and Biden are concerned about bringing down medical and pharmaceutical inflation. 5
Voters are more on Biden’s side when it comes to managing healthcare policy (KFF Survey)
Orphan drug developments to drive pharma outperformance: The most anticipated drug launches of 2024 include KarXT, a schizophrenia treatment from biotech Karuna Therapeutics which was acquired by Bristol Myers Squibb in 2023.6 Sales estimation platform Evaluate projects sales of $2.8B in sales of the drug by 2028. Other hopefuls include donanemab for Alzheimer’s from Eli Lilly, and resmetirom for non-alcoholic fatty liver from Madrigal Pharmaceuticals. As schizophrenia is uncommon, there are few effective treatments and symptoms can be severe. With two promising phase 3 candidates
and the advantage of superior clinical performance as well as an absence of side effects as are in existing schitzophrenia treatments, the company stands to capture share in the market. This drug is a part of the larger trend towards more orphan drug and gene therapy commercialization, incentivized by the FDA’s Accelerating Rare disease Cures (ARC) Program, launched in May 2022. Although these are big steps towards treating rare diseases, the sustainability of financial incentives will be called into question if Medicare/Medicaid funding decreases. Many pharmaceuticals have already had prices challenged and the patent cliff between 2024-2028 could significantly decrease drugmakers’ pricing power.
Not pictured: Record number of orphan drug approvals in 2023 (28) under the ARC program (Center for Drug Evaluation and Research)
Conclusion: While repercussions and backlog from the pandemic years are mostly resolved, the Healthcare Sector continues to underperform the index as demands slow and cost-cutting policies are on the horizon. Key catalysts and risks for investors to look out for in 2H 2024 include key drug approvals and potential interest rate cuts Major risks include the policy implications of the US 2024 election including future CMS rate cuts, and Medicare Advantage-associated demand drops due to increased costs to the patient. Overall, the healthcare industry is a hold, but due to low valuation investors are encouraged to pick stocks. 6
Emma Braff | 21 April 2024
Rating: Hold
Current Price: $501.00
Price Target: $516.00
Company Updates
● 52 Week Range: $436.38- $554.70
● Market Cap: $462B
● Dividend: 7.52
● P/E (TTM): 19.45
● Revenue: $371.62B
● Debt to Equity: 75.98
Competitor Statistics TTM
Revenue: $379.49B
Net Income: $22.38B
Revenue: $357.77B Net Income: $8.34B
Revenue: $195.19B Net Income: $5.16B
UnitedHealth Group Inc. (UNH) Waiting Out the Storm
Investment Thesis:
UnitedHealth Group Inc represents a combination of the Optum and UnitedHealthcare business platforms across four reportable segments (Optum Health, Optum Insight, Optum Rx, and UnitedHealthcare). This diversified business model and industry-leading size offer economies of scale in health plans, delivery, and optimization.
My hold recommendation reflects a belief that the market has digested recent upside surprises, including better-than-expected earnings, while risks stemming from the Change Healthcare cyberattack and CMS rates persist.
Valuation:
As of April 21st, UnitedHealth Group Inc. (UNH) is trading at $501.00. I expect this equity to see a modest increase up to $516.00 within the next twelve months. This conclusion reflects quantitative comparable analysis based on historical EPS data. I expect EPS for 2024 to reach 28.68, based on a projection of the average growth since 2020. I use an 18x multiple to reconcile the scale of the company and resilient fundamentals with an expected poorer performance for the coming year due to CMS policy and other downward pressures.
Overview:
In 2023, UnitedHealth Group Inc. saw total assets increase from $245.7B to $273.7B (11.4%) and total liabilities increase from $159.4B to $174.8B (9.7%).
The company continues to use high levels of debt in its business model and prioritizes strategic acquisitions The company’s Q1 results show adjusted earnings of $6.26 per share compared to Wall Street’s expected $6.16 per share The medical-loss ratio was also 82.2% below expectations As such, UNH has seen gains throughout the past week.
The company also engaged in strong dividend and buyback programs in 2023, giving out $6.8B in dividends and $8.0B in repurchases, up from $6B and $7.0B respectively in 2022.
In 2021, UNH acquired Change Healthcare in an $8B deal to improve its data and analytics. Along with the Optum business segment, this addition demonstrates UNH’s movement into the healthcare technology space—an increasingly lucrative industry.
Emma Braff | 21 April 2024
Historical Comparable Share Pricing (TTM)
Source: S&P Capital IQ
Risk Potential
Cyberattack: The Change Healthcare February 21 data breach forced the company to pause its extensive payment and billing service in the largest domestic healthcare disruption since the COVID-19 pandemic. Months later, claims and benefits continue to be inaccessible or disrupted for many users. Although the initial financial consequences have been minimal, this attack presents substantial reputational risk to the company as stakeholders continue to suffer the consequences, and represents a setback in the reliance on electronic technology in the sector.
CMS Rates: Companies across the sector have seen share prices fall due to increased cost pressures on Medicare insurers. On April 1, the Centers for Medicare & Medicaid Services (CMS) released lower-than-expected rates for Calendar Year (CY) 2025, at an estimated decrease of 0.16%. Following the announcement, UNH fell 6% while CVS dropped 7% and Humana over 10%.
Rising Medicare Costs and Legal Pressures: Medicare insurers have cited increasing medical costs, with seniors utilizing more care than expected, more inpatient hospital stays, increased doctor visits, and higher demand for outpatient services The federal Medicare regulatory agency has also introduced regulatory adjustments, while the Biden administration has historically taken action against for-profit activities in the healthcare sector with bipartisan support. One such preventative measure includes the No Surprises Act. Healthcare reform continues with increased talks regarding private equity investment in the industry and health plan structure UNH remains vulnerable to any material changes or increased speculation in this dynamic political space, especially as regulation increases
Sources: UnitedHealth Group Inc Investor Relations | S&P Capital IQ | CFRA Equity Research | Yahoo Finance | The Wall Street Journal | Bloomberg | CMS gov | Forbes
Bement| 04/21/2024
Rating: Buy
Current Price: $125.40
Price Target: $136.21
Company Updates / News
● Market Cap: $318.60B
● Beta: 0.40
● EPS: 0.14
● PE Ratio: 68.7
● 52 Week High: $133.10
● 52 Week Low: $99.14
● Recent Acquisition of Harpoon Therapeutics, Prometheus Bio, Acceleron Pharma
● The petcare industry is thriving with a 5.22% compound annual growth rate
Competitor Statistics
TTM
EV/EBITDA: 50.18
Revenue: $60.12B
EV/EBITDA: 19.55
Revenue: $18.53B
EV/EBITDA: 21.49
Revenue: $58.50
Investment Thesis:
Merck stands out as a dominant force in both the human and animal pharmaceutical sectors It offers over 50 products targeting crucial areas such as cancer treatment and prevention, diabetes management, and COVID-19 therapies. In the animal health domain, Merck is a top provider of flea, tick, and heartworm prevention solutions. The company has been aggressively expanding through acquisitions, including the purchase of Acceleron Pharma in 2021, Prometheus Bio in the third quarter of 2023, and Harpoon Therapeutics in February These substantial investments have temporarily reduced earnings per share as Merck gears up for a new growth phase A significant driver of revenue, the cancer medication Keytruda, is set to lose patent protection in 2028, highlighting the importance of these strategic acquisitions Given these dynamics and the expected growth in the animal healthcare sector, I recommend a buy on Merck shares, anticipating that these moves will propel the company beyond its current market value
Valuation:
As of April 21st , 2024, Merck was trading at $125 40 per share I believe that the stock is undervalued with an increase to $136.21. This evaluation was arrived at using a Discounted Cash Flow with a terminal growth rate of 2.0% and weighted average cost of capital of 8 71% across 10 years These assumptions are based on Merck's historical growth rate and an optimistic viewpoint of its performance in new healthcare markets as well as the growing animal healthcare market in the United States
Expansion:
Recently, Merck has made significant strategic acquisitions to bolster its pipeline, particularly in immunology and neurodegenerative diseases. In 2023, Merck acquired Prometheus Biosciences for approximately $11 billion, a move that enhances its capabilities in treating immune-mediated diseases like ulcerative colitis and Crohn's disease. This acquisition brings a promising candidate, PRA023 (now MK-7240), a monoclonal antibody aimed at inflammatory bowel disease, into Merck's portfolio In another move to expand its research in neurodegenerative diseases, Merck acquired Harpoon Therapeutics for up to $610 million. This acquisition is part of Merck's strategy to delve deeper into treatments for conditions such as Parkinson's and Alzheimer's diseases, emphasizing their commitment to addressing complex brain disorders
Product Breakdown:
Merck's revenue distribution is heavily skewed towards human healthcare predominately in prescription medications, which contributes about 90% of its total revenue, while animal healthcare, divided between livestock and companion animals, accounts for 9% In the fourth quarter of 2023, Keytruda a cancer immunotherapy drug effective against various head and neck cancers represented 45% of Merck's Additionally, Keytruda's sales made up 42% of total revenue in 2023. With Keytruda's patent protection expiring in 2028, this significant revenue stream is a key motivator behind Merck's recent strategy to acquire other pharmaceutical companies.
Julian Bement| 04/21/2024
Zoetis vs Merck Monthly Share Price (YTD)
Source: S&P Capital IQ
Risk Potential Investment Uncertainty:
Merck's acquisitions carry several risks, including integration challenges that could lead to operational disruptions and cultural clashes. Regulatory hurdles and development risks pose significant threats, as failures in clinical trials or regulatory approvals could impede the success of newly acquired treatments like PRA023 (MK-7240). The financial commitment, notably the $11 billion spent on Prometheus Biosciences, exposes Merck to substantial financial risk if these assets do not yield expected returns. Additionally, market adoption uncertainties and potential intellectual property disputes could further complicate the outcomes of these strategic investments.
Market Uncertainty:
Over the past decade, spending in the petcare industry has surged by more than 100%, but this rapid growth may stabilize in the coming years The surge in pet ownership during the pandemic has led to an increase in expenditures for initial vaccinations, like those for distemper and rabies However, as these pets grow older, spending on such vaccines might decline
Cigna Corporation, headquartered in the United States, is a global health services company that provides medical, dental, disability, life, and accident insurance, as well as related products and services. The firm is also planning a big move recently as it is anticipated at least $5 billion will be used for repurchases by the end of June 2024. This repurchase reflects Cigna's belief that the stock price is significantly undervalued.
Cigna consistently shows growth potential, with a compounded revenue growth rate of 32% over the last five years and net profit reaching $5.2 billion in 2023. In terms of market share growth, as of December 31, 2023, Cigna's total pharmacy customer base increased by 5% yoy, reaching 98.6 million, indicating significant success in expanding its customer base and market share.
Valuation:
As of April 13, 2024, Cigna (CI) is trading at $349.84. I conducted a comparable company analysis (using the EV/R multiple) incorporating data from UnitedHealth, Humana, Molina Healthcare, HCA Healthcare and Davita which arrived at an implied share price of $392.34. Therefore, I believe that CI is undervalued and will increase in price over the next 24 months
Innovation and technology investment:
In the healthcare industry, innovation and technology investment are key drivers for long-term growth. Cigna announced an additional $450 million investment in its corporate venture fund, Cigna Ventures, focusing on identifying and partnering with health tech startups This demonstrates the company's commitment to fostering innovation and transformation in the healthcare sector For example, Cigna Ventures participated in a $52 million Series C funding round for 'Octave' to drive the nationwide expansion of web-based psychiatric clinic services, indicating that Cigna is actively exploring and developing new areas of health technology
Overview:
In terms of market concentration, the business model under the U.S managed care system has matured, and the market concentration is relatively high. There are several major managed care companies (such as UnitedHealth and Humana) that dominate the industry, and leading enterprises are expected to gain significant share in the next two years.
