Fundamentally Furloughed

+1 for imperial brands. As a smoker myself I always question whether to try to recoup some loses from my bad habit by holding imperial brands

4 Likes

Activision Blizzard - ATVI (Buy)

Activision Blizzard is one of my favourite investments (and @userfy_123’s by the sound of it!) It’s a high growth, strong quality company, with growing reoccurring revenue, that appeals to a range of demographics. It’s a growing sector, and few companies are better positioned to take advantage of this.

Tomorrow, Tuesday 5th May, they will be announcing their first-quarter results. It would be easier to do some analysis after the quarterly results, but I have a strong long term view on ATVI.


From Google Finance

What Is Their Business?

ATVI describe themselves as a leading standalone interactive entertainment company. Who delight hundreds of millions of monthly active users around the world through franchises including Activision’s Call of Duty®, Spyro™, and Crash™, Blizzard Entertainment’s World of Warcraft®, Overwatch®, Hearthstone®, Diablo®, StarCraft®, and Heroes of the Storm®, and King’s Candy Crush™, Bubble Witch™, and Farm Heroes™. As someone who has played Call of Duty and Diablo, delight isn’t the word that comes to mind. Enough about my terrible gaming ability and onto why this is an exciting company.

The important piece to know here is, ATVI is four companies in one. You have the game publisher and developer Activision started in 1979, but these days best known for publishing Call of Duty (they don’t develop the game, it rotates between a few development studios.) There is the giant which is known as Blizzard Entertainment set up in 1991, who is best known for smash hits such as World of Warcraft, Starcraft, Overwatch, and Diablo. Then, we have King which was created in 2003, who rode the casual gaming wave (and continue to) with their never-ending, money-sucking, app Candy Crush. Finally, have Major League Gaming originally founded in 2002, which focuses on competitive gaming, MLG is the go-to location to watch top tier esports champions battle it out for cash prizes (to date they have paid out over $9.5m in cash prizes.)


From ATVI Q4 Powerpoint

Publishing games, where you bankroll development but in return, you get paid first, have a lot of control (if you want), control the distribution and sale price and control the IP. Additionally, for in-store microtransactions and additional services, you get even more revenue post-launch.

Developing games, where you have creative control, end-user engagement, can follow trends or even create new ones, and potentially create new IP if you have the distribution channels (which they do.)

Mobile gaming, with both King and Activision pushing more and more into the casual gaming experience, this gives them access to very desirable demographic, own income, spare time, actively seeing a short attention span ease to pickup distraction.

eSports hosting and team creation, where they rent venues to launch massive sponsorship backend events to see the best players around the world compete.

Own digital gaming distribution channel, with Battle.net they control even more of the user experience, pay less out to 3rd parties as they have their channel, and give them more control over their in-app purchases and digital sales.

Movies, physical merchandise, and other licence maximising activities through their studio arm. While this has been a bit quiet this could be a big step into more forms of media e.g. the Warcraft Movie.


From ATVI Q4 Financial Model

That graph is measured in millions. $5.4~ billion in bookings last four quarters, 409 million monthly active users over the final quarter. Let’s just say they are big.

What About Competitors?

I wanted to add in some comparisons to other companies to give you a feel for where they sit, these screenshots are from Genuine Impact.

Activision Blizzard

Take-Two

Electronic Arts

Ubisoft

Tencent owns a lot of developers and publishers as well (not just in China but globally), but they are a bit trickier to invest in. If you have access to the Polish exchange you might be interested in CD Projekt as well.

Financial Growth

Let’s stay focused on ATVI and it’s last earnings report. It’s worth noting that ATVI hasn’t announced any guidance changes since Q4. This likely means we are expecting positive results tomorrow. We have already seen a lot of digital and gaming related firms getting a strong boost in user numbers and spending due to national lockdowns. This will likely boost the revenue and engagement figures for ATVI too.

The expectation for Q4 was a dip in revenue, $1.6m compared to $1.8m a year ago but with microtransactions to increase. With no major new release, this would have been a fair expectation.

Expect there has been a major release. Call of Duty: Warzone, is their new free-to-play battle royale which launched in March. This has been downloaded over 50 million times already. If you haven’t heard of the free-to-play strategy before it’s a popular approach which has seen a resurgence with “battle royale” game modes.

I expect this will cause ATVI to beat expectations for this quarter and even post a very positive outlook. I would say the cloud we potentially will see is a slow down for future projects due to the lockdown, and while COVID-19 is providing a boost now, we don’t know how long that uptick will last.


