Analysis

Offshore

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By Ron Klipin

13 MAY 2022

Occidental Petroleum

Q1 2022

Berkshire   Hathaway’s energy investments are an integral part of its top four asset   business operations – which is comprised of railways, insurances and   portfolio investments (primarily in quoted stocks).

The groups’   energy division has been operative since the early 1990s, and includes power   distribution in the US, UK and Canada, as well as gas pipelines in North   America.

Confidence   in the long-term future of the oil price had already manifested itself, with   the additional purchases of Chevron shares by Berkshire (in the past two   quarters of 2021) and are currently worth approximately $4.5 billion, ranking   it as the ninth largest quoted investment holding.

Berkshire   recently announced a purchase of over 100 million Occidental Petroleum shares,   resulting in its stake in the company increasing to over 14% (and worth in   excess of $7.7 billion).

This   follows an initial investment of $10 billion in 2019, in preferred Occidental   stock (yielding 8%), and linked to warrants enabling Berkshire to buy an   additional 84m shares at a specified price far below that of the prevailing   market price.

A strong set of results announced in February, with good management delivery robust   cash flows, as well as sound operational efficiencies, were some of the   investment criteria for the purchase. Berkshire also highlighted the increase   in the quarterly dividend, debt reduction and the share repurchase scheme as   positive factors.

Warren   Buffet appears to be confident about the long-term future of oil prices, with   Goldman Sachs estimating that Occidental to have the second highest cash flow   sensitivity to oil prices in the oil majors.

Berkshire   Hathaway’s philosophy favors investments generating robust free cash flows,   which seems to fit with the Occidental business model. The share is on a   potential free cash flow yield of 37% in 2022, and accompanies other   attractive and sound financial metrics.

If Berkshire were to exercise the warrants to buy additional shares, the   investment could escalate to a 20% shareholding. And in due course, Berkshire   could buy out the minorities.

The Warren Buffet strategy has been a winning formula in the past, with sound   capital allocation yielding outstanding long term returns for patient   investors. We are holders of Berkshire Hathaway for managed portfolios.

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By Lee Kern

13 MAY 2022

Walt Disney

Q2 2022

  • Walt Disney, the house of (Mickey) Mouse, reported   fiscal second quarter results which saw the entertainment giant post better-than-expected   streaming subscriber growth.

  • Disney+   subscriptions rose 33% to 137.7 million and average revenue per user (ARPU)   was up both locally and internationally (see the subscriber figures in the   table below). Disney also guided for a stronger second half for its fledgling   streaming business. Direct to Consumer offerings (which includes ESPN, HULU   and Hotstar) exceeded 205 million users as of the end of the period.

  • Revenue for the group rose 23% to $19.3 billion. This includes a $1   billion penalty from early termination of some licensing agreements so the   content could be expedited to its direct to consumer offerings. Excluding once-offs, diluted EPS for the quarter increased 37%   to $1.08 from $0.79 in the prior-year quarter.

  • With   the lifting of Covid restrictions, Disney’s parks, experiences and products   segment grew revenue over 100% y/y to $6.7 billion during the quarter.     Operating profit for the segment swung to a profit of $1.75   billion from a $406 million loss previously. This was thanks to increased hotel   bookings, cruise ship trips, attendance at Parks, higher ticket prices, and   spending on food, beverage and merchandise. International guest arrivals are   picking up but are not yet near pre-pandemic levels. Additionally, some   international parks were not open full-time in the quarter and Disney   Shanghai remains closed.

  • The Media and Entertainment division saw revenues climb 9% to $13.6   billion. Following a loss of subscribers at Netflix, investors are weary as   to whether Disney can maintain its streaming growth potential. There are also   concerns over declining returns from high capex, as well as how increased inflation and a possible recession might   impact its other business divisions.

  • Shares of Disney are down 33% year-to-date and over 40% y/y. The company   is on relatively expensive valuation, which is possibly justified by the   earnings quality of this diversified entrainment giant and it’s ability to   consistently generate positive Free Cash Flows (which it reinvests into the   business).  This may not yet be the bottom for Disney but we like the   business and own the share in long-term managed portfolios.