Amy Ren | April 12, 2024
Stock Price with Competitors:
Source: Yahoo Finance
Risk Potential
Regulatory Changes: MCOs are heavily regulated, and any changes in government policies or regulations can significantly impact their operations This includes potential modifications to laws like the Affordable Care Act (ACA) or Medicare and Medicaid policies
Market Competition: The market for healthcare services is competitive, with MCOs competing not only with each other (new entrants) but also with other types of healthcare providers and emerging models of care delivery.
Economic Downturns: Economic uncertainty or downturns can affect the ability of individuals and employers to pay for health insurance, which in turn impacts the revenue of MCOs.
Sources: Pickers Research| Wind|Reuters | Company Official Website(Investor Relations)|PR Newswire|IHC|JP Morgan
Cole Gaines | 4/23/2024
Rating: Buy
Current Price:
$900.16
Price Target: $978.47
Company Updates
● 52 Week Range:
$648.81-$998.33
● Shares Outstanding: 106.3M
● Market Cap: $98.44B
● P/E (TTM): 25.90
● Revenue: $13.12B
● Debt to Equity: 10.74%
Competitor Statistics from Q3 2021
Revenue: 13.12B
Net Income: 3.95B
Revenue: 9.87B
Net Income: 3.62B
R Net Income: 1.59B
Regeneron Pharmaceuticals Inc. (REGN) Pipeline to Success
Investment Thesis:
Regeneron Pharmaceuticals Inc (NASDAQ: REGN) is a biotechnology company engaged in the discovery, development, and commercialization of drug treatments across several fields including ophthalmology, oncology, cardiology, as well as inflammatory and immune disorders, infectious diseases, and genomic medicine. My buy recommendation is motivated by Regeneron’s strong financials, with strong revenue growth (excluding Ronapreve) of 14% for Q42022 to Q42023. Furthermore, it has optimistic growth potential after receiving approval in the US, Europe, and Japan for the treatment of patients with EYLEA 8 mg which outperformed analyst predictions in earnings and EPS.
Valuation/Financial Modeling:
As of April 22nd, Regeneron (REGN) is trading at $900.16. I believe Regeneron to be slightly undervalued and expected to reach a price of $978.47 within this year, which yields an 8.7% upside. I came to this conclusion by conducting a Comparable Company Analysis (CCA) between Regeneron, Vertex Pharmaceuticals, Sanofi, Boston Scientific, Amgen, and Bristol-Myers Squibb using a 1.8% Average GDP Growth rate. These companies were chosen for their comparable market cap, similar regulatory compliance and business models, and similar stages of maturity and growth.
Overview
Regeneron’s business relies on its blockbuster medication EYLEA, which treats age-related macular degeneration, diabetic macular oedema, and diabetic retinopathy. Recent FDA approval for a high dose (8 mg) of the drug is projected to motivate its growth and shields the company from the threat of biosimilar products soon to enter the market to compete with the 2 mg variation.
Regeneron’s partnership with Sanofi (SNY) to develop Dupixent, a drug with broad applicability to several inflammatory conditions, has been highly profitable and has become one of the fastest-growing drugs in the biotechnology sector with ongoing approval to expand into further markets Predictions for the annual sales of Dupixent reach nearly $20 billion by some analysts. The development of Libtayo is expected to become a blockbuster product and has nearly doubled in global revenues from 2022-2023. These give Regeneron a diversified product lineup.
Finally, Regeneron has been highly recognized for its success in developing a robust R&D pipeline, hosting 35 ongoing clinical trials, and utilizes new technologies in genomics and gene modification. Their emphasis on human gene research has been proven very effective in increasing clinical success. They also announced plans to work with Intellia Therapeutics on expanding gene-editing therapies.
Regeneron has a PE ratio of 25.9, which is about 0.79x less than the industry average, contributing to an optimistic outlook on potential growth. Furthermore, Regeneron repurchased ~2.2B of shares in 2023 and is investing nearly ~5B in R&D in 2024.
Historical TTM Comparable Share Pricing
Risk Potential
Decline in Earnings:
Despite Regeneron’s decline in EPS during Q4 of 2023 as compared to Q4 of 2022, their earnings decline can be partly explained by a $0.21 impact from the acquired IPR&D charge However, projections for Q1 of 2024 have earnings growth at 4.02% with Regeneron having outperformed earnings projections for the last 4 quarters Furthermore, there is optimism for earnings growth as EYLEA HD is rolled out to reignite falling revenue from EYLEA 2 mg
DOJ Complaint:
Shares dropped earlier this month after the United States Department of Justice filed a complaint against Regeneron, accusing the company of fraudulent drug pricing The DOJ filed this complaint under the False Claims Act, alleging the company inflated the Medicare reimbursement rates for Eylea, which could have allowed Eylea to become the market leader in its space If found guilty, the government is allowed to recover 3x the amount of its losses from the company Sources:
Julian Dahl| 4/21/2024
Rating: Buy
Current Price: $117.43
Price Target: $126.10
Company Updates
● Market Cap: $18.701B
● Beta: 1.19
● EPS: $0.81
● PE Ratio: 149.58
● 52 Week High: 229.55
● 52 Week Low: 89.00
● Biotechnology industry and Illumina specifically outperformed sales expectations in the past quarter
● Appointment of a new CEO at the end of 2023 and a new CFO this year increase prospects of future shareholder value
Competitor Statistics from Q4 2023
Revenue: $10.89B
Revenue: $ 1.69B
Illumina (ILMN)
Capitalizing on New Leadership and AI
Investment Thesis:
Since Illumina’s founding in 1998, the company has focused on innovation in the field of genomics and has experienced extensive growth with its creation of integrated systems for the analysis of genetic variation.
My buy recommendation reflects a belief that Illumina will experience increased profitability under new leadership and with the advancement of its CRISPR gene editing technology through developments in AI.
Valuation/Financial Modeling:
As of April 4th, Illumina (ILMN) is trading at $117.43. I believe that this equity is undervalued and expected to increase to $126.19 this year. I arrived at this conclusion by conducting a DCF analysis with a 4% growth, 17.5% operating margin, and a WACC of 8.97% across 5 years. I used these assumptions based on historical data and an optimistic view given Illumina’s performance history and the outlook of the biotechnology industry as a whole.
Genetic Sequencing, AI and Illumina’s Advantage:
Illumina is known to have the most advanced systems that carry out DNA sequencing at capacity, speeds and costs that are unrivaled within the healthcare industry. This technological advantage places Illumina at the forefront of the healthcare industry as more companies enter the healthcare space with new ways for Illumina to implement its systems
Additionally, the emergence of AI allows Illumina to create more sophisticated genomic analysis and further innovate its systems Illumina has already unveiled AI software that can predict disease-causing genetic mutations in patients
Overview:
Within the past 5 years, Illumina’s stock has experienced significant turmoil, breaking a stock price of $500 in 2021 and falling below a price of $100 at the end of 2023 as investors began to realistically evaluate the financials after a subpar earnings report. Yet, the company’s promising technology has solidified Illumina as a leader in the genomics market, which needs to be taken into consideration when valuing the company.
Therefore, my categorization of ILMN as a buy takes growing forecasted earnings and continued industry dominance into account as well as the assumption that new company leadership will realize untapped growth.
Julian Dahl| 4/21/2024
Forecasted Consistency and Rebound from 2023 Q4 Lackluster Performance
Source: Yahoo Finance Risk Potential
2024 Q1 Earnings Report: A significant factor that will heavily impact Illumina’s stock price in the near future is its 2024 Q1 earnings report, which will be released on May 2. If Illumina outperforms earnings expectations, it will immediately cause an increase in the stock price as a stellar performance shows that Illumina’s new leadership is steering the company in the right direction.
Legal Disputes: Illumina had been dealing with an antitrust lawsuit from the FTC until the end of 2023, which led to Illumina’s divestment from Grail, a manufacturer of cancer detection tests This lawsuit reversed Illumina’s progress in the cancer treatment market, in which Illumina wanted to increase its market share However, the loss of this lawsuit does not remove Illumina from contention for market share as this ruling only made the cancer treatment more competitive. Illumina’s innovative technology still gives the firm a competitive edge.
Sources:
Financials
1Q2024Recap:TheBadNewsDon’tStop
The nancial industry is still playing it close to the chest in early 2024. Even as some individual companies maybeoutpacingtheirpeersasthingsreturnto“normal”, no one wants to get caught in a whirlwind of potential economic woes. The mostdebatedtopicintheindustryis stillwhetherornotthemarketwillachievethecovetedsoft landing. Adding fuel to the re, rst quarter earnings showed a wide range of results from individual names. Common themes include lower net interest income, concern about in ation, and higher fees returning for investmentbankingbusiness.Thetrueimpacthasyettobe seenbuttherestoftheyearissuretobeatumulta air.
Worse than expected economic data continues to put pressure on the Fed to keep interest rates high. At the beginning of 2024, the market, investors, and economists were optimistic that the Federal Reserve would cut interest rates down around 6 -7 times from their 20-year high of 5.5%. The Fed raised their target Federal Funds Rate in response to soaring inflation in 2021. Now that sentiment has all but been eliminated. The most bullish experts now are planning for only around 3 rate cuts for the full year. Bearish investors are arguing for the possibility of a hard landing and the economy heading into a recession.
Inflation has still not come down to the 2% goal, sitting at an average of 3.4% for FY23 and ~2.8% for the first three months of the year. In parallel, unemployment has remained surprisingly lowbased on a belief from employers who don’t want to get caught short staffed like directly after the pandemic Whereas, the inflation we are currently experiencing should typically drive up unemployment. Furthermore, 1Q GDP dropped to 1.6% from 3.4% a quarter prior, significantly lower than expected. This combined negative economic data puts the Fed at an awkward position - trying to stifle inflation while not driving down growth so much that the economy falls into a recession. Fed chairman, Jerome Powell, has retained a conservative attitude and method of attack towards this problem and the market seemingly expects him to continue this approach.
Metrics and Graphs (Put titles/description under graph)
Investment banking and Private Equity business, blah blah - fighting back. Space. As they lock eyes, what world they know is flipped completely towards the southern sky, and the pool ushers them swiftly towards the edge of the horizon’s curve. The fox and the dog free-fall off the edge into nothing, which is to say, they were fine Landing promptly on the other side of the world, they look up into what is somehow a giant hand, impossibly looking back at them. The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends toward them without beck
Known for his sweetness, this dog shakes himself awake with a gentle groan and cranes his loaf-like head towards the fox with a quizzical bent. As they lock eyes, what world they know is flipped completely towards the southern sky, and the pool ushers them swiftly towards the edge of the horizon’s curve The fox and the dog free-fall off the edge into nothing, which is to say, they were fine
FinTech leading the charge as the industry settles into the 21st Century. One of the biggest changes in the financial space is the implementation of technology into the
leaves fall without a plan to the ground, mirroring the unhurried chestnut thatch of the fox’s dense coat. The fox looks to the west, only then realising the horizon has begun to curve towards them. Perhaps they should not have jumped so soon. The hem of the pool expands indefinitely, ringing the sleeping dog and now worried fox with concentric circles of glowing liquid.
Basel III Endgame and other expected regulations upsetting companies Only one bank has failed so far this year - Republic First, compared to the spiraling trend of similar failures in 2023. The FDIC took over the failed banks in an attempt to recover depositors’ funds, and subsequently regulators sold the banks’ assets to peers
This comes at a time when US regulators are proposing stepped up requirements for banks. The proposals are based on the recommendations of the Basel Committee in response to the Great Financial Crisis of ‘09. They include higher reserve requirements, stricter risk testing, and heightening the requirements for banks with smaller amounts of assets.