From ATVI Q4 Report

While we are seeing the lockdown ease across the globe, it’s worth knowing where ATVI is making its money, it still has a strong American base followed by the European nations. While most of their services look to maximise reoccurring revenues, I am expecting to see a drop off when it comes to monthly active users. Across all their business lines people have free time right now, with summer starting and no new games lined up for the next quarter I expect the next three months will be unpredictable and largely driven by when lockdown ends. I expect a dip in activity immediately following the lockdown ending or easing.


From Genuine Impact

What we do have is a very positive and strong outlook from the sell-side analysts. There is a very strong buy consensus. The target prices are roughly where we are right now until the quarterly earnings come out. I wouldn’t be surprised to see another 5-7% increase in target price for the next quarter, even with a large number of pandemic unknowns.

Summary

We aren’t at all-time highs but I expect this year we can hit them. With some punchy future games lined up over the next two/three years, we can expect some massive payoffs. With strong profitability through their own digital distribution channel, extremely loyal customer base, and excellent capital allocation this is a very strong quality play.

However, this isn’t a cheap stock to buy right now. There is a lot of expectation built into the price. Right now we are already at the target price for the quarter, which doesn’t leave a lot of room for any negative news whatsoever. Making it very likely even a great result won’t be good enough and we will see a price correction following the announcement.

If you take an annual view, this is a very strong momentum buy. Right now one of my favourites. Excellent forecasted revenue growth, a CEO who is closely aligned to the EPS increasing, and extremely strong future sentiment. It has room to grow both in terms of revenue and in terms of price per share.

Let me know what you think of this analysis, I’ve changed the style a little to see if it’s more informative. We’ll see what the stock looks like on Wednesday after earnings and some trading activity!

16 Likes

I need to do some more reading on Imperial Brand. I’ll see if I can write something today @Jonny and @Pdw.

I was thinking about doing some extra education to help round out my analysis. I’m trying to balance giving a nice overview of what it is and the pros/cons, versus a deep drive into the market trends and those risks.

If nothing else this is keeping me entertained!

Thanks everyone for your support so far!

5 Likes

Much appreciated. Thank you for your contribution to the community already!

1 Like

Hi Jack, massive thanks for your posts so far.

When you get some time, would it be possible to take a look at Qualcomm as well?

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Imperial Brands - IMB (Buy)

Thank you @Jonny and @Pdw for the suggestion. This isn’t a company I have ever considered looking at, and I ended up being impressed in a very investment focused type of way. After digging into the facts, Imperial make it their business to keep shareholders extremely happy.

With the half-year results out on the 19th of May, in two weeks, it seems a fitting time to make some assumptions and take a deeper look at the world of Big Tobacco.

imperial-brands-logo@2x

Who Are They?

A British multinational tobacco powerhouse. If it’s related to tobacco, these guys have a say. From farming, logistics, innovation, and even lobbying governments around the world. Imperial is there.

You might not recognise the name Imperial Brands or even their old name Imperial Tobacco. It’s far more likely you will know their retail brands.

Even with all these brands, and selling all over the world, plus acquiring new brands into the group. They are not the largest of the Big Tobacco kingpins.


From Statista - Leading tobacco companies worldwide in 2019, based on net sales

Who Are They Up Against?

We’ll do a high-level Quality, Value and Momentum comparison against their competitors whom you might also be interested in. It’ll also give us a frame of reference before we dive into the details. These shields are from Genuine Impact, and it compares each company against 5,559 others.

Imperial Brands


Decent quality, medium value and momentum.

British American Tobacco


Medium quality, very cheap value and promising momentum.

Philip Morris


Extremely strong quality, cheap value and very poor momentum.

Altria


Extremely strong quality again, medium value and momentum

Is There A Future In Smoking?

Before we hit the numbers, it’s worth considering the wider market and its future. Generally speaking, killing your customers is not considered a textbook approach to good business.


From Our World In Data - Death rate from smoking

Smoking-related deaths are declining. You’ll see that one of Imperial’s objectives is how to make smoking and tobacco use healthier. Keep your products addictive while less harmful is their ultimate goal. We’ll touch on Imperial’s activities in tobacco alternatives and even their “kick the habit” new products to target customers on the complete smoking life cycle.

Smoking has over the years lost some of the charm and appeal. While it’s usage is trending lower with younger generations it still remains strong worldwide, particularly in Asia.


From Our World In Data - Prevalence of tobacco use among adults

One-in-five (20%) adults in the world smoke tobacco. With 51% of British people having a very unfavourable view of tobacco companies, and 52% of Brits have never smoked, what is the attraction of investing in a tobacco company?

