New Holding...Envista Holdings...NVST on the NYSE

New Holding...Envista Holdings...NVST on the NYSE

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Company Profile

Envista is one of the largest global dental products companies with significant market positions in some of the most attractive segments of the dental products industry, including implants, orthodontics and digital imaging technologies. We develop, manufacture and market one of the most comprehensive portfolios of dental consumables, equipment and services to dental professionals covering an estimated 90% of dentists’ clinical needs for diagnosing, treating and preventing dental conditions as well as improving the aesthetics of the human smile. Our executive officer team has extensive dental industry experience and over 50 years of collective service with Danaher. In 2018, we generated total sales of $2,845 million, of which approximately 70% were derived from sales of consumables, services and spare parts.

Our operating companies, Nobel Biocare Systems, Ormco and KaVo Kerr, serve more than 1 million dentists in over 150 countries through one of the largest commercial organizations in the dental products industry and through our dealer partners. Our commercial organization includes over 3,000 employees with deep clinical, product and workflow expertise who interact with customers on a daily basis. We are also a leading global provider of clinical training to enhance patient access to high-quality dental care, reaching over 100,000 dental professionals annually through more than 4,000 training and education events we directly organize.

We generated 23% (or $655 million) of sales from high-growth markets in 2018. Our growing scale in these markets has been driven by strategic investments in underpenetrated markets, such as the Greater China region (mainland China, Hong Kong, Taiwan, Macau and Zhuhai), where we had sales of $213 million in 2018 and currently have a commercial organization of more than 400 employees. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure, which include Eastern Europe, the Middle East, Africa, Latin America and Asia (with the exception of Japan and Australia). We define developed markets as all markets of the world that are not high-growth markets.

We believe that in 2018 our research and development (“R&D”) expenditure of $172 million was one of the highest R&D spends in the dental products industry. Through our increased investments in R&D, we have accelerated multiple new product development initiatives, such as the DTXTM software suite, the N1TM implant system and SparkTM Aligners.

Our Specialty Products & Technologies segment comprised of our Nobel Biocare Systems and Ormco operating companies, develops, manufactures and markets dental implant systems, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products. We typically market these products directly to customers through our commercial organization, and approximately 90% of our 2018 sales for this segment were direct sales. In 2018, our Specialty Products & Technologies segment generated $1,370 million of sales.

Our Equipment & Consumables segment, comprised of our KaVo Kerr operating company, develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; handpieces and associated consumables; treatment units and other dental practice equipment; endodontic systems and related consumables; restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products. We sell our Equipment & Consumables segment products primarily through our channel partners, representing approximately 90% of sales in this segment in 2018. In 2018, our Equipment & Consumables segment generated $1,475 million of sales.

Our History and Transformation

As a platform of Danaher Corporation, Envista was built through the acquisition and integration of over 25 leading dental businesses and brands over the course of more than 15 years. We believe our business today has one of the most comprehensive offerings in the dental products industry. Beginning in 2016, we consolidated our operating companies, reduced our manufacturing sites from 44 to 33, consolidated almost 150 sales offices into less than 80, streamlined our R&D organization, and centralized our direct and indirect procurement organizations. These efforts have helped our free cash flow (referred to in “—Summary Historical and Pro Forma Combined Financial Data”) to exceed our net earnings in each of the three years ended December 31, 2018.

We organize our operating companies in a way that leverages long histories of brand leadership across their respective product categories. Consolidating our multiple brands helps ensure alignment of our product and commercial strategies, allows us to better meet the needs of a broad set of customers, and facilitates an efficient and effective innovation pipeline. Streamlining our business operations has also allowed us to increase our salesforce and reinvest significant resources in initiatives such as expanding our R&D spend and expanding our presence in high-growth markets, which we believe will help drive long-term market leadership.

Industry Overview

We believe the global dental products industry is an attractive and growing sector within healthcare with estimated total product sales of approximately $23 billion in 2018, which we estimate has grown at an average, annual mid-single digit rate over the last three years. While the U.S. represents a significant portion of the global dental products market, we have also been focused on building significant scale in high-growth markets. Within the global dental products industry, we believe segments such as Imaging, Implants and Orthodontics will grow at a more rapid pace than the overall market.

We believe future growth of the dental products industry will be driven by:

an aging population; 

the current under-penetration of dental procedures, especially in high-growth markets;

improving access to complex procedures due to increasing technological innovation;

an increasing demand for cosmetic dentistry; and

growth of Dental Support Organizations (“DSOs”), which are expected to drive increasing penetration and access to care globally.

Our Competitive Strengths

We believe we have significant competitive strengths, including:

Brand leadership with a long track record and strong brand recognition. We built our business around brands with long histories of innovation and strong brand recognition in the dental products market. The founder of our Nobel Biocare Systems operating company introduced the world’s first dental implant and Nobel Biocare Systems has since become a world leader in the field of innovative implant-based dental restorations. Our Ormco operating company has over 50 years of distinguished history providing orthodontists with high quality, innovative products. Multiple brands within our KaVo Kerr operating company have more than 100 years of history in dental products. We believe the long history and leadership of our well-known brands in the dental products industry enhances our connections with both patients and providers, and supports our strong market position.