The industry has pushed back against the current Endgame prospal, which would not go into effect until July 2025. The industry argues that the suggested guidelines would lower profitability and reduce competition, ultimately causing more banks to fail.
Augustus Paluzzi | 4/22/2024
Rating: Sell
Current Price: $231.04
Price Target: $164.02
Company Updates
● P/E: 19.03
● Equity Value: $168B
● EPS: $11.21
● 52 Week Low: $140.91
● 52 Week High: $242.30
● Shares Outstanding: $723M
Competitor Statistics from Q4 2023
Cards issued: 2.9B
Revenue: $32.7B
Cards issued: 2.7B
Revenue: $25.09B
Cards Issued: 44M
Revenue: $49.48B
American Express (AXP) The Future of Retail Lending
Investment Thesis:
American Express (AXP) serves a wide range of different customers across the globe, offering consumer credit and lending services, as well as loan opportunities As of April 2024, the firm maintains 4.61% of total global credit card usage as compared to 38.7% and 24% for Visa and Mastercard respectively
My sell recommendation reflects a belief that the firm’s COGS has steadily risen over the past few years cutting into margins year on year, and additionally, the firm has undergone several instances of restructuring but still has a fairly poor BBB+ rating With the anticipation of high future interest rates and internal issues within the firm.
Valuation/Financial Modeling:
As of April 22nd, American Express (AXP) is trading at $231.04 I believe that this equity is overvalued and expected to decrease to $164.02 over the next few years. I arrived at this conclusion by conducting a DCF analysis with a tax rate of 23%, risk free rate of 2.944%, beta of 1.23, and a WACC of 5.2%. based on the firm’s bond rating and market premium from the S&P average. This gives an implied downside for the firm and supports a view of the sell rating primarily driven by the firm's high COGS growth limiting cashflows.
High Interest Environment:
The US federal reserve is currently targeting a higher for longer interest rate which will cut directly into the firm’s lending and loan revenue. Additionally, the US government is exploring higher liquidity requirements following the implosion of Silicon Valley Bank and other regional banks. These potential changes may also change the lending environment which will further cut into future revenues. In order to mitigate these changes the firm may need to explore a modification of its current lending model and its interest deposit structure in order to meet liquidity guidelines.
Overview:
In 2024 the firm had a 10.7% market share and has demonstrated strong YTD growth, contributing to a view of being overvalued as a factor of the actual underlying equity. The firm’s shares have realized a 22% YTD growth although the firm only experienced a 9.8% growth in total gross revenues (after loan losses) and a 10.39% increase in COGS
Augustus Paluzzi | 4/22/2024
Opening Price of Visa and American Express YTD:
Source: Yahoo Finance
Risk Potential: Potential Upsides
The firm has seen strong year-to-year revenue growth across several of its divisions which has bolstered the firm's earnings performance increasing bullish sentiment on the firm. The firm also maintains a great deal of cash reserves in the form of cash and short-term investments, which provides a cushion to future liquidity issues if they occur.
The firm has also seen a revamping of its member rewards programs which has injected fresh capital into the company's reserves as customers aim to fully utilize their points. This led to a greater amount of cash for the firm, which was promptly used on advertising expenses and reinvested in the firm's core operations to contribute to further revenue generation.
The firm’s primary competitive advantage over its competitors is its offerings to high net worth individuals such as the platinum and black cards, which contribute to the firm’s strong brand image and cache as the choice of the perceived wealthy. These offerings provide the firm not only with very productive revenue streams but also create a public perception which favors the brand publicly.
Gregory Bucher | 23 May 2024
Rating: Buy
Current Price: 124.42
Price Target: 193.42
Company Updates
● Market Cap: $13.33B
● Beta: 0.81
● EPS: 5.54
● PE Ratio: 22.9
● 52 Week High: $127.00
● 52 Week Low: $72.60
Competitor Statistics
Revenue: $1.865B
Interactive Brokers Group Inc. (IBKR) Riding the Wave
Investment Thesis:
Interactive Brokers Group Inc is an online trading brokerage that allows consumers to execute trades at low costs while providing advanced analytic tools. Interactive Brokers provides services to retail investors, hedge funds, proprietary traders, and financial advisors. The main source of revenue for this company is trading commissions.
My buy recommendation reflects the belief that Interactive Brokers will be able to beat its quarter two earnings report due to the strong financials that it has posted over the past few years. Namely, the company has increased revenue at a compound rate of 17.9% over the past five years with net income experiencing growth as well. Additionally, the firm has been pushing to expose itself to more clients including retail investors and institutional clients.
Valuation:
As of May 23rd, Interactive Brokers Group Inc. (IBKR) is trading at $124.42. I expect this equity to see a sharp increase up to $193.42 within the next twelve months. This conclusion reflects quantitative comparable analysis based on historical increases in revenue data. I expect revenue for the end of 2024 to reach 5.945B TTM, based on a projection of the average growth since 2020. I compared Interactive Brokers to a number of competitors and examined trading multiples such as EV/Revenue, EV/EBITDA, and P/E ratio to determine a target share price for the company
Overview:
In 2023, Interactive Brokers saw total assets increase from $245.7B to $273.7B and total liabilities increase from $159.4B to $174.8B It is important to note that Interactive Brokers is heavily affected by larger economic conditions one of the largest ones being interest rates When interest rates are high, trading activity tends to lessen and vice versa. It is expected that the federal reserve will cut rates later this year due to stabilizing inflation. This may cause traders to be more active.
The firm is also actively working to expand its client base. On May 22, 2024, news broke that the firm was invited to join a derivatives trading market in Europe. The market in question is the Cboe European derivatives market which will give the firm much more exposure to clients. On the same day, it was announced that Interactive Brokers would partner with FusionIQ, a wealth management solutions platform used by advisors and institutions. Both of these events will expand the firm’s reach and may lead to more users.
Gregory Bucher | 23 May 2024
Historical Comparable Share Pricing (TTM)
Source: S&P Capital IQ
Risk Potential
Data Breach: In May of 2024, Interactive Brokers filed a notice of data breach with the attorney general of Massachusetts This data breach was caused by a third party achieving access to an employee’s email account. This allowed the third party to get access to sensitive customer information including social security numbers, financial account information, and driver's license numbers This has caused some consumers to lose trust in the firm. It could be worth investing in stronger encryption for employee emails which may mitigate the chances of this occurring in the future
Liquidity Risk: Interactive Brokers provides customers with the option to trade on margin. This entails loaning the customer currency with the expectation that it will be paid back. Trouble could arise if customers do not repay what they owe the firm. This could be heavily reliant on unemployment trends
Competition Pressures: Online trading brokerages have become increasingly popular in the past decade. This has led many platforms to reduce trading commission and option contract fees which makes the landscape more competitive Being that commissions are a huge part of Interactive Brokers’ revenue, this could negatively impact earnings. It is essential that the firm continuously lowers its commissions in comparison to competitors or it will start to lose customers. Another potential route to keep revenue intact is to incorporate advertisements on the app and website.
Sources: S&P Capital IQ | Yahoo Finance | Advisorhub | PR Newswire | JD Supra
Hospitality&RealEstate
4Q2023Recap:BackandBetterthanEver
US real estate investment trust stocks outperformed the broad market in the fourth quarter of 2023, signalling success in the sector. Real estate stocks include residential, commercial, healthcare, and specialty properties. Additionally, they may include certaintrustsandmortgageREITs.Whilenottheentire sector, the Dow Jones Equity All REIT may be able to predictthesectorbroadly,astheyclosedthequarterwitha 17.9%totalreturn,outperformingtheS&P500whichwas up 11.7% for the quarter. The prior quarter lefttheDow JonesEquityAllREITIndexnegative8.4%.
The Dow Jones US Real Estate Regional Malls Index closed the fourth quarter of 2023 with the highest total return of 34.3%. This signals the success of malls and the return of retail post-pandemic Macerich Co. had a quarterly return of an outstanding 43.8% and Simon Property Group Inc. closed with a 33.9% return. While these equities performed well this quarter, it is likely more productive to look toward e-commerce stocks over brick-and-mortar stocks in terms of long-term investments. Commercial real estate lending remains tight. High interest rates have meant that capital for commercial real estate was costly and difficult to raise. As a result, developers switched toward private credit markets in the hope of boosting supply despite the rocky territory. Indeed, high interest rates likely curbed transaction activity. Transaction volume estimates show that transaction activity was down approximately 37% year-over-year.
While not as significant, the Dow Jones US Real Estate Apartments Index closed the fourth quarter with a return of 8.9%. The supply of single-family homes was on the rise with inflation subsiding and a strong economy This combination of factors makes it economical for developers to increase the construction of new properties Nonetheless, demand still outweighs supply in the market as supply is at a historic low
Q4 2023 total return for the Dow Jones Equity All REIT Index (%) (Source: S&P Global Market Intelligence)
Commercial Real Estate lending standards showed relief (Source: Bloomberg Finance)
Capitalization rates over investment-grade bonds narrowed and remained low at the end of the fourth quarter of 2023. Shopping centres and offices were the most attractive with the highest cap rates. Nonetheless, they have seen recent challenges with the shift to remote work and the rise of e-commerce. The Fed signalling a decrease in interest rates would mean that commercial real estate spreads would become more attractive as the cost of capital would decrease as a result.
Hotel Room Occupancy by Year (Source: Oxford Economics + STR)
Hotel stocks rallied in 2023; up 40% when compared to numbers in 2022. The Baird/STR Hotel Stock Index, which includes 20 of the largest publicly traded real estate investment trusts and hotel brand companies on the US Stock exchange by market capitalization, was up 10.5% for Q4 of 2023 and 38.4% for 2023. The hotel industry has seen a steady recovery since its lowest point during the COVID-19 pandemic in 2020. Thus, it is said that the year 2023 has been referred to as “normalizing.” The returns are therefore somewhat relatively inflated given how low the lowest drop was in the sector. Revenue per available room, “RevPAR” increased 5% from the previous year and averaged 3.1%; the long-term quarterly average is 2.9%. While this is up from 2020 during the pandemic, when compared to numbers from 2019, RevPAR was still above the benchmark. While these numbers were up, quarterly occupancy rates fell 160 basis points.
This is likely a byproduct of decreased demand for corporate and leisure travel in the face of economic uncertainty and high inflation at the end of 2023.
As we enter into 2024, the housing market shifts. Indeed, mortgage rates remain high, forcing many out of the option to purchase a home. This coupled with staggeringly high home prices and low housing stocks means limited options for many. For the housing market to recover, a few factors must unfold. Indeed, mortgage rates would need to decrease The fall in rates can be a little slow, however If they descend too quickly, there may be an increase in demand that would diminish the inventory and once again increase the price of homes Mortgage rates returning to a normal rate, of about 4%-5%, rather than the current 7.17% would signal a healthier market.
Blackrock predicts that today’s volatile macroeconomic environment is the perfect opportunity for an investor to choose assets at ‘attractive prices.’ Real estate trends will likely shift as millennials grow families, increasing demand for affordable housing stock. With this comes the demand for retail in nearby neighborhoods and such accompanying service providers. Meanwhile, baby Boomers will boost demand for destination retail and hospitality. They will also be increasing the demand for medical offices. Investors should look toward these changes in the real estate market as an opportunity to take advantage of social shifts.