Show Me The Money

I said Imperial do a great job of looking after shareholders and investors. In fact, Genuine Impact ranks them #186 when it comes to capital allocation.

8th July 2019, Imperial announced the dividend would increase by 10%, and then went on to affirm, it would keep increasing each year going forward as well.

That alone might not sound impressive. Until you take into account the 5-year average dividend yield has come to 6.27%. With a payout ratio of 183%~, like many sin stocks, Imperial know why people invest and what they expect.

Payouts might pad your pocket today, but how will they survive for tomorrow?


From Imperial Brands - 2019 Full Year Results

I was surprised to see the growth is primarily in the Americas rather than in Asia. Thankfully we have some more up to date numbers to look at from the 2020 AGM.


From Imperial Brands - 2020 5th Feb AGM

NGP refers to non-traditional smoking, this is your vaping and tobacco addiction help medication. This line has been hit recently the future estimate is significantly lower year-on-year NGP net revenue. Imperial has brought in a further cost savings programme to mitigate some of these short-term headwinds hitting their operating profit.

Also in the US, they have banned flavoured vapours, which has been a cause for downplaying their future operating profits again. While a growing area still, it has been hit with a number of setbacks.


From Imperial Brands - 2020 5th Feb AGM

Not only have we seen high growth in their new product development, but the core product is also seeing steady growth as well. The real take away was the 95% cash conversion figure.


From Imperial Brands - 2020 5th Feb AGM

The slow increases in price, the high margins, and expansion into new growth regions mean revenue and profits are continuing to grow even when the volume is dropping.

The financial strength is extremely poor, which is normally an indication of too much debt.

On the 27th of April, one week ago, Imperial agreed on the sale of its cigar business. This is a £1.1m~ injection (in two parts) into the business to help it pay off debts, and to keep the business more streamlined and focused.

So much debt is there? £13 billion. Suddenly the revenue figures don’t look as attractive.

Now the good news is most of this debt isn’t maturing for a long time, and often is in the form of the going credit facility, to which they just signed a £3.5bn deal for. With a line of good credit and high cash conversion, it seems they have the reliance they need to keep expanding.

Buying A Bargain

While Imperial has excellent control over its cash flow and access to easy credit, they don’t maintain the best balance sheet when it comes to buying this stock.

With a price to book ratio of 319, this might not be the best time to pick up some shares if you were hoping for a value-based decision.

The price to sales is extremely attractive at 0.97, which might help sway you.

The price ratios are very much all over, without a clear indicator whether this is a cheap buy or an overpriced mess.

Imperial themselves have said they haven’t been impacted by COVID-19, which means we can expect on-target results.


From Yahoo Finance - Six-month price history

There has been a COVID-19 dip but we are broadly back where we started, this does mean a degree of risk is still priced in compared to a non-pandemic situation.

Moving Forward

While their revenue is not growing how they hoped, analysts are not displeased with the results. With strong targets for future earnings and generally strong future sentiment.


From Genuine Impact - Beat/Miss and Analyst Ratings

While they have missed the target when it comes to earnings per share, they have been consistent with their revenue and earnings targets.

In fact, we can see some strong target price estimates from the sell-side analysts.


From Market Beat - Target Price Estimates

The share price is slowly dipping over the last five years as Imperial pays out to shareholders to keep them interested, and struggles to make headway with new products. However, the scrappy nature of management to get the job done and cut costs seems to be giving life to the targets.

Why A Buy?

I am seeing strong dividends and an under priced company. While I don’t like investing in a tobacco company I can see some upside in the short to medium term.

The business has shareholders at heart, will sell off under performing business arms and even reduce it’s product lines. They are taking steps to smooth their debt and they have a robust new credit line in place.

With a rough 20% increase based on the target price, this could be a short-term move while you scope out the next big buy.

Let me know what you think of the analysis and anywhere you would want more information or insight. I’m trying to get a balance right without it taking my whole day! Thanks for reading!

13 Likes

That would be an exciting one! I’ll do some research today and see if I have enough to write about.

For me this is a great way to analyse new companies for myself too! :money_mouth_face:

1 Like

Qualcomm - QCOM (Hold)

Thanks to @Fotis for the suggestion to take a look at the mega chip manufacturer Qualcomm. This isn’t a company I have looked at before but it’s an exciting firm and one you might not have heard of, but you have likely engaged with their products and solutions.

qualcomm

Qualcomm is a specialist in network technologies, think 4G and 5G, for mobile and smart devices. They also get involved in the hardware as well as the policy side of wireless networks.

What Do They Do?

Qualcomm is split into three different divisions.