Comprehensive portfolio with leadership in key attractive segments. We believe we have one of the most comprehensive offerings in the industry, enabling us to be a vendor of choice. Our broad product offering positions us particularly well to serve the needs of dental support organizations, or DSOs, which have been one of the fastest growing segments of our customer base.

Global commercial reach. Our operating companies serve more than 1 million dentists in over 150 countries through one of the largest customer-facing sales teams in the dental products industry and through our dealer partners. In 2018, we generated 56% of our sales from markets outside of the U.S.

Strong position in high-growth markets, particularly in the Greater China region. We have successfully grown our business in high-growth markets; these markets represented 23% of our total sales in 2018. We have built one of the largest dental products businesses in the Greater China region, with $213 million of sales in 2018. In that region, we currently have approximately 900 employees (including more than 400 sales personnel), three manufacturing operations and a fully localized infrastructure with dedicated R&D, product management, operations, regulatory affairs, sales and marketing, and customer service resources.

Track record of innovation. With $487 million of cumulative R&D investment in the three years ended December 31, 2018, we have supported our significant market positions in the industry with what we believe is one of the highest levels of R&D investment in the dental products industry. Our focus on innovation has yielded many differentiated products over the years, such as our NobelActiveTM dental implants, our DamonTM passive self-ligating orthodontic wires and brackets, and our i-CATTM 3D imaging system.

Danaher Business System. We believe our deep-rooted commitment to DBS helps drive our success and market leadership and differentiates us in the dental products industry. DBS encompasses not only lean tools and processes, but also methods for driving growth, innovation and leadership. Within the DBS framework, we pursue a number of ongoing strategic initiatives relating to customer insight generation, product development and commercialization, efficient sourcing, and improvement in manufacturing and back-office support, all with a focus on continually improving quality, delivery, cost, growth and innovation.

Experienced management team with extensive Danaher and dental industry experience. Our management team includes long-tenured leaders from Danaher with a proven track record of applying DBS to execute on our strategic and operational goals. Our executive officer team has extensive dental industry experience and over 50 years of collective service with Danaher. Under their leadership, we have undertaken a significant transformation to better position our business for organic and inorganic growth and diversify our sales globally.

Our Business Strategy

Our strategy is to maximize shareholder value through several key initiatives:

Build upon our strong portfolio of leading brands and commercial scale. We believe the long history and leadership of our well-known brands in the dental products industry enhances our connections with both patients and providers, and supports our strong global market position. We expect to continue our significant investments in expanding our global commercial reach and footprint especially in our direct businesses. We believe these investments better position us to effectively meet the needs of our customers, particularly the growing DSO segment.

Invest in underpenetrated high-growth markets globally. We have succeeded in the Greater China region by harnessing our existing go-to-market infrastructure, building familiarity with local customer needs and regulations, and establishing dedicated locally-based management resources. We expect to continue to invest in the Greater China region as we believe it will be a strong growth driver for our business in the future. We are also replicating key elements of this approach in other high-growth markets such as Latin America, Asia Pacific, Eastern Europe and Russia.

Continue to drive growth in our implants franchise. The dental implant market enjoys higher margins and faster growth than the overall dental products market. In the U.S., which is our largest geographic market, implant penetration lags significantly behind other Western European markets, such as Germany, Spain and Italy. We believe we have an approximately 20% share of the $5 billion global implants segment and will continue to invest in our global commercial footprint and product innovation to grow our strong position in the underpenetrated dental implant market.

Maintain a strong market leadership position through innovation that our customers value. As we seek to continue to improve our business and drive increased cash flow, we expect to strategically invest in innovation in order to better serve our customers. We will focus our new product introductions on driving growth in attractive core segments, such as our upcoming N1 implant system and our new Spark clear aligners and DTX clinical software ecosystem for KaVo’s imaging solutions.

Drive continuous improvement and margin expansion through DBS. We continue to pursue a number of ongoing strategic initiatives across our operating companies relating to efficient sourcing and improvements in manufacturing and back-office support, all with a focus on continually improving quality, delivery, cost, growth and innovation.

Deploy capital through acquisitions and investments. We see many opportunities for capital deployment in our core businesses, as well as in attractive adjacencies. We intend to drive shareholder value by deploying capital to acquire or invest in other businesses that strategically fit into or extend our product offering into new or attractive adjacent markets.