1-year total return for Dow Jones Equity All REIT Index (2023) (Source: S&P Global Market Intelligence)
Krish Patel | 30 April 2024
Rating: Buy
Current Price: $87.94
Price Target: $100
Company Updates
● Market Cap: $26.81B
● EV/EBITDA: 17.74
● Forward P/E: 21.41
● Return on Assets: 3.63%
● Quarterly Revenue Growth (YoY): 9.20%
● Dividend Yield: 1.72%
Competitor Statistics from Q1 2024
EV: $30.37B Revenue: $5.18B
EV: $7.34B Revenue: $4.33B
EV: $1B Revenue: $645M
CBRE (CBRE)
Fortune’s “Most Innovative” Commercial RE
Investment Thesis:
Despite facing numerous significant threats to its core business, CBRE has delivered an outstanding return of over +1000% since its listing on the NYSE in 2004. The company's ability to thrive in the commercial real estate sector despite challenging macroeconomic conditions such as the subprime mortgage crisis and the COVID-19 pandemic underscores its resilience.
My buy recommendation of CBRE stock is based on the company's position as the world's largest commercial real estate services provider, coupled with its diverse range of services, which will continue to support robust financial growth.
All-Encompassing Commercial RE Services:
CBRE leads the real estate services industry with six core offerings: customized consulting, client financial advisory, real estate asset management, and property design and construction. Notably, its property design and construction service boasts a 7:1 Value-to-Fee ratio globally. CBRE's extensive in-house capabilities allow it to capture more market share and effectively cross-sell services. For 2024, CBRE expects to achieve core earnings-per-share of $4.25 to $4.65, implying mid-teens percentage growth at the midpoint of the range up from 2023 EPS of $3.84, but still notably short of 2022 EPS of $5.69
Overview:
The financial metrics comparing Q4 2022 to Q4 2023 demonstrate several notable improvements Revenue increased from $8,194M to $8,950M, marking a 9.2% rise, while net revenue saw a 4.3% increase from $4,975M to $5,187M. Moreover, GAAP net income showed a significant surge, increasing from $81M to $477M, marking a staggering 487.9% rise Additionally, core EBITDA increased by 10.4% from $668M to $737M. These positive figures reflect the company's robust performance and its ability to generate strong revenue and profitability.
Krish Patel | 30 April 2024
CBRE Stock Performance vs Comps (Q3 2022 - April 30, 2024)
Source: Yahoo Finance
Risk Potential:
Office Space Downturn: The COVID-19 pandemic's shift to remote work has changed workforce operations, with large occupiers reducing office footprints by 20% to 30%, and some cutting by 50% or more (Collier Report, 2023). This has led property owners to sell assets at reduced prices. For CBRE, this presents both opportunities and threats. CBRE can offer financial solutions to help clients navigate these challenges, but macroeconomic factors pose risks of significant losses and potential loss of client trust.
Economic Uncertainty: In the volatile market, commercial real estate stakeholders are cautious, navigating price discovery. PwC reports lenders imposing stricter borrowing requirements, raising financing costs and challenging companies seeking capital. This has decreased competition for deals and pressured certain assets. Colliers' 2023 report predicts distress across all asset classes.
Consumer Behavior on Retail Real Estate: The average lease size of retail shops is expected to decline due to rising interest rates, disrupted supply chains, and the growth of online shopping. Retailers are optimizing space quality to maintain their bottom line. Business Insider reports over 2,100 store closures in the US for 2023. For example, Foot Locker plans to close around 400 mall stores in North America by 2026, aiming to introduce new play-focused outlets This trend highlights the 2024 shift from traditional stores to new-concept outlets
Sources: CBRE Webpage | Yahoo Finance | SEC gov | Capital IQ | Financial Times | LinkedIn - Nakisa Real Estate
Isabella Mourelle| April 10, 2024
Rating: Buy
Current Price: $236.00
Price Target: $263.47
Company Updates / News
● 52-Week High: 260.57
● 52-Week Low: 162.78
● EPS Ratio: 9.84
● P/E Ratio: 23.33
● Recently, Fairfield by Marriott announced its 50th hotel opening in greater China, the Fairfield by Marriott Chengdu High-Tech Zone.
● Marriott International Signs an Agreement with NEOM bringing the Ritz-Carlton Reserve to Trojena.
Competitor Statistics from Q3 2022
R 10,235,000
Revenue: 6,667,000
Revenue: 16,164,249
Marriot International (MAR) Fairfield Growing Globally
Investment Thesis:
Marriot International is one of the largest hotel chain companies, providing service in over 139 countries and owning over 30 hotel and timeshare brands. Marriot sorts its hotel offerings into 7 different categories: luxury, distinctive luxury, premium, wealth, select, longer stays, and collections. The company aims to provide customers with good food and hotel service at a reasonable price throughout its chains
My buy recommendation reflects my belief that Marriot will continue to perform well, given the recent expansion of its Fairfield brand into Europe and the Middle East and the company's continued enactment of its net-zero emissions objective.
Valuation/Financial Modeling:
As of April 10th, 2024, Marriot International traded at $236 00 per share I believe that this equity is undervalued and will increase to $263.47. I arrived at this conclusion by conducting a comparable companies analysis, comparing Marriot to Hilton, Hyatt, MGM Resorts, and Wynn Resorts, with a 1.8% growth assumption.
Fairfield Brand Expansion:
Marriot is expanding its global presence with the launch of its Fairfield by Marriott in Copenhagen Nordhavn. The Fairfield by Marriott is the company’s second-largest brand, operating 1,290 open hotels worldwide with 450 companies The company is expected to open 17 hotels in Europe and the Middle East.
In addition to this global expansion, Marriott is converting existing properties into Fairfield hotels to mitigate pandemic-related construction delays. Amid the construction slowdowns caused by the pandemic, Marriott has adeptly shifted its strategy to include converting existing properties into Fairfield hotels By the end of 2023, conversions accounted for a significant portion of new room signings and openings, highlighting Marriott’s adaptive approach to expanding its global footprint amid a challenging financial landscape.
Science-Based Targets Initiative (SBTi):
SBTi is a voluntary project organized by many non-profit organizations and the United Nations As a joint venture among respected non-profits and the United Nations, SBTi aims to drive ambitious corporate climate action by helping companies set science-based emissions reduction targets Its reputation is only to accredit companies that have adopted rigorous standards for tracking and disclosing data and have many serious carbon-mitigation plans Marriott has recently stated that the SBTi approved its near-term and long-term science-based targets, joining some of its industry competitors such as Accor and Hilton. The company has committed to reducing its absolute scope 1 and 2 GHG emissions by 46 2%, utilizing 2019 as a base year The company plans to do this by 2030
Isabella Mourelle| April 10, 2024
Marriot International & Competitors Monthly Share Price (YTD)
Source: Yahoo Finance
Risk Potential
Wars: Currently, many wars are affecting various countries and states, including Palestine, Israel, Russia, and Ukraine. If these wars continue to engulf more of the world, it could affect Marriot, which may hinder many travelers from traveling. This may hinder Marriot's global expansion plans, as it may not be profitable to expand into the European and Middle Eastern hospitality industry if travelers cannot travel due to the safety concerns caused by the nearby wars.
Pre-Mature Termination of Contracts: Marriot Relies heavily on its hotel management and franchise agreements, causing the company to be subject to premature termination of its agreements in circumstances such as the bankruptcy of a hotel owner or franchisee, the failure of the hotel owner or franchisee to comply with its payment or other obligations under the agreement. When these pre-mature terminations occur, Marriot may need to enforce its right to sue the entity for damages and other legal claims, causing the company to incur significant legal fees and expenses. Additionally, if the company lost these agreements significantly, it could hurt its overall financial performance and ability to grow.
Sources: T-Mobile Investor Relations | Deloitte | Investors.com | | Yahoo Finance | Marriot International Investor Relations | Hilton Investor Relations | SEC.gov | Capital IQ
ESG&Energy
1Q2024Recap
Lede and Abtract: The hem of the pool expands inde nitely, ringing the sleeping dog andnowworriedfox withconcentriccirclesofglowingliquid Thepoolhaslost itsre ectioninthespread,imbuedwithaninnerlightthat seems to have its own authority, though not lacking in warmth.Aoncedullandlistlesspoochnowshineswiththe brillianceofarecentlycleanedneon.
Known for his sweetness, this dog shakes himself awake with a gentle groan and cranes his loaf-like head towards the fox with a quizzical bent. As they lock eyes, what world they know is flipped completely towards the southern sky, and the pool ushers them swiftly towards the edge of the horizon’s curve The fox and the dog free-fall off the edge into nothing, which is to say, they were fine Landing promptly on the other side of the world, they look up into what is somehow a giant hand, impossibly looking back at them. The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.
Known for his sweetness, this dog shakes himself awake with a gentle groan and cranes his loaf-like head towards the fox with a quizzical bent. As they lock eyes, what world they know is flipped completely towards the southern sky, and the pool ushers them swiftly towards the edge of the horizon’s curve. The fox and the dog free-fall off the edge into nothing, which is to say, they were fine. Landing promptly on the other side of the world, they look up into what is somehow a giant hand, impossibly looking back at them. The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends toward them without beck
The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends toward them without beckThe hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends toward them without beck
Metrics and Graphs
Known for his sweetness, this dog shakes himself awake with a gentle groan and cranes his loaf-like head towards the fox with a quizzical bent. As they lock eyes, what world they know is flipped completely towards the southern sky, and the pool ushers them swiftly towards the edge of the horizon’s curve. The fox and the dog free-fall off the edge into nothing, which is to say, they were fine Landing promptly on the other side of the world, they look up into what is somehow a giant hand, impossibly looking back at them. The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends toward them without beck
Known for his sweetness, this dog shakes himself awake with a gentle groan and cranes his loaf-like head towards the fox with a quizzical bent. As they lock eyes, what world they know is flipped completely towards the southern sky, and the pool ushers them swiftly towards the edge of the horizon’s curve The fox and the dog free-fall off the edge into nothing, which is to say, they were fine
Landing promptly on the other side of the world, they look up into what is somehow a giant hand, impossibly looking back at them. The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends toward them without beck.The fox and the dog free-fall off the edge into nothing, which is to say, they were fine.
leaves fall without a plan to the ground, mirroring the unhurried chestnut thatch of the fox’s dense coat. The fox looks to the west, only then realising the horizon has begun to curve towards them. Perhaps they should not have jumped so soon. The hem of the pool expands indefinitely, ringing the sleeping dog and now worried fox with concentric circles of glowing liquid.
The pool has lost its reflection in the spread, imbued with an inner light that seems to have its own authority, though not lacking in warmth. A once dull and listless pooch now shines with the brilliance of a recently cleaned pinball machine unknowingly showcasing a rescued sens of neon.e quick brown fox jumped over the lazy dog into a shimmering pool of rainwater that had gathered since the last frost. Soft clusters of
Landing promptly on the other side of the world, they look up into what is somehow a giant hand, impossibly looking back at them. The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends toward them without beck.The fox and the dog free-fall off the edge into nothing, which is to say, they were fine. Landing promptly on the other side of the world, they look up into what is somehow a giant hand, impossibly looking back at them. The hand bends toward them without beckoning, and the dog and fox survey their new landscape, the under-pool or their second world.The hand bends
Thomas Bailey| April 25, 2024
Rating: Hold
Current Price: $39.40
Price Target: $40.51
Company Updates / News
● Market Cap: $107.5B
● Beta: 0.61
● EPS: 0.18
● PE Ratio: 1.07
● 52 Week High: $40.84
● 52 Week Low: $33.52
● Beginning production from offshore rig in the ACG field.
● Offshore wind mills leading the sustainable transition.