Source: Qualcomm Investor Relations

QCT develops and supplies circuits and software based on CDMA, OFDMA for mobile devices. We are talking smartphones to gaming devices, broadband gateway equipment to the Internet of Things (IoT) devices. Aside from their biggest market which is smartphones, smart and driverless cars will be a massive growth market for this segment.

This is the biggest revenue driver right now and the biggest focus of the business. Selling chips for the next generation of phones, e.g. 5G enabled phones with fast chips with integrated networks. They also offer network cards and software for Wi-Fi, Bluetooth, NFC, and even help support location and data services.


Source: QCT Information

QTL grants licenses to use portions of Qualcomm’s intellectual property, which includes patent rights essential to the manufacture and sale of some wireless products. Their heavy investment into the standards and processes in the wireless space, along with a rough and tumble league of lawyers, mean they can lockout competitors or collect IP license fees from rivals.

While a declining area, due to the growth of 4G over the years, we can expect this to increase as 5G devices increase in popularity. However, new competitors with their IP mean this isn’t going to be lucrative forever. This does force other companies to invest in their R&D creating an arms race.

It’s worth noting that Qualcomm has an advantage due to its vertically integrated business model. Versus other network firms who do not own the IP behind the technology, or even the manufacturing process.


Source: QTL Information

QSI looks after and makes strategic investments. This is different from the groups R&D which belongs to each sub-division. Here Qualcomm invests in different companies involved in automotive, IoT, mobile, datacentres, and healthcare.

This allows them access to the inside track with early-stage companies which might be moving faster in specialist areas. This is an easy way to acquire new licences or customers, depending on the focus of the company.


Source: QSI Information

What Are The Risks?

Qualcomm is a competitor to Huawei. The two has slightly different approaches but are heavily influenced by each other.

Huawei has secured 5G contracts in the UK, while this helps the rollout of 5G which enables 5G enabled devices (where Qualcomm can sell the chips) they are missing out on the available infrastructure plays.

There is also the bet on 5G delivering on the promise. Having faster internet on devices is only a small part of the deal. The real cherry is the new devices and technologies that 5G enables. For example, why do complex processing on your phone when doing digital enhancements to a photo (privacy concerns to the side for a moment) when it can be done by cloud edge computing? Fast, lean, cloud-based functions which your device can rely on to do complex processing without it being a drain on your device. Driverless cars where the central processing is done remotely due to the availability and speed of 5G. You are no longer limited to the hardware of the device you deploy with.


Source: Forecast of the 5G chipset market size worldwide from 2019 to 2027


Source: Number of wireless subscriptions by generation worldwide from 2010 to 2023

While the 5G growth and adoption, figures look extremely promising. Qualcomm does have an additional risk which isn’t shared by all its competitors.

The vertical integration of its business is a blessing and a curse. Any manufacturing or logistical issues encountered will be felt throughout the whole value change. This does make them slower to innovate against their adversaries who don’t have the same constraints.

We also have the different legal issues Qualcomm has, having just ended with a successful payout from Apple over the use of their IP. While they are the largest smartphone chip producers they are not loved by their customers. Making them vulnerable in the long run to a more customer-centric business. This is where their licence division focused not on making money but locking out competitors and keeping the barrier to entry as high as possible.


Source: Wallmine

Qualcomm is also extremely sensitive to a US/China trade war. Which is sadly brewing once again. If Trump is to be elected for another four years, this will put the pressure back on for Qualcomm as it damages it’s manufacturing plans.

Fundamental Headline


Source: Genuine Impact

Qualcomm is a very high-quality company. They have excellent profitability, bringing in $24.7bn in revenue and converting an impressive 18% into profit.

They also have a strong grasp over their debt due to the high cash conversion.


Source: Qualcomm 2Q 2020 Results

$2.5bn of short term debt is normally a warning sign, but with $8.4bn cash on hand (plus other cash-like assets which I haven’t included), this is meanly cash flow control.


Source: Qualcomm 2Q 2020 Financial Results (Summary)

In terms of a dividend, this might be an attractive business for you. With 72.5% of earnings paid back to investors! They sure know how to keep you sweet. A 3.2% dividend yield is impressive, while not groundbreaking, but can be sensitive to the risks mentioned before.

When it comes to buying Qualcomm it’s very expensive to pick up right now. Nothing about the price versus balance sheet, or income, or even against the cash flow is attractive right now.

Even when we take target share price figures into account and future growth, the company is still overpriced. There is a lot of optimism around the 5G explosion with little risk priced in. This means negative news or slowdowns (which the trade war can easily bring back) we can expect to slash the price.