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By Desmond Esakov

06 MAY 2022

Illinois Tool Works

Q1 2022

  • Illinois Tool Works (ITW) manufactures industrial products and equipment. It operates   through the following segments, Automotive OEM, Test & Measurement and   Electronics, Food Equipment, Polymers & Fluids, Welding, Construction   Products, and Specialty Products.

  • For Q2 2022, ITW reported revenue of $3.9 billion representing a   year-on-year growth rate of 11%. EPS of $2.11 was recorded, which was flat.   Both revenue and EPS were marginally above consensus. The company’s operating   margin decreased from 25.5% to 22.7% while return on invested capital   declined to 27.6% from 32.1% in Q1 2021.

  • Despite   current economic headwinds, ITW raised full-year revenue growth guidance to   between 8.5% and 11.5%. EPS guidance was hiked to between $9.00 to $9.40 per   share, an increase of between 11% and 16%.

  • ITW   is one of 65 companies in the S&P 500 that has qualified as a so-called   dividend aristocrat. Dividend aristocrats are companies that have increased   dividends for at least 25 years and in ITW’s case the company has increased   its dividend for a staggering 51 consecutive years. In our view, ITW has a   wide economic moat with the company holding over 17,000 granted and pending   patents. ITW is held in our global managed portfolios as well as the Cratos   BCI Worldwide Flexible Fund.

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By Lee Kern

06 MAY 2022

Shell

Q1 2022

  • Multinational oil and gas company Shell (Formerly Royal Dutch Shell Plc), reported its highest quarterly profit since 2008 thanks to a jump in commodity prices. The results mirror exceptional profits seen across the energy majors, despite expensive write-downs as a result as an exiting of Russian operations.

  • Adjusted earnings were up 184% y/y to $9.1 billion for the three months ended March, in line with expectations. This follows the $6.4 billion the company made for the fourth quarter of 2021. Shell also announced a 4% dividend hike to $0.25 per share. 

  • The oil giant bought back $4 billion of its own stock in the period, out of a potential $8.5 billion which was approved for stock repurchases. Shell has been accused of making supernormal profits whilst energy costs for the average consumer spiral. This has spurred calls by environmental and political campaigners for a “once-off” windfall tax on oil and gas companies. Whilst this presents downside risk to the counter, the chances of such a policy being passed are relatively slim as it would discourage investment and keep oil prices higher. 

  • Shell is not trading on an onerous valuation (historic PE of 11x and a dividend yield of 3.14%). As part of a series of global sanctions, the European Union plans to ban Russian oil imports within six months and refined products by the end of the year. This news sent oil prices higher and could keep prices buoyed for the medium term. Natural gas prices have risen 186% y/y, and Gasoline and Brent Crude are up 70% and 61%, respectively over the past year. Shell is a stock which I hold for clients in managed portfolios.


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By Desmond Esakov

29 APRIL 2022

Mastercard

Q1 2022

Mastercard   released Q1 2022 results, with adjusted earnings of $2.76 per share on $5.1 billion in   revenue. This was well above estimates of $2.18 in earnings per share and   revenue of $4.91 billion.

Adjusted net income was $2.7 million, up 55% from the same period   last year. Operating expenses increased 11% due to a 6-percentage point   increase from acquisitions, and increased spending on advertising and   personnel costs.

The strong performance was driven by an increase in gross dollar   volume and cross-border volume, with the former up 17% and the latter up 53%   on the back of a recovery in travel. Mastercard repurchased 6.8 million   shares for $2.4 billion and paid $479 million in dividends.

Looking toward Q2, Mastercard expects revenue to grow at the high   end of a high-teens rate excluding acquisitions, reflecting strong consumer   spending and improvement in cross-border travel, management said in a call   with analysts. The growth comes despite tailwinds related to Mastercard’s   suspension of business in Russia after it invaded which accounts for roughly   4% of revenues.

Mastercard is an outstanding business with operating margins in   excess of 50% and returns on invested capital above 25%. The business is one of   a few that should be protected from the current elevated inflationary   environment. Mastercard is held in portfolios as well as the Cratos BCI   Worldwide Flexible Fund.