● Understanding the energy transition timeline is crucial to the future profitability of BP
Competitor Statistics
from FY 2023
EV/EBITDA: 6.59
Revenue: $338.3 B
EV/EBITDA: 4.0
Revenue: $316.6B
EV/EBITDA: 6.58
Revenue: $196.0B
British Petroleum (BP plc) Sustainable Future? Not Yet
Investment Thesis:
British Petroleum (BP) is an international energy and industrial conglomerate with over 21,000 retail sites in 70 countries across the globe While the company is well-known for its oil and gas business, the firm operates in every aspect of the energy supply chain ranging from bioenergy to hydrogen to renewables. As our world and future shareholders prioritize sustainability, BP will be well able to reinvent itself into a company for the future. As current technology is far from achieving fully sustainable methods to replace fossil fuels, BP’s multidimensional positioning in the energy industry allows it to both supply the globe’s current demand while simultaneously investing in the technology for its future.
Valuation/Financial Modeling:
As of April 25th , 2024, BP was trading at $39.40 with a market capitalization of $107.5 billion. In completing a discounted cash flow analysis, this equity is fairly valued with an expected increase to $40 51 within the current year I conducted a discounted cash flow analysis with a terminal growth rate of 5% and a weighted average cost of capital of 6 75% across 5 years to arrive at this valuation My assumptions are based on BP’s historical data and an optimistic view of Target’s future performance Because of this analysis, I am rating BP as a hold in your portfolio.
Oil and Gas Expansion:
Although most of the conversation in today’s world concerns ESG and renewable forms of energy, my analysis indicates that oil and gas will power our world for the next 5 On April 16th, BP’s offshore ACE rig in the ACG field in the Caspian Sea off the coast of Azerbaijan, began production. This project has a lifespan of 3 years or 300 million barrels with a rate of 100,000 barrels per day BP incorporated technological advancements in this project to ensure the safety of its employees and the world as a whole. For example, ACE is the first offshore rig with an onshore control center which might appear counterintuitive to ensuring safety, but in reality, the motion sensors, cameras, and other technology on the platform provide live updates to the team who can make mechanical changes immediately
Sustainability Effect:
Similar to the rest of the world, BP understands the importance of converting the world’s energy sources from fossil fuels to renewable sources To take it a step further, as a global energy conglomerate, BP is leading the charge. The company has not only publicly stated its goal to help the world by achieving carbon neutrality by 2030, but created and released a detailed plan on how the firm’s leadership will achieve the goal. For example, BP is capitalizing on optimizing its wind technology by moving windmills offshore BP does not view the energy transition as a threat to its business but rather is investing in R&D to position itself to continue its status as a leader and pioneer in the energy industry.
Thomas Bailey| April
25, 2024
British Petroleum vs Exxon Mobil Monthly Share Price (YTD)
Source: S&P Capital IQ
Risk Potential
New Technologies
Although British Petroleum has immense resources and is investing heavily in renewable energy technologies, alternative competitors could potentially invent and patent protects new groundbreaking methods of renewable energy or energy storage. With the increase in tax incentives provided by the US government through the Inflation Reduction Act, competition to find the “next” oil is fierce.
Energy Transition Timeline
As a leader in the fossil fuel industry, BP has several long-term investments and capital locked into what will soon be outdated technologies. If the firm’s leadership misjudges future demand for fossil fuels, the company can be left with large amounts of inventory selling at steep discounts or on the other hand face a supply shortage. Correctly predicting the energy transition timeline is crucial to future success.
Geopolitical Uncertainty
British Petroleum operates in over 70 countries across the globe and has operations in several others. With the raging war in Ukraine and Israel/Palestine and the recent involvement of China and Iran, there are immense concerns surrounding the geopolitical future of our world. To further this concern, BP has a global supply chain with strongholds in the Middle East. This uncertainty will affect the price of oil and thus BP’s overall profitability
Sources: bp com/en/global/corporate/investors html| NY Times | Barrons| Yahoo Finance | Investors tjx com | Capital IQ |corporate.exxonmobil.com
Raheem Amany | 4/22/24
Rating: Hold
Current Price: $39.18
Price Target: $54.92
Company Updates
● PE ratio: 8.37X
● Market Cap: $50.29B
● EBITDA: $17.78B
● Revenue: $12.8B
● Suncor Energy stock, despite being stably upwards over the past 12 months, raises concerns to investors due to low P/E ratio at 8.37X
● Murphy Oil completes sale of Syncrude Assets to Suncor Energy for $741M
Competitor Statistics from Q3 2021
Suncor: $12.8 B
Revenue: $210.1B
Revenue: $11.3B
Suncor Energy (SU) All Tapped Out?
Investment Thesis:
Since its official establishment in 1967 after investing heavily in the Great Canadian Oil Project, also referred to as ‘The Biggest Gamble in History,’ Suncor Energy Inc. has been going strong in its stock value in the energy industry. From April 2022, the stock has maintained stable pricing, growing from $32.82 to $39.18 now.
My hold recommendation reflects a belief that Suncor will maintain stable pricing and possibly continue to grow; however, will take time due to the reliance on oil and the long-term nature of proposed projects
Valuation/Financial Modeling:
As of April 22nd, Suncor Energy (SU) is trading at $39.18 I believe that this equity is undervalued and expected to increase to $54.92 within the next 12 months I arrived at this conclusion by conducting a DCF analysis with a 5% growth, 6% operating margin, and a discount rate of 7% across 5 years I used these assumptions based on historical data and a realistic view given Suncor’s performance history, but also the current challenges faced by the company specifically and the industry as a whole as a brand reliant on oil.
Oil Sands Development:
Suncor Energy is the first company to commercially develop oil sands in Northern Alberta. The oil sand industry created by the company is now a key contributor to the overall success of Canada as a whole. Oil sands differ from traditional crude oil because it is in a solid, albeit granular state rather than the typical liquid form. As a result, Suncor pioneered the method of mining or heating it into becoming a higher-value version of synthetic oil. Suncor Energy has premier access to oil sands in Canada due to their initial exposure. Their sustainable mining and conversion processes and revolutionary techniques enable them to maximize the utility of their land as well as the efficiency of their production.
Canada’s Electric Highway:
Suncor Energy have pioneered Canadian energy and transportation through the creation of “Canada’s Electric Highway,” the first-ever highway that spans from coast to coast in Canada with EV fast chargers. As a company that champions sustainability, this was a massive landmark for both the company and the world in making electric vehicles a viable alternative to traditional gas. There are EV stations every 250 km maximum and the highway spans from Halifax to Victoria, BC, and goes through big and small cities, located close to the TransCanada Highway.
The highway also has an associated app that provides real-time updates about nearby EV charger availability, pay, charge initiation, and termination. Canada’s Electric Highway is responsible for lower carbon emissions in Canada.
Raheem Amany | 4/22/24
Suncor vs Competitors Close Price:
Source: Yahoo Finance
Risk Potential:
Global Reach: Despite being ranked 48th in 2020 for largest public companies in the world by Forbes Global 2000, Suncor Energy does not have a vast presence in global markets It is currently active, particularly in Canada, where it is headquartered, as well as in the United States Furthermore, it has onshore assets in Syria and Libya. However, Suncor is not currently active in Europe, Africa, South America, and most of Asia, and the window for these markets seems to be closing due to increased focus on renewable energy. Thus, there could be a cap on the company’s growth.
Allegations: In October 2023, Greenpeace Canada filed a complaint against Suncor with the Alberta Securities Commission (ASC) for failing to fully disclose climate-related risk to shareholders, including removing warnings that oil sands projects could become stranded assets in their 2023 climate report. The case is still ongoing, but this is a serious allegation for a company with “sustainability” in its core values. Aside from the accusations themselves already causing negative perception, should shareholders discover these claims have merit, the company could be due for serious restructuring and instability in the near future.
Declining Demand: The market for oil is incredibly competitive and at risk of dying out long term. In October 2023, cancellations occurred across Europe for oil as a whole, resulting in a huge increase in oil prices. Furthermore, considering it takes more resources to turn oil from solid sand to liquid form than normally liquid oil, it may be hard to maintain profits in a declining market while having to do more than competitors in production.
Sources: Suncor|Forbes| Tipranks.com | gurufocus.com | reuters.com | Yahoo Finance | Capital IQ | Simplywall.st
Kristian Suh | April 19, 2024
Rating: Buy
Current Price: $176.81
Price Target: $194.32
Company Updates / News
● First Solar, others seek additional tariffs on panel imports from Asia
● First Solar to Invest $1.1 Billion in Fifth US Panel Factory
● First Solar upgraded, SunPower downgraded at Evercore ISI
Investment Thesis:
First Solar Energy (FSLR) Solar Energy for the Future
First Solar Energy’s integrated approach in its renewable energy business model has leveraged itself as an industry leader Given the ongoing shift toward renewable energy sources, First Solar is poised to capitalize on the increasing demand for reliable and cost-effective energy solutions Since its IPO in 2006, First Solar’s share price has increased from $24 74 to $176 81 as of April 19, 2024
My buy recommendation reflects my belief that First Solar will perform well in the long term due to significant solar demand in the US combined with tariffs and First Solar’s expansion of its production capabilities.
Valuation/Financial Modeling:
As of April 19, First Solar is trading at $176 81 I believe that this equity is undervalued and expected to increase to $194.32 within the next twelve months. I arrived at this conclusion by conducting a DCF analysis with 1.8% growth, 10% operating margin, and a WACC of 5% across 5 years I used these assumptions based on historical data and an optimistic view given First Solar’s performance history.
Competitor Statistics from Q3 2024 Revenue: $2.6 B Revenue: $1.7 B
$7.5 B
US Demand and Protectionism:
In 2023 alone, 53% of new electric capacity came from solar energy. The U.S Energy Information Administration projects that US solar power generation will grow 75% from 163 billion kilowatt-hours in 2023 to 286 billion kWh in 2025. In the US solar panel manufacturing industry, First Solar captures an estimated 39 7% of the market share, making it a leading figure in the industry Furthermore, analysts expect First Solar to continue to gain market share due to incentives from the Investment Tax Credit and a reduced import cost risk Over the past year, the Biden Administration has reevaluated its trade policies with Chinese partners in the solar energy industry. The American Alliance for Solar Manufacturing Trade Committee has accused Chinese companies of inundating the US market with panels priced below domestic production costs, leading to a collapse in prices and jeopardizing the US solar industry These lobbying efforts come as the Biden Administration has shown increased support in driving growth in domestic US solar energy and revitalizing manufacturing activity through the Investment Tax Credit and Inflation Reduction Act
Expanded Production Capability:
In 2023, First Solar significantly increased its manufacturing capacity, reaching 16.6GW in 2023, up from 9.8GW in 2022. This increase is primarily attributed to its additions in Series 7 module capacity at US and Indian manufacturing plants Furthermore, the backlog for the total volume of orders that First Solar received grew from 61 4GW in 2022 to 80 1GW by February 2024, indicating a strong demand for First Solar’s products and renewable energy as a whole First Solar’s nameplate manufacturing capacity continues to increase as it heavily invests in constructing manufacturing facilities in the US due to favorable policies by the Biden Administration First Solar is investing up to $1 1 billion to construct its fifth manufacturing facility in the US and plans to vertically integrate it into its supply stream By 2026, First Solar is projected to double its nameplate capacity
Suh | April 19, 2024
Stock Price Change for DTE, FSLR, SPWR
Source: Yahoo Finance
Risk Potential
Inflation Risk: Inflation continues to impact consumer spending and remains a topic of concern. Trends show that inflation has forced consumers to incur debt to maintain their current living standards. Furthermore, inflation has also undermined the value of bonds where traditional relationships of bond values increasing and stocks decreasing have been reversed. With the Federal Reserve maintaining high interest rates and bond yields increasing, the US Government could be disincentivized in investing in solar infrastructure, due to the high costs and debt they would incur.
Operating Expenses: As First Solar continues to expand its production capabilities, it is also incurring significant operating expenses. In 2023, the total company debt amounted to $0.6 billion, an increase from $0.2 billion while the debt/capitalization ratio was 8%, up from 3%, the prior year. Given the capital-intensive nature of expanding manufacturing capacity, First Solar remains vulnerable to international competition, macroeconomic policies, and consumer trends that could impact its financial performance in the coming years.