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Envista Holdings Corporation,

Management Discussion and Analysis

Source

https://www.sec.gov/Archives/edgar/data/1757073/000175707319000010/envistas-1prospectus.htm#s182F436A19F652B4B7DE02329BAF8404

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Company Profile

Envista Holdings Corporation is a dental products company. The Company provides products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone. The Company operates through two segments: Specialty Products & Technologies, and Equipment & Consumables. Its Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products. Its Equipment & Consumables segment develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; treatment units and other dental practice equipment; endodontic systems and related consumables; restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.

BNN - Market Call Comments

Dental products, with a broad range. Spun off from Danaher, allowing them to focus on improvements. Quite global, with only 48% of revenues coming from North America. Leading player in implants, a growing segment. Good growth in both developed and developing markets. Likes the valuation and its industry position. No dividend. (Analysts’ price target is $50.57)

Christine Poole, Oct 12, 2021 (Top Pick)

They make dental products. She likes the dental industry for its secular growth, specifically from aging demographics (a desire to keep your teeth longer which feeds the implant business), and a low penetration rate in developing markets. 22% of their revenues come from emerging markets, plus 50% from North America. There's a lot of room for NVST to grow and they have a broad product offering, supplying 90% of the equipment of what a dentist needs. They lead in many product categories. They just launched the Sparks clear dental liner which is enjoying strong growth in the U.S., the first innovation in years. They're #1 in the implant business. (Analysts’ price target is $51.75)

Christine Poole, Sept 9, 2021

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Colfax: Setup Turns Compelling Heading Into The Upcoming Separation Event

Colfax: Setup Turns Compelling Heading Into The Upcoming Separation Event

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Colfax Corporation (CFX)

Summary

Colfax delivers an impressive quarter across both the FabTech and MedTech business segments.

The Mathys acquisition adds incremental upside to the MedTech earnings trajectory.

With the full-year guidance also raised heading into the planned separation, expect more upside ahead.

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Colfax (CFX), a diversified industrial company involved in the development, manufacturing, and distribution of fabrication technology (FabTech) and medical technology (MedTech) products, recently posted a strong set of quarterly results alongside another MedTech bolt-on acquisition in Mathys. And with the cyclical performance in ESAB also remaining strong at a time when many other industrials are struggling with inflation, the setup into the FQ1 '22 separation looks compelling. As acquisitions continue to pick up across the MedTech portfolio, there remains plenty of scope for incremental upside from additional bolt-ons ahead at reasonable valuations. Assuming management also taps into strategic opportunities around common sales channels or technologies with its M&A, I see investors turning more constructive heading into the FQ1 '22 separation event and, therefore, remain near-term bullish.

A Broad-Based Return to Growth Over Pre-COVID-19 Levels

The FabTech business posted an impressive quarter, growing at a high-single-digit % pace sequentially and by over 45% Y/Y (both on an organic basis). Notably, pricing accelerated during the quarter and provided a c. 11% tailwind (up from the c. 4% in the previous quarter). On the bottom line, FabTech margins also made encouraging progress, ticking higher sequentially to a record 16.4% operating margin. This was a surprise after management had previously guided FQ2 '21 margins down sequentially on cost pressure, which were expected to outweigh ramping volumes. Nonetheless, with pricing actions and volume growth remaining strong, a mid-teens % organic growth looks very achievable through the second half of the year.

On the MedTech side, top-line trends have been strong as well, growing c. 6% relative to pre-COVID-19 levels and c. 60% Y/Y on an organic basis. The Reconstructive business was the key driver, moving up in the double-digit % range relative to prior peak levels – this result was especially impressive considering the industry is still operating below pre-COVID-19 levels. On the back of the revenue performance, margins also bounced back to the low teens %, which should support a continued sequential improvement across both the top-line and margins for the full year as well.

MedTech on the Offensive with Mathys Acquisition

Alongside the quarterly results, Colfax also announced the completion of the Mathys acquisition for a c. $285 million consideration financed by a c. 6.5 million share issuance (implying a $0.03-0.04/share dilution to fiscal 2021 EPS). Management has subsequently sold those shares in an equity offering concurrent with the earnings release. While negative at first glance, the equity offering has allowed CFX to preserve the tax-free status of its separation, which is a modest positive. As things stand, management is projecting a c. $150 million revenue run-rate, implying a transaction multiple of sub-2x EV/Sales on fiscal 2022 numbers. This compares favorably to its MedTech peers, which generally trade at c. 4x, despite Mathys outperforming on the growth front (note Mathys has sustained a double-digit % normalized growth rate).

As a European orthopedics leader focused on the development of innovative products for reconstructive joint replacement, Mathys is an excellent addition to the MedTech portfolio. From a strategic perspective, Mathys is set to significantly expand the addressable market opportunities within the Reconstructive space. Specifically, the acquisition of Mathys will enable expansion into Europe (recall that Colfax's key MedTech asset, DJO Surgical, is over 95% US-based), along with cross-selling synergies via key products such as anatomic shoulder implants. On a pro-forma basis, MedTech's reconstructive business is set to generate c. $0.5 billion in revenue (mainly from DJO and c. 33% from Mathys), with a double-digit % organic growth trajectory supporting a c. $1 billion target over the medium term. I see upside to these targets, however, considering the pipeline of bolt-on M&A opportunities.