Source: Genuine Impact

We are also seeing an unimpressive, but not concerning view from the sell-side analysts. We are seeing analysts change from a buy rating to a hold one.

I can understand why, with so many unknowns in the immediate future, and trade war 2 electric boogaloo on the horizon, we can expect some discounting of the share price yet.

So Why A Hold?

There is a lot of upsides here, I see strong future growth and a high-quality company with enough cash reserves to fight off the competitors and keep winning big deals.

When it comes to 5G these are the guys to watch, while slower than their peers they have the vertical integration few companies can dream of.

However, we are likely going to face some short term volatility. This is a stock to watch, if you hold it you won’t have any issues with pound cost averaging, but if you are looking to enter this is one to add to the wishlist and keep monitoring. We have political, manufacturing, and competition risks to manage right now unless you are happy to lockin and get those dividends, this doesn’t feel like one to rush.

Either wait for the next earnings or until the share price makes this slightly more attractive.

Let me know what you think! Any suggestions for companies or funds to look at next, or any points you disagree with. Love to hear your feedback!

9 Likes

Great post man! Thanks a lot :slight_smile:

1 Like

No worries, thanks for the suggestion! I had a lot of fun looking into them and taking a look through the numbers. It’ll be one I’ll start watching now as well :+1:

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Great posts! I find the visuals and charts in your post to be particularly useful as they me to access to a great range of information and analysis.

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Thanks for the kind words, it’s great to hear you are enjoying them :champagne:

I’m planning a lighter write up today ahead of the bank holiday. While I might be free the girlfriend still has to work. Finally a chance for her to help me shopping for once :smiley:

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Lyft - LYFT (Buy)

This is an interesting company for me. Late to the ride share business, operating in fewer markets than their competitors, smaller market share, and having to face the same criticisms over gig-economy workers being employees.

What has my attention about Lyft versus their competitors, and why am I interested in a transportation-as-a-service company which operates only in the US and Canada?

lyft logo

What Does Lyft Do?

The phrase transportation-as-a-services doesn’t give you that many clues, they could be running a bus loan service. At the core of their business is using technology to make transportation better for individuals. This is a slightly different take compared to a company like Uber which uses technology to solve logistic and fleet management issues. Both result in similar outcomes but play out with different business investments and focuses.

Unlike other firms, Lyft doesn’t make it completely clear all their business lines and services just by looking at their investor relations page. One of those, if you know you know kind of deals.

I had to read the full SEC filings to get some useful information. Lyft likes to group everything and talk from the perspective as a group, which isn’t useful when it comes to breaking down their bets and individual risks.


Source: Lyft Full Year 10-K SEC Filing

Ride sharing marketplace
The core offering, this is the platform that connects drivers and riders. It’s more than just a marketplace, this also controls surge pricing and predicting rider flow. Like Uber this is a key piece of IP, knowing where your drivers need to be so they make money and knowing when to expect rides so there is never a shortage for riders.

Bikes and scooters
Shared bikes and scooters in major metropolitan areas is a growing trend, no doubt you’ve seen this yourself. When thinking about transport you’ll often here bikes and scooters referred to as “the first-mile and last-mile of a multimodal trip”. This is for short walking distances, part of a larger journey rather than trying to get walkers to start scooting about. These are “dockless” as well, which means they employ staff to go around and move these bikes and scooters so they are always available where you want them to be.

Lyft believes they operate the largest bike-sharing platform in the US, but all we care about is they have exclusive city partnerships in a majority of locations, like including New York City, the San Francisco Bay Area, Chicago and Boston.

Public transit
I joked they could just be running buses, turns out that’s not completely false. Their public transit business is just displaying transit options, this generates no revenue or fee. As part of their business, it’s all about engaging with their app and product suite. Looking up and planning travel with Lyft means giving over your valuable data.

Autonomous vehicles
Now we are getting to the juicy bits. Lyft partners with Waymo and Aptiv (plus a few others) to make this happen. They have deployed a fleet of autonomous vehicles in Las Vegas where it is revenue-generating. Over 100,000 rides in Aptiv autonomous vehicles with a safety driver since January 2018.

Rentals
Most firms in this space also end up vertically controlling the experience. It starts with mandating the cars which can be used, and quickly brings them into the world of car rentals to drivers and offering insurance. However, rentals now include a new offering which they have started testing in 2019. Renting cars as a rider for things like a weekend away. This is temporary car ownership. While a tried and tested business from the era of airport car rentals, this is another growing revenue line in a world where car ownership is at risk.

The Competition Summary

Let’s take a look at the fundamentals of Lyft and their competitors, this is a quick comparison to see the health of each company and to frame where they stand as investments.