Sources: McKinsey & Company | CFRA Equity Research | Wall Street Journal | Yahoo Finance |Alpha Energy | Insight Trends | Bloomberg | Capital IQ | Financial Times
Kristian
Rating: Buy
Current Price: $135.15
Price Target: $182.61
Company Updates / News
● Market Cap: $8.15 B
● Beta: 1.44
● EPS: 41.3x
● PE Ratio: 38.0x
● 52 Week High: $156.95
● 52 Week Low: $79.86
● Generac’s Q4 earnings miss expectations
● Profit margin decreased roughly 2% from 2023 Q3, driven by higher costs from producers
● Generac’s commercial energy generation market is expected to decline by 10%
Competitor Statistics from Q4 2023
EV/EBITDA: 17.7
Revenue: $4.02 B
EV/EBITDA: 27.0
Revenue: $2.28 B
EV/EBITDA: 18.6
Revenue: $3.26 B
Generac Holdings (GNRC) Revolutionizing Household Energy
Investment Thesis:
Founded in 1959, Generac has offered residential and industrial energy generation solutions across America for almost a century. Currently, its product offerings include industrial products such as mobile generators, light towers, heaters, pumps as well as residential products such backup power generators, clean energy, and portable generators. Recently, Generac missed Quarter 4 earnings marginally. However, this, coupled with weakening industrial demand, dropped the stock’s price vastly below its intrinsic value. Since its IPO in 2010, Generac has maintained a CAGR of 15%, demonstrating how it has been able to effectively utilize capital to develop its business. As such, my buy recommendation reflects the belief that Generac will continue to develop its core business while better combining its strengths and opportunities to dominate the household energy generation market.
Valuation/Financial Modeling:
As of April 21st, 2024, Generac Holdings was trading at $135.15 per share. I believe that this equity is undervalued and will increase greatly to $182.61 within the current year. I conducted a comparable companies analysis using First Solar, Nextracker, nVent Energy, Solar Edge, and EnerSys
Commercial and Household Smart Energy Sales:
Generac expects its main revenue growth to come from residential purchases of generators. Commercial sales are expected to be driven down 10% year over year due to increased demand for renewable energies over fossil fuel generators as well as increased reliance on large scale utilities over small, independent generators. Many homes in the United States do not come with a backup generator. This means that even capturing 1% of the market would lead to massive revenue 400 million generation. Furthermore, generation is not the entire story when it comes to powering a residential unit. Power metering and control are equally important parts that Generac also provides solutions for. As such, Generac is completely dominant and will remain a market leader in terms of residential energy solutions.
Power Outages: Crisis and Profit:
Most of Generac’s products in the residential space are back-up generators. So, demand for these generators would be strongest in residential properties that experience power outages as well as extreme weather events often. Due to climate change, there has been a rapid uptick in demand for energy generators across the United States. This, as well as a renewed demand for residential energy due to warming temperatures as well as household EV chargers have brought Generac new demand and markets. Generac projects up to a 500% increase in overall addressable market space as well as achieving significantly higher penetration rates in the Southwest regions due to more extreme conditions. In addition, the demand for renewable energies gives Generac an opportunity to develop its fledgling clean power products, which will come to support Generac’s overarching business. Although energy blackouts were lower in 2023 Q4, there was no significant impact to sales.
Justin Li| April 21st, 2024
Generac vs. nVent and Nextracker % Change in Monthly Share Price (YTD)
Source: S&P Capital IQ, Yahoo Finance
Risk Potential
Reliance on Cyclical Suppliers:
Generac relies heavily on suppliers for raw materials such as steel, copper and aluminum for batteries and complex electrical compliments. Given recent disruptions in both the global shipment supply chains as well as various political instabilities in areas that have historically produced high quantities of these materials, Generac’s bottom lines could be affected by these events.
ESG Reporting:
Generac has primarily focused on fossil fuel energy generation due to their nature of accessibility and reliability compared to renewable energies. Although it has started developing a clean-power series of products, its core businesses still stem from its fossil fuel generators. As such, if ESG reporting were to become more of a preference with its customers, Generac’s demand and reputation could be significantly impacted.
Linear Supply Chains:
Generac currently relies very heavily on singular specialized producers for core electrical parts. As such, if any one of these companies faces financial difficulties or the supplier contracts fall through, Generac would be faced with extreme difficulties with transitioning to another source for their components while also maintaining quality and quantity standards required to provide reliable back-up power generation.
Sources: investors.generac.com|Barrons|NY Times |CFRA Equity Research| Yahoo Finance | investors.nextracker.com | investors.nvent.com | Capital IQ | Robinhood
Consumer&Retail
1Q2024:TurningtoProfitableVolume
Consumer companies focus on price, volume, and product mix to drive growth amid challenges. Consumer product companies have been combating an increased price in producing goods by relying on price increasesasakeygrowthdriver.
Bain & Company’s 2023 Consumer Products Report, which surveyed 120+ senior consumer product executives, indicated that inflation was a key factor in the decoupling of volume growth and price. This paradox creates a crossroads where prices are too high to sustain a steady rate of consumer spending while they are too low to keep up with the high input costs. Leading GPGs have increased prices by 20%+ since 2021, but so have their COGS. Additionally, top CPGs EBIT margin is the lowest it has been in the past decade.
This growth strategy of raising prices is not sustainable. The 2024 consumer sector outlook includes increased consumer pressures, margin growth, and profitability as key drivers for success, underpinned by an unpredictable macroeconomic state and uncertain consumer environments. Thus, significant price increases will not remain effective. Rather, many companies will likely implement new strategies that include growing volume while maintaining pricing power.
Based on surveys conducted by the Wall Street Journal, only 2% of consumer product executives reported raising prices as a priority in their 2024 growth strategy. Rather ⅓ of respondent reported shifting their strategy to focus on volume and ⅔ focusing on shifting their product mix.
AliaPiccinni
April23,2024
S&P Global: US Inflation
S&P Global: Discretionary Spending
There are multiple factors that are driving this strategy shift in 2024. One factor is that as consumer product companies have increased their prices, consumers have become unwilling to pay. This has slowed consumer spending growth and will continue to do so if prices increase. As a result, consumer product companies will likely push back on price increases if they haven’t already. Additionally, consumer preferences started to shift towards cheaper, private-label alternatives as prices rose, creating new competition for consumer producers. This leaves consumer companies with only one option –sell more units at a lower price to increase revenue.
The plan to grow volume and introduce a more profitable product mix is supported by Deloitte’s analysis of their 2024 executive survey. Deloitte’s suggested profitable volume strategy includes: targeted advertising and promotion, precision growth management, opportunistic M&A, a rebalanced mix, strategic innovation, and enhanced operations and supply chain. Considering these strategies, it is important to find the right balance.
While there is much uncertainty with 2024 predicted to be characterized by slow economic growth and slow consumer spending, Deloitte believes that come 2025, the economy will pivot and a rebound will occur.
International Monetary Fund: World Economic Outlook 2004
Gerald Yavorsky| April 24, 2024
Rating: Hold
Current Price: $65.15
Price Target: $60.51
Company Updates / News
● Market Cap: 6,570.3 M$
● LTM Range: $32.12 - $65.53
● FY24 P/E Ratio: 22.21
● 2023 EBITDA: 518.6 M$
● 2023 Net Income: 258.9 M$
● Gross Profit Margin: 36.90%
● Shares Outstanding: 100.85 M
● Sprouts targets 35 new stores in 2024, up from 21 in 2023 and 12 in 2022
● Sprouts signs NIL deals with 8 female college athletes including Stanford basketball star Cameron Brink, adding to their 150 deals already in place with female athletes
Since Sprout’s listing on NASDAQ on August 1, 2013, the stock has grown more than 360%. Sprouts has grown to be one of the largest and fastest-growing specialty retailers of lifestyle-friendly ingredients, only second behind Whole Foods. This includes natural, organic, plant-based, and gluten-free items catering to ‘health enthusiasts,’ with over 400 stores in 23 states and a plan to expand to over 1,200 stores in the long-term.
My hold recommendation reflects a belief that Sprouts will continue to perform well, given the unique approach to physical stores and the increase of health-focused shopping; however, inflationary pressures on consumer spending, recent workplace lawsuits, and fierce competition are all reasons to stay cautious.
Valuation/Financial Modeling:
As of April 21st, Sprouts Farmers Market (SFM) is trading at $65.15. I believe this equity is slightly overvalued and expect a decline to $60.51 this year. I arrived at this conclusion by conducting a Comparable Companies analysis using an EV/EBITDA multiple of 13.4x, which was a bit higher than the median of 10.1x. I used these assumptions based on historical data and an optimistic view given Sprouts’ growth over the past few years.
The “Flipped” Store Model:
Sprouts has a unique approach to their grocery stores in that they position produce at the center of the store, while a complete grocery offering surrounds the produce. About 20% of the store’s square footage is produce, which is a lot higher than their competitors. Furthermore, stores are designed with open layouts and low displays, which provide an easy-to-shop environment and the feeling of a farmers’ market experience. Having a small box format with a curated assortment of healthconscious, locally-sourced products also contributes to the farmers’ market experience. Lastly, the average store size is approximately 28,000 square feet, which is a lot smaller than competitors, to stay true to the farmers’ market heritage via freshfocused products.
The Rise of Healthy Grocery Shopping:
By 2023, Sprouts had launched 7,100 new products, featuring responsibly sourced products catering to customers prioritizing lifestyle choices and seeking better-foryou grocery options. These include products with labels such as organic, paleo, keto, plant-based, non-GMO, fair trade, gluten-free, grass-fed, and raw. In 2023, organic products made up 27% of total sales. Sprouts’ selection of products can do well to capture the now 64% of shoppers that follow a diet or health-related wellness program, up from 49% in 2018.
Inflationary Pressures on Consumer Spending: With inflation at 3.5% for 2023, there has been an increased preference for eating and cooking at home. However, this can cause consumers to begin opting for cheaper store brands, purchasing in bulk, utilizing coupons, seeking discounts, and relying more on leftovers; this could lead to Sprouts’ customer base using their dollars on cheaper alternatives. The food-at-home consumer price index peaked in August 2022 at 13.5%, and moderated to 1.2% in March 2024. However, the packaged food and beverage categories including snacks and non-alcoholic drinks have seen stickier inflation, while beef and chicken prices have also risen in 2024. The Supplemental Nutrition Assistance Program (SNAP), known as food stamps, has seen benefits decrease by at least $95 per month, meaning less spending on food and beverages.
San Fernando Valley Sexual Harassment Case: Recently, Sprouts agreed to pay $265,000 to settle sexual harassment and retaliation allegations from employees in the San Fernando Valley, according to the U.S. Equal Employment Opportunity Commission. The Commission found “reasonable cause” that employees faced retaliation for complaining about sexual harassment in violation of Title VII, and Sprouts has entered into a oneyear conciliation agreement with the EEOC. Additional scandals and bad publicity could harm the company, especially since Sprouts strives to create a strong and unified company culture.
Fierce Competition in the Food Retail Sub-Industry: Sprouts has fierce competition in their subindustry, from specialty food retailers such as Whole Foods, Trader Joe’s, and Natural Grocers, conventional supermarkets such as Kroger, Albertsons, Safeway, and Publix, mass and discount retailers such as Target, Costco, BJ’s, and Walmart, and online retailers such as Amazon. To continue to grow, Sprouts has to continue to open up retail locations and survey the consumer base to know which products to stock on their shelves to generate sales.