Guidance Signals FabTech Improvement Ahead

The near-term earnings growth trajectory looks solid, with CFX raising its full-year EPS guidance to $2.10 - $2.20. While this may seem unsurprising considering the recent earnings beat, it also likely implies underlying operational improvements are outweighing any dilution from the 6.5 million share offering. It is unclear if the Mathys acquisition, which had not yet closed at the time of the guidance announcement, has been incorporated in the guidance, but the fact that CFX still expects FCF generation of over $275 million is a key positive. By segment, management is guiding toward FabTech growing 19-21% organically (including a c. 11%pts favorable tailwind from price), although core EBITDA margins of 20+% will be offset by pricing trends and lower acquisition EBITDA margins of c. 10%.

Looking ahead, FabTech's relative performance should further improve as the business will be able to freely allocate its $450+ million in EBITDA to drive growth in higher-margin verticals and invest in efficiency improvements as well (note that much of the segment's cash had previously been directed towards MedTech). Interestingly, CFX also disclosed that the FabTech business is targeted to operate with initial net leverage of 2.5x-3.0x post-separation, which broadly matches my view that FabTech will take on the majority of CFX consolidated debt going forward.

Final Take

On balance, the modest share price outperformance post-earnings was likely attributable to CFX's acquisition of Mathys, which is projected to add $15-20 million of EBITDA in fiscal 2022. While the decision to finance the deal through equity (rather than debt) seems surprising considering the current interest rate backdrop, there remains plenty of room on the balance sheet for further M&A. And with recent acquisitions significantly boosting Reconstructive revenue on the path toward a c. $1 billion run rate, expect more deals ahead. As such, I see investors turning more constructive on the business ahead of the separation and, therefore, remain optimistic on the shares at the current c. 14x EV/EBITDA valuation.

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Opal Investment Research, Aug. 15, 2021 

Source

https://seekingalpha.com/article/4449524-colfax-setup-turns-compelling-heading-into-the-upcoming-separation-event

Colfax Announces Intention to Separate into Two Independent Public Companies

Colfax Announces Intention to Separate into Two Independent Public Companies

Will Create Focused Specialty Medical Technology and Fabrication Technology Companies

Separation Will Accelerate Strategic Momentum and Unlock Significant Value Creation Potential

Company Intends Tax-Free Separation to be Completed in the First Quarter of 2022

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Annapolis Junction, Maryland, March 4, 2021 – Colfax Corporation (NYSE: CFX), a leading diversified technology company, today announced its intention to separate its fabrication technology and specialty medical technology businesses into two differentiated, independent, and publicly-traded companies. The separation is intended to be structured in a tax-free manner and is targeted to be completed in the first quarter of 2022.

“This is an exciting day for Colfax and an important step to unlock the full value inherent in our MedTech and FabTech businesses,” said Matt Trerotola, Colfax President and CEO.

 “Now is the right time to build on the momentum in both businesses and enable each to better capitalize on its distinct opportunities. Our abilities to successfully develop talent, drive innovation, leverage our Colfax Business System for continuous improvement and acquire attractive businesses are core to both MedTech and FabTech. We believe a separation will better position each business to execute tailored strategies to deliver above-market growth, margin expansion and strong, consistent free cash flow.”

“This decision is the result of a thorough strategic review undertaken by the Board with management, reflecting an ongoing commitment to drive long-term value for all stakeholders,” said Mitch Rales, Colfax co-founder and Chairman of the Board. “We have now successfully put in place a proven operating model to compound value and have effectively transformed our Company. With two strong management teams, and focused business and capital allocation strategies in place, FabTech and MedTech are poised to accelerate growth and drive increased shareholder value. I look forward to continuing to support and guide each of the management teams as a member of both businesses’ Boards of Directors.”

The specialty medical technology company will be led by Colfax CEO Matt Trerotola and Colfax EVP Brady Shirley will serve as Chief Operating Officer. Mr. Shirley will join Mr. Trerotola on the MedTech Board. Colfax CFO Chris Hix will serve as CFO. Headquartered in Wilmington, Delaware with a significant presence in Dallas, Texas, the company will be renamed before the separation is completed to reflect its strategic focus.

The fabrication technology company will be led by current Colfax EVP Shyam Kambeyanda, who will join the FabTech Board. Long-time Colfax financial executive and current ESAB business CFO Kevin Johnson will serve as FabTech’s CFO. The company will remain headquartered in Maryland and continue to operate under its well-known brand name ESAB.

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Compelling Strategic Rationale for a Separation

The businesses operate in distinct markets, with unique business opportunities and investment requirements. The Colfax Board, with management, believes the separation will result in material benefits to the standalone companies, including:

  •Sharpened strategic focus for independent specialty medical technology and fabrication       technology companies.