Lyft


Source: Genuine Impact
Good debt control, not profitable, and doesn’t pay any money out to shareholders. Very expensive to buy as they aren’t profitable and the share price is predictive of them growing. Poor future revenue, but very strong future earnings, very strong sentiment to buy the stock now.

Uber


Source: Genuine Impact
Decent debt control, not profitable, and not paying out any money. Extremely expensive to buy right now. High returns are priced in and expected. Poor future revenue, but extremely strong future earnings, and decent sentiment to buy the stock.

Yandex


Source: Genuine Impact
A large Russian company where Yandex.Taxi is a small part of their business but I’ve included it due to the list being so short! High profitability, debt is extremely well covered and controlled, still not great at paying money out. Not as expensive to buy as the other two but larger firms tend to be worth less than the sum of their parts, due to poor synergies and optimisation. A very weak outlook for the future, not something the analysts think you should be even considering right now.

It’s pretty tough to find direct competitors which you can invest in. Most of the competitors are privately owned, and the other public ones are large firms like Yandex or car manufactures where it’s a smaller part of their business.

To help paint a picture, here is a landscape picture from an asset manager.


Source: GAM TaaS Is An Opportunity

Looking above where we covered off the different business lines, you can see the different areas of the TaaS landscape Lyft is trying to enter into.

What Are The Risks?

The biggest risk is, what if this isn’t the future trend we think it is? There is a big expectation that the future of car ownership is in decline. In the future we rent our transportation and see it as a commodity. Even companies like Tesla are working towards your Tesla working as a public taxi while you are not using it. The risk is, what if this graph is wrong.


Source: Statista Ride Hailing Taxies - User Growth

The prediction is more and more users will start ride hailing than ever before, and this is a year on year growth which won’t end.


Source: Statista Rie Hailing Taxies - Revenue Growth

Even accounting for COVID-19 we are expecting ongoing growth outpacing user growth, meaning we are using the services more and more.

The other big risk is the law. The gig economy as it stands today is being challenged. Right now Uber and Lyft are facing a legal battle in some US states to not classify the drivers as employees. This is a common trend around the world and one the taxi services are having to fight. On the side of the corporations is the growing number of gig worker market places available, e.g. Deliveroo, which would also be affected. While TaaS firm can repurpose their offering, this is a fundamental threat to their core services currently.

A sudden change in the law could result in years worth of setbacks.

Finally, on the point of law, is automation. Both Lyft and Uber are making automation bets, along with a few other notable companies like Tesla and Alphabet. If driverless cars are not given the freedom these firms are pushing for, it means these experiments stay in R&D for longer and keep burning cash.

For publicly listed companies they sure do behave like start-ups. Extremely high cash burn, need to be well funded which means more capital will likely be raised (plus aggressive acquisition strategies to fund,) creates a situation where a bad global pandemic could shake your business to the core.

Lyft has been forced to make some tough moves and laid off staff, as well as massively downgrading their 2020 plans and targets.

A sensitive, unknown, trend setting, cash consuming, non-profitable business. Some meaningful risks in a nutshell.

The Growth Plans

Which brings us back, with so many risks what are Lyft doing about it. What is the growth strategy?

Number one is to increase their use cases. Think about the transit business line which doesn’t generate any income. They want to become the go-to source for transportation, using their services or not. This also gives them the flexibility to move into a service provider and step away from delivering the service (think Amazon running a marketplace but they don’t manufacture the goods, well not always.)

Subscriptions are also a new feature they are working on. Produce regular predictable revenue and a loyal customer base to roll out new products and cross sell into.

Next up is the B2B angle again. Selling their logistics management solution to other fleets. Rather than digging for gold, sell the pickaxes. Another way to pivot the business or potentially expand it, depending on the climate.

Geographic expansion. Lyft is very small geographically speaking compared to many of their competitors. They are very focused, which is great for a very tailored experience, terrible for your market penetration outside of your home regions. Uber is burning cash getting themselves a very defensible market hold, Lyft is planning to start expanding as well.

Acquire more of the value chain. They brought Flexdrive which was their business partner for loaning cars to drivers. Lyft is not shy when it comes to M&A activity, they see this as a way to grow their business and completely control the experience from top to bottom. A smaller region focus means you can create strong synergies but replicating this round the world might be tougher.

What’s The Hook?

Looking through you might still be surprised I have this as a buy. The long term future looks like a challenge, and it’s not as impressive when it comes to fundamentals. What is the upside that has my attention?


Source: Genuine Impact

The future share price is what has me excited. Let me turn this rank into a tangible number for you.