Sources:
Sydney Jiang | 04/18/2024
R ating: Buy
Cur r ent Price: $43.61
Price Target: $51.95
Company Updates
● Market Cap: $12,910.82 M
● P/E Ratio: 17.04
● 52 Week High: $55.52
● 52 Week Low: $37.94
● Shares Oustanding: 298.1 M
● EPS: $2.85 M
Competitor Statistics from FY 2023
Revenue: $12.172B
Campbell Soup Company (CPB) A
Recipe f or Success in Snack Innovation and Por tf olio Expansion
Investment T hesis:
Campbell Soup Company (CPB), headquar tered in Camden, New Jersey, is a leading manufacturer of convenience food and beverag e products. T he company operates through two main segments: Meals & Beverag es and Snacks T he Meals & Beverag es unit offers soups, sauces, and juices under brands like Campbell's, Preg o, and V8. T he Snacks unit consists of crackers, cookies, and baker y items under Pe pperidg e Far m, Snyder’s of Hanover, Kettle Brand, and more T he company distributes its products through food chains, convenience stores, and e-commerce platfor ms
My buy recommendation ref lects a belief that Campbell Soup Company will continue to perfor m well, given the company’s investment in facilities and workforce, cost savings initiatives, and recent acquisition of Sovos Brands.
Valuation/Financial Modeling:
As of April 18, CPB is trading at $43.61. I believe that this equity is under valued and expected to increase to $51.95. I reached this conclusion after conducting a Comparable Companies analysis, applying an EV/Sales multiple of 1.88x. I analyzed several companies from the same industr y: Conag ra Brands, Kraft Heinz, Kellanova, and Hor mel Foods Cor poration.
Investment in Facilities and Wor kf orce:
Market Cap: $13.69 B Cap: $45.35
Revenue: $13.122B Market Cap: $19.16 B
In 2024, CPB announced a $160 million investment in expanding its Goldfish Crackers baking complex in Richmond, Utah. T he expansion will boost Goldfish output by 50%, which is cr ucial for the brand, valued at $1 billion. In Q2 FY24, compared to the previous year, Goldfish net sales surg ed by 4%, consumption rose by 6%, and market share increased by 0.2 points.
Cost Savings Initiatives:
CPB will increase its enter prise cost-saving prog ram from $850 million to $1 billion by FY 25 through three strategic initiatives: fundamentals, network and cost optimization, and route to market. T hey aim to streamline product offerings to increase capacity and simplify operations, targ eting 15% snack margins by FY 24 and 17% by FY 26. Additionally, Direct Store Deliver y will streamline distribution, with CPB aiming to conver t 20% of its nationwide snack routes into combined routes in the coming years.
Acquisition of Sovos Brands:
CPB acquired Sovos Brands for $2.7 billion, anticipating $50 million in annualized savings beginning in two years through various revenue and cost synergies Rao’s, Michael Ang elo’s, and Noosa will be folded into the new “Distinctive Brands” business unit alongside Pacific Foods
Sydney Jiang | 04/18/2024
Campbell Soup Company and Competitor s
Sour ce: Capital IQ
Risk Potential
Inf lationar y Pr essur es: CPB relies on various resources like labor, distribution, and raw materials such as tomato paste, g rains, poultr y, dair y, and wheat. T hroughout 2023, they experienced elevated costs in these areas; although there was some moderation in cost inf lation, they anticipate continued moderate inf lation into 2024. Exter nal factors, such as crop yields, livestock health, and g eopolitical conf licts inf luence these costs. CPB can respond to rising costs by altering product prices or packaging sizes, though these chang es might result in lower sales volumes. Additionally, productivity improvements or commodity hedging might only par tially mitig ate cost increases.
Disr uption to Suppl y Chains: CPB faces the risk of disr uptions in manufacturing, distribution, and supply chains due to climate chang e, extreme weather, natural disasters, pandemics, g eopolitical conf licts, and labor shor tag es. For example, supply shocks from the Russia-Ukraine War have caused price spikes for g oods like energ y, metals, and food, as Russia and Ukraine are major producers and expor ters Disr uptions in wheat, cor n, and oilseed expor ts have hindered production efficiency and increased operational costs for the company
Competitive Pr essur es: CPB faces fierce competition across all product lines in the Nor th American food and beverag e market. Many of CPB’s larg er competitors have substantial resources and ag g ressive marketing strategies that intensify the competitive landscape; simultaneously, reduced bar riers to entr y and easier access to funding incentivize new players to enter the market. In response to rival tactics, CPB may need to lower prices or increase promotions, risking sales and margins CPB faces an ong oing demand to innovate across various product categ ories to meet diverse consumer preferences and sur pass competitors
In2023,industrialM&Aactivityunderwentadecline due to high interest rates, geopolitical tensions, economic uncertainty, and more. Dealmaking fell 12.5%toanumberonlyslightlyhigherthannumbers seen during COVID-19. However, despite the bleak numbers, the outlook for the sector is optimistic. As the economic landscape clears and interest rates decrease,deal owisexpectedtopickup.Furthermore, companiesarelookingtoincorporatenewtechnologies and expand their digital capacities to build their market presence and keep a competitive edge. The expectedtopdriversofM&Aactivityinthissectorinclude arti cial intelligence, supply chain resilience, increased sustainabilityinitiatives,andinnovativetechnologies-such as cloud technologies, robotics, and electric vehicles). StrategicM&Awillbeessentialinthiscomingyear,witha heavy emphasis on research and development towards innovative products This advancement of technologywill createnewopportunitiesfordealstooccur.
In Q4-23, Global Industrial Manufacturing M&A deal volume fell 10.9% compared to Q4-22 to a total of 310 transactions. The sector hit its lowest level since 2015. Q3-23 in the industrials sector experienced great uncertainty due to automotive-related activities. Specifically in the United States, the United Auto Workers (UAW) strike, which occurred in September and ended in October. This strike began when the union was unable to reach a deal with the “Big Three” automakers: General Motors, Ford, and Stellantis This created bottlenecks across the supply chain, creating stoppages and slowing activity in the sector After the strike ended, this had residual impacts on Q4-23 automotive M&A transactions as activity remained mostly flat (19 transactions as opposed to 21 transactions in Q4-22.
Global Industrial Manufacturing M&A Activity (Source: PMCF Investment Banking)
U.S. Industrial Manufacturing M&A Activity (Source: PMCF Investment Banking)
Furthermore, in Q4-23, U.S. Private Equity (PE) transactions declined from 17 deals (Q4-22) to 14 deals (Q4-23). The stagnant activity was most likely due to increased interest rates, and thus borrowing costs, placing constraints on PE activity. However, the outlook for 2024 is positive and this trend is expected to reverse as interest rates stabilize and PE buyers look to utilize a build up of uninvested capital.
Cognitive and Artificial Intelligence (AI) systems market revenue worldwide, depicting a sharp increase from 2015 to 2024 (Source: StuartPanz)
Another driver of M&A activity for the 2024 year will be innovative technologies. There has been an increased focus on strategic investments in new technologies to gain a competitive advantage in the rapidly changing world. Due to this, tech-driven transactions will positively impact the industrial sector in the near future This will be strongly evident in areas relating to batteries/charging technologies for electric vehicles, as well as cloud technologies, and robotics
In addition to the previous driver, there has been an increased emphasis on sustainability and broader environmental, social, and governance (ESG) initiatives due to stricter regulations and scrutiny from investors, consumers, and the government. Companies in the industrials sector are looking to invest in companies with products and services that can help them achieve their sustainability goals. Thus, we can expect heightened activity for companies focusing on decarbonisation, renewable energy, and electrification of services
Furthermore, the biggest innovative technology, Artificial Intelligence (AI) is expected to be an integral source of growth for deal activity in industrial products AI has undergone significant advances in ability and scope throughout 2023. Companies will be looking to incorporate this into their business strategy to diversify and increase revenue streams. A survey from PwC showed that 64% of industrial manufacturing CEOs expect generative AI to greatly change how companies create and deliver value in the next three years.
Overall, most signs point towards a positive outlook regarding deal flow in the industrials sector for 2024. As we enter a period of stabilization after turmoil, we expect to witness a rebound in activity as geopolitical instability and interest rates calm down, allowing space for PE firms to act after laying low.
Industrials deal activity by type (Source: KPMG)
Jack Rebillard| April 23, 2024
Rating: Buy
Current Price: $207.53
Price Target: $243.74
Company Updates / News
● FY23 Revenue: $20.4B
● EBITDA Margin: 28.9%
● EV/EBITDA: 16.9x
● The company is the new official sustainability partner of the MLB
● Named by Ethisphere as one of the world’s most sustainable companies for the 15th time
● Announced $0.20 increase in annual dividends on 12/11/23
Competitor Statistics from Q3 2022
FY23 Revenue: $14.9B
EBITDA Margin: 29.3%
EV/EBITDA: 16.7x
FY23 Revenue: $8.0B
EBITDA Margin: 29.2%
EV/EBITDA: 21.2x
FY23 Revenue: $1.3B
EBITDA Margin: 21.5%
EV/EBITDA: 23.4x
Waste Management (NYSE: WM) Turning Trash into Cash
Investment Thesis:
Waste Management is the leading provider of waste and environmental services. My buy recommendation is based on the company’s aggressive push into recycling and sustainability efforts, its innovative use of technology, and its ability to generate cash flows through their integrated service model. Waste Management is a good investment for investors looking for stable, positive returns in an industry critical to environmental and urban development.
Valuation/Financial Modeling:
Waste Management (WM) is trading at $207.53 but I believe this equity is undervalued and its share price should be expected to increase to $243.74 within the next year, implying 17.4% upside I arrived at this number by completing a Comps analysis with key competitors and a DCF analysis with modest revenue growth projections, margins in line with 3-yr historical averages, and a WACC slightly lower than their competitors at 5.96%.
Strategic Focus on Sustainability and Recycling:
The company has invested heavily in advanced recycling technologies and infrastructure, which positions it uniquely compared to its competitors. This includes the development of "single-stream" recycling facilities that allow for the sorting of various types of recyclables collected all at once, enhancing operational efficiencies and customer convenience. As environmental regulations continue to tighten and corporate and public demand for sustainable waste solutions increases, Waste Management's advanced recycling capabilities allow it to capture a larger market share and command premium pricing. Their commitment to sustainability is a strategic business move that taps into the growing trend of eco-consciousness among consumers.
Industry-Leading Technological Innovations:
Another growth driver is Waste Management's innovative use of technology to optimize operations and enhance customer service. The company has invested in technologies such as route optimization software, automated collection vehicles, and real-time data analytics. These technological advancements lead to more efficient operations, reduced costs, and better service reliability and timing, which are critical factors for customer satisfaction. Furthermore, digital initiatives, such as customer-facing apps and online service management, streamline interactions and make it easier for customers to manage their services By leveraging technology, Waste Management not only improves its operational efficiencies but also enhances its appeal to a tech-savvy customer base, potentially increasing market share in a competitive and evolving waste management industry
Jack Rebillard| April 23, 2024
TTM Share Price Performance of Waste Management and Competitors
Source: S&P Capital IQ
Risk Potential
Dependence on Municipal Contracts: A significant portion of Waste Management's revenue comes from long-term contracts with municipal governments for waste collection and processing services. These contracts are typically awarded through competitive bidding processes. The risk arises from the potential loss of contracts upon renewal or from governmental decisions to internalize services, influenced by political changes or fiscal pressures. Losing key municipal contracts to competitors or changes in government policy could result in significant revenue declines and impact the stability of Waste Management’s business model.