  •Increased operating flexibility and resources to capitalize on growth opportunities in their respective markets.

  •Capital structures and capital allocation strategies that are tailored to each company’s growth strategy.

  •Improved investor alignment with each company’s clear value proposition, and ability for investors to value the two companies based on their distinct strategic, operational and financial characteristics.

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Two Highly Focused Market-Leading Companies

Medical Technology Company

The MedTech company is a leading, specialty medical technology growth company. It has top-tier positions in attractive orthopedic segments across the continuum of care, including surgical implants as well as injury prevention and recovery devices, with clear paths to further accelerate growth. The company recently completed several strategic bolt-on acquisitions, strengthening and expanding its position in attractive market segments including extremities reconstruction and therapeutic laser technology for recovery. The company will be comprised of Colfax’s current Medical Technology operating segment, which is expected to generate revenue of approximately $1.4 billion in 2021.

The separation is expected to enable MedTechCo to continue to expand its share in high-growth, high-margin served and adjacent markets through strategic M&A and R&D investments. This will position the company with significant opportunities to deliver above-market growth, margin improvement and increased cash flow. Capital deployment is expected to be focused on supporting the company’s strategic growth program.

ESAB

ESAB is a fabrication technology leader with an unparalleled global footprint, track record of industry-leading product innovation and strong positions in attractive emerging markets. The company has successfully executed its operational improvement strategy to out-grow peers in recent years and significantly increase margins and cash flow. Through strategic bolt-on acquisitions, ESAB has broadened its product and technology offering, extended its geographic reach and expanded into attractive new segments, including gas control for medical and life sciences. ESAB will be comprised of Colfax’ Fabrication Technology operating segment, which is expected to generate revenue of approximately $2.2 billion in 2021.

The separation is expected to support ESAB’s leadership in global industrial markets and position it to further increase market share through innovation and commercial excellence. ESAB will focus on complementing its growth with operating improvements to further enhance margins and cash flow. It expects to maintain a balanced capital allocation policy focused on growth investments, bolt-on acquisitions, and return of capital to shareholders.

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Separation Details

Colfax intends the separation to be tax-free to Colfax’ shareholders. Colfax is targeting completion of the separation in the first quarter of 2022. Completion of the separation is subject to, among other things, completion of financing and other transactions on satisfactory terms, other steps necessary to qualify the separation as a tax-free transaction, receipt of other regulatory approvals and final approval from the Colfax Board of Directors. Details of the separation will be included in future filings with the SEC. There can be no assurance regarding the form and timing of the separation or its completion.

Conference Call and Investor Presentation Today

Colfax will hold a conference call to discuss this announcement beginning at 8:30 a.m. Eastern today, which will be open to the public by calling 1-877-303-7908 (U.S. callers) and +1-678-373-0875 (International callers) and referencing the conference ID number 9319529 and through webcast via Colfax’ website www.Colfax.com under the “Investors” section. Access to a supplemental slide presentation can also be found at the Colfax website under the same heading. Both the audio of this call and the slide presentation will be archived on the website later today.

Investor Day Scheduled for March 11

As previously announced, Colfax will host an investor day on March 11, 2021, which will include a detailed discussion of each business. Participation details can be found in the Investor Relations section of the Company’s website at https://ir.colfaxcorp.com/events-presentations.

Advisors

Goldman, Sachs & Co. LLC and Evercore are serving as financial advisors, and Latham & Watkins, LLP is serving as legal advisor, to Colfax.

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About Colfax Corporation

Colfax Corporation is a leading diversified technology company that provides specialty medical technologies and fabrication technology products and services to customers around the world, principally under the DJO and ESAB brands. Colfax believes that its brands are among the most highly recognized in each of the markets that it serves. The Company uses its Colfax Business System (“CBS”), a comprehensive set of tools, processes and values, to create superior value for customers, shareholders and associates. Colfax’s common stock is traded on the NYSE under the ticker “CFX.”

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Source

http://thezenofinvesting.com/upcoming-spinoffs/

http://thezenofinvesting.com/wp-content/uploads/Colfax-Announces-Intention-to-Separate-Announcement-Presentation.pdf

Is the Market about to Crash?

Is the Market about to Crash?

Market observations by Leon Tuey back in late May of this year.

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Relax...The Bull Market will Continue to Surprise All

For the past several months, pundits have been warning investors of a market correction with many looking for a 5 - 10% correction (they are talking about the S&P and not "the market", of course), scaring the living daylight out of investors. While fully aware of the market's overbought condition and high level of optimism shown by the various sentiment measures, but because of the extremely bullish backdrop, I felt that a meaningful correction was not in the cards. Also, because many of the indices and ETFs have upside targets that have not been met. I concluded that the market will correct, but in a rotational manner, but not of magnitude. That is precisely what is happening.