Lyft is currently priced around $32 a share price right now, the medium sell-side analyst target price (target price is normally within the next 12 months) is $51 a share. This is a 60% increase.


Source: Wallmine

With the general view being a buy, buy-hold, or hold. The analysts see a strong short term future after COVID-19. While there will be some struggles once the lockdown eases up, the growth strategy seems promising.


Source: Genuine Impact

Additionally there might be some short term wins to be had for Lyft over Uber.

Barclays analyst Ross Sandler expects a quicker recovery for Lyft than Uber because of its West Coast orientation, assuming West Coast cities reopen a few weeks before the eastern U.S. and Europe.

Let me know what you think, is now a good time to pickup Lyft and how does it stack up against Uber as an investment.

Thanks again everyone for the suggestions and readership!

11 Likes

Really enjoying these analysis, keep them coming kind sir :smile:

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Thanks for the kind words!

I’m looking at what to write about today, I’ll have a peep for anything interesting!

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Aston Martin? Maybe you could find out why it appeared in the most bought stocks last week. It runs out of money more than I do :laughing:

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Wow, I just gave them a quick look and it looks like a nightmare! :scream:

I think their cars hold better value than the stock. This could be an exciting one to look into!

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Got another favourite please - Legal & General!

My last remaining hope for any dividends this year.

Another one for you if you have the time - a deep dive in home builders: Barratt vs Taylor Wimpy

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Aston Martin Lagonda Global - AML (Sell)

For my next analysis, I wanted to look at Aston Martin after @jamesr 's suggestion. The stock has been in a downward spiral since it became publically available back in October 2018. Let’s see who is in the driver’s seat and where they are going.

Who is Aston Martin Lagonda?

Aston Martin Lagonda is an independent luxury car group. Over 100 years of experience across two brands. One of the few British car companies left, much less publically listed.

Aston Martin, created in 1913, is named after a race when Lionel Martin took on the Aston Clinton Hill Climb in and won. They brought Lagonda in 1947. Both companies have a rich history of racing and fast luxury cars. We’ll find out if that is enough for them to survive in the modern world.


Source: Aston Martin Investor Information Strategy

AML makes its money by making luxury cars such as the DB range. They don’t have as robust an organisation as some of the manufacturers who control more of the supply line to a wider audience. Their sole focus is on producing and selling new cars, both to wholesale and retail (online and with their showrooms.)


Source: Aston Martin 2019 Full Year Results

Aston Martin has also recently (rejoined) Formula One, however, this is not a revenue opportunity, rather an exercise in brand exposure.

The Starting Line Up

Not all car manufacturers are equal, and some have a bit of a head start when it comes to their fundamentals. To keep it brief and help frame the investment, we’ll give each firm a quick MOT.

Aston Martin


Source: Genuine Impact
Horrifically poor quality, high debt, no shareholder payouts. Even with the massive share price slashes, still an expensive buy. An extremely weak outlook for future revenue and earnings.

Ferrari


Source: Genuine Impact
A good comparison as both companies are luxury brands focused on racing. High profitability but also heavily loaded with debt. Very expensive to buy shares right now. Also, an extremely weak outlook for future growth.

Volkswagen


Source: Genuine Impact
Not as profitable as their peers but paying money out to shareholders makes this more attractive. They are considered very cheap to pick up right now as well. They have a weaker outlook but still mildly better than the others here.

We also have Ford, BMW, GE, Daimler, and even Tesla. Aside from Tesla which doesn’t follow the fundamental rules, the larger companies largely follow the same pattern of Volkswagen. Currently at a discount due to COVID-19. However, Aston Martin is not considered cheap like it’s peers.

Potentially this is done to the “awareness” of Aston Martin, while it might be synonymous with James Bond they have not been mentioned where it matters. In past 62,560 rap and hip-hop songs from the 100 Greatest Rappers of All Time as well as any rapper who has appeared on the Hot 100 chart in the past decade. Mercedes (Daimler), Volkswagen, and Ferrari all dominate the top three and they have stronger fundamentals than Aston Martin, take that analysis as you will.


Source: Genius What Are The Most Popular Car Brands In Hip-Hop & Who Is Rapping About Them?

The Share Price

I mentioned the declining price since they became a public company.


Source: Guardian Aston Martin’s troubled flotation

Plagued with false starts and cash flow troubles, Aston Martin finally had some good news in 2018 when they reported their first-ever profitable year. However, the rose-coloured IPO was short-lived.

What has been causing the recent issues though? How hard hit was Aston Martin?