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By Ron Klipin

29 APRIL 2022

Coca-Cola

Q1 2022

Coca-Cola   presented a   robust set of results which surprised market analysts. Sales were up by   18% vs the 9% consensus. This was driven by volume increases of 11% and price   increases of 7%.

Revenue   rose 16.3% y/y to $10.49 bn. Net income was up 23.8% to $2.78bn with diluted   HEPS of $0.64, up 23.08%. And the net profit margin rose to an impressive   26.51%.

The   company once again raised its dividend, announcing an increase of 4.8% to   $0.44 per share. A continuation of its strong record of dividend increases   over many years.

CEO   James Quincey reinforced expectations that the company is well positioned to   deliver topline growth ahead of peers over the next several years, due to an   advantaged business model as well as positive strategy changes now starting   to bear fruit.

Enhanced   product innovation, new marketing innovations and strong global market   execution, are some of the drivers of future growth for this multi-national   beverage giant, with a beverage basket of around 200 brands.

Both   Goldman Sachs and JP Morgan Chase rate Coke amongst their top stock picks for   2022, in the consumer staples sector.

The   dividend yield of 2.67%, is also attractive compared to that of the S&P   of around 1.45%, with the company expecting a rise in EPS of 8%-10% in 2022   vs that in 2021.

The   current PE of 27x, does reflect a premium rating for this high-quality share.   I have been invested in Coke shares over the past few years. The share should   be purchased into market weakness.

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By Lee Kern

29 APRIL 2022

Microsoft

Q3 2022

  • Software maker Microsoft posted fiscal third-quarter earnings that topped   foreasts.

  • Microsoft’s   revenue increased by 18% year over year (compared with 20% in the previous   quarter) to a higher-than-expected $49.36 billion. Microsoft guided for   fiscal fourth-quarter revenue of between $52.4 billion to $53.2 billion.

  • Microsoft   announced its plan to acquire video-game publisher Activision Blizzard for   $68.7 billion, the largest transaction in Microsoft’s 47-year history. It   also closed its health care industry acquisition, Nuance Communications,   which added $111 million in revenue to Microsoft’s top line.

  • Sales   and marketing expenditures jumped 10% y/y to $5.6 billion, the fastest growth   in more than three years.

  • Microsoft’s   Intelligent Cloud segment, which contains Microsoft’s Azure public cloud   hosting (along with SQL Server, Windows Server and enterprise services)   generated $19.05 billion in revenue, up 26% y/y. Revenue from Azure and other   cloud services jumped 46% in the quarter – with CEO Satya Nadella announcing   that the number of Azure deals worth at least $100 million in the quarter had   more than doubled.

  • Microsoft’s   Productivity and Business Processes segment, which houses its Office   productivity software, LinkedIn and Dynamics, posted an better-than-expected   $15.79 billion in revenue, up 17% in the quarter. It raised the prices of   certain Office 365 productivity software subscriptions in the period.

  • Lastly,   the More Personal Computing Segment (including Windows, Xbox, and search   advertising) increased revenue 11% to $14.52 billion.

  • Microsoft   is an incredible business with operations supporting widely used operating   systems, software and cloud services. We own the stock across managed   portfolios as well as the Cratos BCI Wordlwide Flexible fund.

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By Lee Kern

22 APRIL 2022

Johnson & Johnson

Q1 2022

  • Johnson   & Johnson, the industrial pharmaceutical business, saw first-quarter sales rise  5% to $23.4 billion compared to the same quarter last year, missing analyst   estimates. Net income for the group fell 17% to $5.15 billion.

  • The largest segment of the group, pharmaceutical sales, grew sales   6.3% y/y to $12.87 billion.

  • The medical devices business had sales increase 5.9% y/y to $6.97   billion, and surgeries are expected to rise above 2019 levels on demand from   general and advanced surgery as well as orthopedics.