As most spend their time watching the S&P, they are not aware that since mid-February, the techs have been correcting. Meanwhile, Financial, Industrial, Material issues, and Commodities have been surging to record highs. Short-term, however, these sectors are very stretched and are about to correct. The techs, on the other hand, have been correcting since February and will likely be the first to bottom.

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Inflation

The concern du jour is "inflation" which is rolling off everybody's lips. They point to surging prices, supply bottlenecks, the tight labour market, the sizzling real estate market, etc. While the pundits howl about inflation, Jerome Powell and several other Fed members, however, feel that the current inflation is transitory, but many argued that it is not.

The widespread inflation fear is not surprising as last year, I mentioned that about 12 months after the Fed eases aggressively as they did back in March, 2020, inflation shows up and the market has been telescoping this since last year.

On a short-term basis, I side with the Fed. Inflation is transitory. The broad surge in prices in the first half of this year is not surprising. The curtailment in production caused by the pandemic, the pent-up demand, record savings, and the re-opening of the economies are some reasons for prices to skyrocket. The second half of the year, however, comparison becomes more difficult as in the second half of 2020, the economy was already recovering. Come the first half of 2022, the comparison become even more difficult as the recovery will be normalized; the explosive supply/demand imbalance will stabilize. Inflation, therefore, will moderate. Accordingly, the bull's ascent over the last 12-18 months will not match the spectacular rally of the past eighteen months when the market surged more than 80%. This does not mean that the bull market is over, far from it.

From a secular standpoint, inflation will rise, bit in a modest manner. Demographics, globalization, technology such as AI, robotics, etc., will keep inflation at bay. Also, remember what Jerome Powell said back in the summer of 2018. He said something to the effect that "we would like to smooth out the wild swings of past economic cycles by fine-tuning the monetary policy", the most profound statement that any Fed Chairman ever made. His words were put into action in 2018 and 2019 until the pandemic hit. Rest assured, when the economy is normalized, his new policy will be activated again.

So what, you say?

I've pointed out numerous times that the best environment for equities is in a period of modest growth and stable inflation, the so-called "Goldilocks" economy, not too hot and not too cold which is ensured by Chairman Powell's monetary policy.

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Sentiment

Many have been howling about "Bubble", "Euphoria", and "Speculation". As mentioned, in my wide contacts around the world, however, investors are far from euphoric. Concern is widespread as they are sitting on a mountain of cash and very light on equities (which is backed up by hard data). Also, as can be seen in the following charts, because of the recent market pause, fear is already rising. What these sentiment indicators are telling investors is that the market may correct further, but in a rotational manner, not of magnitude. As the secular trend remains powerfully bullish, emphasis should be on stocks and not watching the S&P.

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More on Sentiment

Most claim the sentiment indicators are contrarian indicators. Not really. As the market retreats, pessimism rises. At the bottom of a correction or a bear market, however, pessimism becomes excessive. Conversely, as the market rises, so is optimism. At the top of a rally or a bull market, excessive optimism is witnessed. Hence, it's at market extremes, the sentiment indicators are most useful. As Warren Buffet advised, "Be fearful when others are greedy and be greedy when others are fearful). Also, Sir John Templeton accurately observed, "Bull markets are born from pessimism, grow on skepticism, mature on optimism, and die on euphoria".

October 10 will mark the thirteenth anniversary of this great bull market. Yet, investors are still wary. Most are grossly under-invested in equities and are sitting on a mountain of cash. As can be seen in the charts below, pessimism is already starting to rise, not because the market crashed, but because it hasn't rallied in recent weeks. Given where these indicators sit, if the market were to drop for one or two weeks, they will give bullish signals. Clearly, despite the widespread concern, risk is limited...

Again, do not be distracted by the headlines and the daily market gyrations, stay invested. Moreover, further weakness should not be feared, but should be viewed as a buying opportunity.

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Leon Tuey, May 24, 2021

Source

https://www.scribd.com/document/509280203/Is-the-Market-About-to-Crash

New Holding...Brookfield Reinsurance Partners (TSX: BAMR)

New Holding...Brookfield Reinsurance Partners (TSX: BAMR)

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Overview of Our Business

The Company was established by Brookfield to own and operate a leading reinsurance business focused on providing capital-based solutions to insurance companies and their stakeholders. Through our operating subsidiaries, we act as a direct issuer of PRT products for pension plan sponsors and will provide annuity-based reinsurance products to insurance and reinsurance companies. In doing so, we seek to match long-duration liabilities with a portfolio of high-quality investments in order to generate attractive, risk-adjusted returns within our business. We intend to leverage our relationship with Brookfield in order to opportunistically source new business and deploy our capital in assets that are tailored to our investment needs. Our relationship with Brookfield provides us with access to a diverse mix of leading alternative investment strategies that we believe are well suited for this purpose.