Uncertain Acquisition Performance: Waste Management’s growth strategy includes expanding its market reach and service offerings through acquisitions. Recent major acquisitions within the past five years include Petro Waste Environmental, Advanced Disposal, and Ray’s Trash Service. While this can potentially lead to increased market share and diversified revenue streams, it also carries integration risks. Challenges such as aligning corporate cultures, integrating technology systems, and achieving anticipated cost synergies can adversely affect the company's operations and financial health. Failure to effectively integrate new acquisitions could lead to operational disruptions and financial strain, undermining the expected benefits of such strategic moves.
Exposure to Commodity Price Volatility: Waste Management's revenue from recycling operations is significantly impacted by fluctuations in the prices of recyclable materials such as paper, plastics, and metals. The pricing of these materials is determined by global supply and demand dynamics, which can be unpredictable and subject to changes due to economic cycles, trade policies, and shifts in consumer behavior towards sustainability. A sharp decline in commodity prices can reduce the profitability of Waste Management’s recycling division, which in turn could impact the overall financial performance of the company, particularly if recycling operations continue to scale up as a proportion of total business. In FY23, revenue from recycling is almost $1.6bn.
Sources:
Waste Management Investor Relations| CNBC com | S&P Capital IQ | Yahoo Finance | The Wall Street Journal | Statista
Aditya Mehra| April 23, 2024
Rating: Buy
Current Price: 167.62
Price Target: 293.26
Company Updates
● PE Ratio: 12.76
● TTM EPS: $13.14
● Dividend Yield: 1.43%
● TEV / TTM EBITDA: 7.2x
● Revenues: $9677mm
Investment Thesis:
Owens Corning (OC) Reinvigorating Growth
Owens Corning is a provider of building and construction materials and operates within three primary segments: roofing, insulation, and composites, which account for 40%, 37%, and 23% of sales respectively. It is the world’s largest manufacturer of fiberglass composites, for which the company manufactures, fabricates, and sells glass reinforcements in the form of fiber.
My buy rating is recommended by the significant upside represented in OC’s valuation, positive medium to long-term forecasts for demand in the company’s end markets, and significant growth potential driven by its M&A strategy. Over the past 12 months, stagnant growth has put pressure on OC’s stock, yet macro and inorganic growth tailwinds, and OC’s aggressive strategy to return cash to shareholders, should buoy OC’s stock upwards.
Valuation/Financial Modeling:
Competitor Statistics from FY 2023 Net Margin: 12.4% Revenue: $9.7B
Net Margin: 11.4% Revenue: $8B
Net Margin: 9% Revenue: $17.1B
As of April 23rd, Owens Corning (OC) is trading at $167.62. I believe that this equity is undervalued and expected to increase to $293.26 within two years. I arrived at this conclusion by conducting a comparable company analysis, comparing OC to competitors Masco Corporation, Carlisle Companies Incorporated, Builders FirstSource, Beacon Roofing Supply, and Griffon Corporation.
Inorganic Growth:
In February 2024, Owens Corning entered into a definitive agreement to acquire Masonite (NYSE: DOOR), which manufactures and sells doors and door systems Over the past 12 months, OC has experienced negative growth due to declining activity in new home construction, and its revenues have decreased by 1%. This acquisition will helpto reinvigorate growth prospects through leveraging a more comprehensive suite of homebuilding products Furthermore, the acquisition is expected to be free cash flow accretive in the low double digits by 2025, as the macroeconomic backdrop spurs home-building activities. Lastly, from a financial standpoint, this acquisition should assist in alleviating stockholder pressure from declining growth.
Significant End-Market Growth:
Owens Corning, as a function of its Roofing, Insulation, Composites, and now Doors segments, sells primarily to residential real estate builders. Examples from these segments include door systems, asphalt shingles, and flooring. Over the past few years, activity within homebuilders has been constrained. However, with the US being short more than 6.5 million homes due to macroeconomic headwinds and supply chain issues, there will be a significant uptrend in homebuilding activity. Owens Corning is in a perfect position to capitalize, given its strong EBITDA margin and cash flow generation.
Owens Corning & Competitors 1 Year Stock Performance:
Source: Yahoo Finance
Risk Potential
Dependency on Input Prices: Owens Corning is reliant on input prices such as asphalt, glass fiber, and resins, which can adversely impact profit margins if costs increase unexpectedly. The company's heavy reliance on these materials, and its fixed price contracts, exposes it to risks in regards to sudden changes in commodity prices. These contracts typically lock in prices at the outset, which can become challenging if material costs increase unexpectedly due to inflation or other unforeseen events. This could be a potential downfall for profitability if OC cannot adjust its pricing strategy to cope with increased input prices.
Potential Weakness in End Markets: In the short-term, there is potential for longer-than-expected weakness in the residential real estate industry, if higher interest and mortgage rates persist. Currently, this market is seeing lower volume due to the aforementioned considerations. Repair and remodeling activity is similarly pressured, yet given the aging of real estate inventory, in the long-term these risks should not heavily influence OC’s growth.
Aditya Mehra| April 23, 2024
Ben Park | 4/22/24
Rating: Buy
Current Price: $462.58
Price Target: $531.77
Company Updates
Market Cap: 68.53%
Price to Earnings Ratio: 34.2
Dividend Yield: 1.62%
Shares Outstanding: 151.2M
52 Week Range: 414.56 - 496.89
Market Cap: $135.0B
Revenue: 2.32%
Northrop Grumman (NOC) Laser Focused on the Future
Investment Thesis:
Since Northrop Grumman’s initial public offering on April 27th, 1984, the stock has grown more than 3,376%. Since then, Northrop Grumman has grown to one of the top 5 largest aerospace and defense contractors with over $39.3B in sales in 2023.
My buy recommendation reflects a belief that Northrop Grumman will continue to perform well, given the increase in geopolitical tensions and dominant market position with large sector specific moats.
Valuation/Financial Modeling:
As of April 22nd, Northrop Grumman (NOC) is trading at $470.79. I believe that this equity is undervalued and expected to increase to $531.77 within this year. I arrived at this conclusion by conducting a comparative companies analysis comparing enterprise value to revenue, EBIT, and EBITDA figures from a universe of Northrop Grumman’s peers including General Dynamics, Lockheed Martin, Raytheon, Boeing, and L3Harris.
Long-Term Focus on Sector-specific Moats
Northrop Grumman has been centrally focused on its core competencies across aeronautics, defense, space, and mission systems. Breaking down NOC’s top line revenue by segment, space has lead with 14% growth, offsetting declines in mature aeronautics product lines Furthermore, NOC’s increased capital expenditures of around 7.5% of sales, has yielded significant breakthroughs that signal future growth. One prominent example is the For example, one significant achievement involved the successful launch of ULA's Vulcan using the Graphite Epoxy Motor (GEM) 63XL solid rocket booster, which is the largest monolithic solid rocket motor in existence, indicating promising growth opportunities in the space industry and defense
Financial Engineering Accretive to Shareholders
In December of 2023, NOC’s board of directors announced a plan to purchase roughly tripled the amount of Northrop Grumman stock that the company was previously on track to buy back, to $3.8 billion. In February of 2024, the company further announced that it will "accelerate" that buyback plan by buying a $1 billion portion of its shares all at once. This buyback plan further underscores the significant appreciation likely for NOC given its discount position as benchmarked to peers.
Mark R
Ben Park | 4/22/24
Stock price of NOC, LMT, and GD (1985-2024)
Source: Yahoo Finance
Risk Potential
Legal Risk from Human Rights Violations: Inadequate assessment and mitigation of adverse human rights impacts from the use of its products and services, or addressing specific risks associated with particular customers and how they may use its products, may expose Northrop Grumman to legal risk. For example, legal risk may exist if military equipment is misused and results in civilian casualties or if its contracts to develop systems and databases for governments violate First Amendment rights
Political Challenges: Northrop Grumman relies on the U.S. government for 82% of its revenue, and changes to priorities, spending, and approaches to contracting from the U.S. Government or changes to its social, economic, or political priorities present political and regulatory uncertainty for Northrop Grumman.
Public Pressure from Divestment Initiatives: Northrop Grumman is among a group of military defense contractors that is facing public pressure from the divestment movement due to the nature of its business, which may harm its reputation. It is on the list of companies recommended for divestment by the American Friends Service Committee and the Divest from the War Machine. There are also many asset owners within education and religious entities that have divested from Northrop Grumman and are launching widely publicized campaigns.
Anika Mittle|April 21, 2024
Rating: Hold
Current Price: $194.26
Price Target: $180.10
Company Updates
● Earnings Per Share (EPS): 8.47
● 52 Week Range: 174.88 - 210.87
● Market Cap: 126.599 B
● PE Ratio: 22.94
● Forward Dividend & Yield: 2.22%
Investment Thesis:
Honeyw (HON) The Future Is What We Make It
Since Honeywell’s listing in the New York Stock Exchange in November 1994, the stock has grown more than 2,000%. The company's strategic focus on high-growth industries such as aerospace, building technologies, and performance materials, combined with its push into digital transformation and sustainable technologies, positions it well for future growth.
My hold recommendation is rooted in Honeywell’s strong position in digital innovation and aerospace within the industrials sector, tempered by caution due to prevailing global supply chain vulnerabilities and the potential impact of inflationary trends on industrial spending
Valuation/Financial Modeling:
Competitor Statistics from Q4 2023 Revenue: $23.196 B
Cap: $122.595 B
$16.107 B
As of mid-April, Honeywell (HON) is trading at $194.26 I expect this equity to decline very slightly to $180.10 within the next twelve months I arrived at this conclusion by conducting a Comparative Companies Analysis using five companies with financial data within the same industry, such as 3M, Carrier Global Corporation, Eaton Corporation, Illinois Tool Works Inc., and Rockwell Automation Inc..
Honeywell Forge:
Honeywell Forge is an enterprise performance management platform that integrates data from diverse sources using AI and advanced analytics to optimize operations. Distinguished by its adaptability and industry-specific configurations, Forge offers real-time, actionable insights, enhancing asset performance and energy efficiency. Its versatility in sectors like aerospace and building technologies sets it apart, making it a leader in industrial digital solutions.
Synergy with Global Aerospace Trends:
Honeywell's strategic focus on aerospace, rooted in its historic contributions to the Apollo missions, sets it apart from competitors. The company continues to lead in advanced aerospace technologies, including avionics and connected aircraft systems, aligning with global trends towards sustainability and efficiency. Honeywell's commitment to innovation and its legacy in critical mission support highlight its unique position and leadership in the aerospace industry.
Anika Mittle|April 21, 2024
Honeywell Inc. vs. Its Competitors
Source: Capital IQ
Risk Potential
Cyberattacks: As Honeywell expands its digital solutions, including the new HOS Gold operating system, it faces heightened cyberattack risks These threats are particularly critical for its industrial control systems and military aerospace sectors, where a breach could disrupt critical infrastructure or compromise security The repercussions of such an attack could be severe, including significant financial liabilities, reputational damage, and loss of customer trust. Honeywell is bolstering its cybersecurity measures to mitigate these risks, recognizing that digital resilience is essential for safeguarding its operations and maintaining customer confidence in an increasingly connected world.
Foreign Exchange Volatility: Honeywell's international operations expose it to foreign exchange risk, where fluctuations in currency exchange rates can affect its financial results For instance, a strengthening U.S dollar could make Honeywell's products more expensive and less competitive in foreign markets Effective foreign exchange risk management strategies, such as the use of hedging instruments and maintaining a balance in currency exposures, are essential to minimize the impact of currency volatility on the company's earnings.
Technological Disruptions: As technology evolves rapidly, Honeywell faces the risk of its products or services becoming obsolete if it fails to keep pace with innovation. This is particularly pertinent in areas like aerospace and building technologies, where advancements such as autonomous systems and smart buildings may outpace Honeywell's current offerings. The company needs to invest heavily in research and development and possibly pursue strategic acquisitions to stay at the forefront of technological advancements and maintain its competitive edge.