  • J&J’s consumer health business, which will be spun off into a   separate listing by November 2023, had sales fall 1.5% to $3.59 billion. The   consumer health segment was impacted, particularly in skin health and beauty,   by supply issues for ingredients and packaging. J&J   said the group faces economic headwinds from commodity supply constraints,   and rising input costs from labour, energy, and transportation.

  • J&J shaved $1 billion off the full-year sales guidance it   provided in January. The drugmaker is now forecasting full-year 2022   sales of between $94.8 billion and $95.8 billion - and earnings   estimates per share were also adjusted lower to between $10.15 and $10.35,   from a previous forecast of $10.40 to $10.60.

  • J&J will no longer provide Covid-19 vaccine revenue guidance. It   felt reporting guidance for a single product to be out of the ordinary. Also   making vaccine revenue forecasting tricky are the global vaccine supply   surplus and uncertain demand for vaccines in the   future. The company has so far sold $457 million of its Covid-19 vaccine   globally, and said it never intended to make a profit from the vaccines   anyway.

  • The board approved a 6.6% increase in the quarterly dividend,   marking the 60th annual increase in dividends for the company - and making it   one of the longest and most impressive track records in dividend growth stock   history. We continue to hold J&J in the Cratos BCI Worldwide Flexible   Fund as well as in managed client portfolios.

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By Lee Kern

08 APRIL 2022

Levi's

Q1 2022

  • Demin   jean maker Levi Strauss & Co. announced results for the first quarter of fiscal 2022 which   beat Wall Street forecasts on the top and bottom line.

  • The company managed to pass price increases onto customers and   increased sales volumes of t-shirts and jeans in the period.

  • Revenue was up 22% y/y to $1.59 billion (26% on a constant currency   basis), topping estimates of $1.55 billion. Levi’s took a knock from the   temporary suspension of its Russian operations, which comprise around 2% of   total sales. It also took a $60 million hit to total sales as a result of   supply chain constraints. Sales jumped 26% y/y in the Americas, 13% y/y in   Europe, and grew 11% y/y in Asia..

  • The direct to customer (DTC) strategy (which Nike has also   leaned-into in recent years) saw Levi’s DTC net revenues increase 35%, driven   by both company-operated stores and e-commerce. As a percentage of first   quarter company net revenues, sales from DTC stores and e-commerce comprised   30% and 9%, respectively, for a total of 39%. Wholesale net revenues   increased 15% reflecting strong demand for the Levi's brand globally.

  • · Gross profit increased 24% y/y to $944 million, with the gross   margin improving to 59.3% from 58.2%. Net income was up 37% y/y to $196   million, or 48 cents per share. Cash and cash equivalents totaled $678   million at the end of the first quarter, with net debt of $248 million. Free Cash   Flow (FCF) was negative at the end of the period due to share buybacks,   increased capex and higher dividends.

  • Levi’s reaffirmed its guidance for fiscal 2022 as it has not yet seen consumers trading down for less expensive apparel. It expects revenue growth of 11% to 13% y/y, to between $6.4 billion and $6.5 billion. And Adjusted diluted EPS of $1.50-to-$1.56.

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By Ron Klipin

01 APRIL 2022

Micron

Q2 2022

  • Micron   Technology reported second quarter non-GAAP EPS of $2.14, a   consensus beat of $0.16. Revenue rose 24.8% y/y to $7.79 billion.

  • The   company provided strong third quarter revenue guidance of between $8.5   billion to $8.9 billion, and adjusted EPS of between $2.36 and $2.56, and is   a testament to the underlying strength of demand for semi-conductor   microchips.

  • High   free cash flows (FCF) should also become a positive for the company in a   rising interest rate environment. Micron continues to add shareholder value   with the share re-purchase of $408 million shares in the current quarter,   over and above the $0.10c quarterly dividend declared.

  • The   groups two major operations consist of Nand, the specialist chip storage   business, which is expected to show growth of around 30%, and DRAM, the   memory chips operations which will increase contributions in the mid- to   high-teens range.

  • Secular   underlying drivers for Micron Technologies are demand from data centers,   increasing demand for electric vehicles, as well as strong growth in the 5G   usage from cellphones.