We currently have a single operating segment related to our PRT business. Going forward, we plan to focus primarily on growing our annuities-based reinsurance business, which we refer to as our annuities business. Over time, we may look for opportunities to expand our reinsurance business to cover other longer-duration products such as life insurance and structured settlements. 

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Annuities

Within our annuities business, we are focused primarily on the reinsurance of annuity-based products, and will primarily seek to reinsure annuity-based products for direct insurers and other reinsurers operating in North America and Western Europe.

Annuities are insurance contracts that provide a defined income stream, typically for retirement planning. Policyholders deposit money with an insurance company in return for a fixed stream of cash flows either immediately or in the future. Reinsurance is an arrangement whereby an insurance company, the reinsurer, agrees to indemnify another insurance company, referred to as the ceding company or cedant, for all or a portion of the insurance risks that are underwritten by the ceding company. Reinsurance serves multiple purposes, including to (1) transfer insurance risk off of a ceding company’s balance sheet, enabling it to more efficiently manage balance sheet capacity to increase the volume of business it can underwrite (2) stabilize a ceding company’s operating results, (3) assist the cedant in achieving applicable regulatory requirements, and (4) optimize the overall financial strength and capital structure of the cedant.

Reinsurance may be structured as a block transaction, pursuant to which a reinsurer contractually assumes assets and liabilities associated with an in-force book of business, or as a flow arrangement, pursuant to which a reinsurer contractually agrees to assume assets and liabilities for future business.

We primarily seek to reinsure three types of annuity products: fixed annuities, fixed index annuities and payout annuities.

Fixed Annuities

A fixed annuity (“FA”) is a type of insurance contract that provides a fixed rate of investment return (often referred to as a crediting rate) for a specified period of time. Fixed rate reset annuities have a crediting rate that is typically guaranteed for a period of one year, after which insurers are able to change the crediting rate at their discretion, generally to any rate at or above a previously guaranteed minimum rate.

Insurers earn income on FA contracts by generating a net investment spread, which is based on the difference between income earned on the investments supporting the liabilities and the crediting rate owed to customers.

Fixed Index Annuities

A fixed index annuity (“FIA”) is an insurance contract in which the policyholder makes one or more premium deposits that earn interest at a crediting rate based on a specified market index. Policyholders are entitled to recurring or lump sum payments for a specified period of time. FIAs provide policyholders with the ability to earn interest without significant downside risk to their principal balance. A market index tracks the performance of a specific group of stocks or other assets representing a particular segment of the market, or in some cases, an entire market. A policyholder’s crediting rate in relation to a market index is based on the change in the relevant market index, subject to a pre-defined cap (a maximum rate that may be credited), spread (a credited rate determined by reducing a specific rate from the index return) and/or a participation rate (a credited rate equal to a percentage of the index return).

Insurers earn income on FIA contracts based on a net investment spread, which is the difference between income generated on investments supporting the liabilities and the interest that is credited to policyholders.

Payout Annuities

A payout annuity is an income-generating insurance product. In exchange for a lump sum premium, the policyholder receives a series of guaranteed income payments for one lifetime, two lifetimes or a specified period of time.

Insurers earn income on payout annuity contracts based on a net investment spread, which is the difference between income generated on investments supporting the liabilities and the interest that is credited to policyholders.

We intend to operate our annuities business through licensed operating companies, North End Re (Cayman) SPC ("NER SPC") and North End Re Ltd (“NER Ltd”). As of the date of this MD&A, we have not entered into any reinsurance contracts.

Pension Risk Transfer

Pension risk transfer (“PRT”) is the transfer by a corporate sponsor of the risks (or some of the risks) associated with the sponsorship and administration of a pension plan, in particular, investment risk and longevity risk, which is the risk of an increase in life expectancy of plan beneficiaries. These risks can be transferred either to an insurer like us through a group annuity transaction, or to an individual through a lump sum settlement payment. PRT using insurance typically involves a single premium group annuity contract that is issued by an insurer, permitting the corporate pension plan sponsor to discharge certain pension plan liabilities from its balance sheet.

A PRT insurance transaction may be structured as either a buy-out annuity or a buy-in annuity. 

Under a buyout annuity, a direct insurer enters into a group annuity contract with the plan sponsor and assumes the liability to fund, administer and pay benefits covered under the contract directly to the individual pension plan members covered under the contract. 

Under a buy-in annuity, the insurer enters into a group annuity contract with the plan sponsor and is liable to fund and pay the benefits covered under the contract to the pension plan fund, with the plan sponsor retaining the liability to administer and pay pension benefits to plan members. In both cases, the insurer assumes the investment and longevity risk.

Insurers earn income on buy-out and buy-in group annuities by generating a net investment spread, which is based on the difference between income earned on the investments supporting the annuity contract and the cost of the pension liabilities assumed.