Aston Martin Lagonda confirms that it will be raising gross capital proceeds of £536m through an equity raise, including a private placement of shares for £171m to the Lawrence Stroll led Yew Tree Consortium (as part of their total investment of £262m) and a subsequent rights issue.
Source: Aston Martin Investor Relation Rights Issue

Show Me The Money

Why have they raised additional capital? The share price woes lead us perfectly onto the financial situation at Aston Martin. In the same announcement, AML had to share some uncomfortable news.

COVID-19 has hit them hard and stopped all production on the new SUV, delaying their entrance into the market even more. Given how much is riding on this and not letting customers cancel their pre-orders, it’s a touchy time.

It gets worse. Due to the regulation, a company is either has enough working capital for the year or it doesn’t. There is no middle ground. Aston Martin has been forced to announce they do not have enough working capital and the investment was part of a cash injection to solve these issues.

They have a few options to help provide some comfort. Additional funding facilities of approximately £150 million. The option until 8 July 2020 to draw up to $100 million of the Delayed Draw Notes issued on 8 October 2019. Discussions with the UK government concerning the potential support packages available to businesses to trade through the pandemic.

When it comes to financing you want to make sure you have the best people on the job. Mark Wilson, the Chief Financial Officer, has now stepped down. Aston Martin currently has an interim CFO. Additionally, three directors are stepping down and not seeking re-election. Meaning the company setup is no longer compliant, thus a new search for independent board members is underway along with trying to source a CFO.


Source: Aston Martin 2019 Full Year Results

After some heavy investment into a new factory, and with pre-orders for their first SUV sold out, this is the worst time for Aston Martin to deal with a lockdown.


Source: Aston Martin 2019 Full Year Results

The lack of diversification across their revenue lines, and issues with potential customer cannibalisation, are all impacting their ability to sell more cars. Compound this with the financing issues and they can’t make the new cars to sell.

In 2019 they also started a voluntary redundancy and early retirement programme actioned which resulted in a 22% reduction in year-end headcount. The main is by 2021 to save over £10m in operational costs. With an operating profit margin of 0.05%, they are not in a strong position when it comes to profit generation.

With £19m cash flow from their operations and £243m coming in from financing activities, cash flow conversion is a serious issue for them. They are currently in almost £1bn worth of debt and currently reporting a pre-tax loss.

Buy While It’s Cheap?

Sometimes buying a distressed company means you can pick it up cheap. As Mr Buffett likes to say, buy a great company at a good price.

Sadly, due to the loss-making nature, high revenue, and poor cash flow, Aston Martin is not an attractive company based on its share price ratios. Price/book of 27.28 and Enterprise value/EBITDA 28.50, these figures can die another day.

First Place Finish In The Future?

Often when I talk about distressed assets I talk about it as an opportunity for a long term investment. Taking a risk now to buy the company on the cheap to enjoy its future growth.

This is not the case with Aston Martin.


Source: Genuine Impact

With very weak future revenues, (the deposits for the new cars have already been taken and it’s assumed a large number will convert already.) Earnings in the future are also very weak, the operational issues have not been solved and the margins are too tight.

Aston Martin need to streamline the business and they recently did some expansion, plus losing key members is not helping the transition.

The sell-side analysts have a very disappointing outlook. With many showing a lower target price than Aston Martin is currently trading at.

With the Q1 2020 results expected this Wednesday, 13th May 2020, we’ll see the full scope of the damages.

Why A Sell?

If I was holding Aston Martin I would be looking for my moment to sell sooner than later. I have a very low expectation for the announcement this Wednesday, and I don’t see a recovery any time soon, if ever.

The best outlook for Aston Martin would be an acquisition. However, who would want to buy the brand while it is heavy with debt and struggling to optimise its business?

The added brand exposure from the Formula One is unlikely to move the needle and might be a bigger expense than expected. The bottom teams are paying more money than they make, and that’s likely how Aston Martin will start the session.

Let me know what you think about my write up and analysis. Any parts you would want me to focus on, or bits you want me to cover?

Stay safe and thanks for reading!

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Thanks for the write-up mate, and thanks for all the others you’ve shared with us on this thread.
I agree with your finding the stock as a sell, but i wont be selling mine anytime soon!
This is only because i bought some shares in February at £4.50 ( :open_mouth: ) and now they are at 42p! :sob: - Thankfully, i had only purchased 5 shares.
I then got another 20 shares at 30p each through the rights issue which has brought my average price per share down to £1.1443.
So even though it seems pointless holding them, i don’t see much point in selling either due to both the current price as well as the size of my investment. Will hold for now and sell if the price ever improves.
Thanks again for the analysis.

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