  • The   group is beginning to outsource some of its chip production to third parties   and is focusing on high- end products such as data centers, which are more   lucrative.

  • Some   of the challenges ahead in 2022 include rising material input costs as well   as supply chain constraints. The supply of components is expected to gradually   improve in 2022.

  • The share appears to be undervalued relative to its peers on a PE of   9.8x, and trades around $77.80 a share. Micron has a sound track record and   is a stock which I hold in discretionary portfolios for clients.

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By Lee Kern

01 APRIL 2022

Lululemon

Q4 2021

  • Lululemon,   the Canadian athletics apparel retailer, reported fourth quarter results for 2021 which saw   profits come in higher than expected but produced revenues which missed Wall   Street expectations.

  • The yoga-wear maker also announced better-than-expected guidance and   a a $1 billion share buyback programme which sent shares higher.

  • Net revenue for Q4 2021 rose 23% y/y to $2.1 billion. Sales   increased 21% in North America and was up 35% internationally. E-commerce   revenue totaled $1.0 billion, making up 49.3% of total revenue.

  • Gross profit for the period jumped 22% y/y to $1.2 billion, with the   gross margin falling 50 basis points to 58.1%. The decrease in the gross   margin was because of higher air freight costs as a result of global supply   chain disruptions, which was partially offset by smaller markdowns. Costs at   distribution centers also weighed on profits.

  • Income from operations increased 29% y/y to $590.6 million with the   operating margin expanding 120 basis points to 27.7%. Diluted EPS in the   fourth quarter were 33% higher y/y to $3.36.

  • Lululemon ended the period with $1.3 billion in cash and cash   equivalents. Capex of $127.5 million was mostly due to the company opening 22   net new company-operated stores, ending the period with 574 stores in total.

  • For the first quarter of fiscal 2022, the company expects net   revenue to be in the range of $1.525 billion to $1.550 billion, representing   growth of between 24% and 26% y/y.

  • Lululemon is high quality business and the group performed well across all products, channels, and regions. The latest set of results highlighted the pricing power of the brand in an inflationary environment where consumers had to practice more discretion with their more-limited purchasing power. We do however prefer Nike in the athletic apparel space, which we hold across portfolios and in the Cratos BCI Worldwide Flexible fund.

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By Desmond Esakov

25 MARCH 2021

Adobe

Q1 2022

  • Digital media and marketing software   firm Adobe reported Q1 2022 results with the company   reporting an adjusted EPS $3.37, an increase of 7% on the corresponding   period of 2021. Revenue for the quarter totaled $4.26 billion, an increase of   17% on an adjusted basis. Analysts had expected Adobe earnings of $3.34 a   share on sales of $4.24 billion. For Q2, Adobe is forecasting adjusted   earnings of $3.30 a share on sales of $4.34 billion. 

  • Looking at the various business segments. The Digital Media segment grew   revenue 9% to $3.11 billion, as creative revenue rose 7% to $2.55 billion and   document cloud revenue gained 17% to $562 million. The Digital Experience   segment saw revenue rise 13% to $1.1 billion, with digital experience   subscription revenue up 15% to $932 million.

  • Looking at the various business   segments. The Digital Media segment grew revenue 9% to $3.11 billion, as   creative revenue rose 7% to $2.55 billion and document cloud revenue gained   17% to $562 million. The Digital Experience segment saw revenue rise 13% to   $1.1 billion, with digital experience subscription revenue up 15% to $932   million.

  • Adobe continues to benefit from a surge toward digital content creation. Although revenue and EPS growth this year is likely to be weaker than investors have seen in the past several years, Adobe is still targeting a big piece of a massive digitisation market. Most importantly in our view Adobe has an extensive moat. Acrobat software has become the standard for reading and creating documents electronically. In addition customers, such as graphic designers, are trained early in their careers to use products like Photoshop and Illustrator, making it difficult for competitors to take meaningful market share. High switching costs make it tough for customers to get comparable products elsewhere or do their job without Adobe. As if switching costs weren't enough, Adobe also benefits from the network effect. With more than 500 million copies downloaded, Acrobat has a foothold on computer desktops everywhere.