Today, our PRT business is operated primarily through Brookfield Annuity Company (“BAC”), a Canadian domiciled, licensed and regulated direct life insurance company that provides PRT solutions to organizations across Canada. BAC is led by a team of experts with an average of over 25 years of experience in group annuities, pensions, insurance and investments.

BAC was incorporated in August 2016 as a wholly-owned indirect subsidiary of Brookfield and wrote its first group annuity policy in the first quarter of 2017. As of June 30, 2021, BAC had $1.3 billion (C$1.6 billion) of policyholder reserves.

Life Insurance

Although today our business is focused primarily on annuity-based products, in the future we may look to expand our reinsurance business to cover other longer-duration products, including life insurance. Life insurance is a contract between an insurer and the insured person in which the insurer guarantees payment of a death benefit to named beneficiaries in exchange for premiums paid by the insured person. Insurers generate income based upon the income earned on assets invested in connection with the policy, relative to the cost of administration and the death benefit paid.

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Recent Developments

Brookfield Asset Management Reinsurance Partners to Acquire American National in $5.1 Billion Transaction

BROOKFIELD, NEWS, Aug. 09, 2021 (GLOBE NEWSWIRE) -- American National Group, Inc. (American National) (NASDAQ:ANAT), and Brookfield Asset Management Reinsurance Partners Ltd. (Brookfield Reinsurance) (NYSE:BAMR; TSX:BAMR), today announced they have entered into a definitive merger agreement whereby Brookfield Reinsurance will acquire American National in an all-cash transaction valued at approximately $5.1billion.

As part of the agreement, each issued and outstanding share of American National common stock will be converted into the right to receive $190.00 in cash at closing of the merger. The merger consideration of $190.00 per share of American National common stock (the Merger Consideration) represents a 55% premium to the unaffected share price of $122.56 on May11,2021, as well as a 24.7% premium over American Nationals 30-day volume-weighted average price as of August 6,2021. The merger has received unanimous approval of American Nationals Board of Directors.

Sachin Shah, Chief Executive Officer of Brookfield Reinsurance, said, 'The acquisition of American National represents a significant milestone in the continued expansion of our insurance business. American Nationals management team has a strong track record of stable growth and disciplined underwriting. We are excited to partner with them, and the dedicated American National employee base and distribution partners, as we look to further grow the business and maintain a strong franchise for the benefit of all stakeholders.'

Following closing, Brookfield Reinsurance intends to maintain American Nationals headquarters in Galveston, Texas and its presence in League City, Texas, as well as its operational hubs in Springfield, Missouri and Albany, New York. Brookfield Reinsurance also looks forward to continuing American Nationals longstanding involvement with its local communities.

Jim Pozzi, President and Chief Executive Officer of American National, said, 'This is an energizing moment in American Nationals history. Our two companies share a long-term view of building strong, enduring businesses. Brookfield Reinsurance has been very clear: they want us to continue to grow our business, together with our leadership team and our excellent team of employees and distribution partners. I would like to thank our board of directors, particularly our strategic opportunities committee of independent directors, which conducted a thorough review of a range of strategic alternatives and possible business opportunities to maximize value for our stockholders. The transaction provides clear and immediate value for our stockholders at an attractive premium.'

The merger is expected to close in the first half of 2022. It is subject to certain customary closing conditions, including antitrust clearance and receipt of insurance regulatory approvals, for a transaction of this type. Following the execution of the merger agreement, stockholders representing more than a majority of the issued and outstanding shares of American National common stock delivered stockholder written consents adopting and approving the merger agreement. American National will file a current report on Form 8-K with the U.S. Securities and Exchange Commission containing a summary of the terms and conditions of the proposed acquisition, as well as a copy of the merger agreement.

The Merger Consideration will be funded by Brookfield Reinsurance through a combination of committed debt and equity financing, including committed debt financing of $1.5billion and an equity commitment of up to the aggregate Merger Consideration from Brookfield Asset Management Inc. (NYSE: BAM; TSX: BAM.A) (BAM), which equity commitment will be reduced by the amount of debt funded at closing. BAMs equity commitment will be funded by existing liquidity at the corporate level.

Aug 09 2021

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Source

https://bamr.brookfield.com/

Whitecap Resources Inc. Announces 2022 Budget, 2021 Guidance Update and Increased Cash Returns to Shareholders

Whitecap Resources Inc. Announces 2022 Budget, 2021 Guidance Update and Increased Cash Returns to Shareholders

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Company Profile

Whitecap Resources Inc is a Canada-based oil and gas company. The Company is engaged in the business of acquiring, developing and holding interests in petroleum and natural gas properties and assets. It is focused on acquiring sustainable assets with Discovered Petroleum Initially In Place (DPIIP) and low current recovery factors and moving them through the development chain by converting contingent resources , probable reserves, producing reserves (cash flow). Its portfolio of assets has stable production and low base declines, which provide its shareholders with a predictable cash flow stream for monthly dividend payments.

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Whitecap Resources Inc. ("Whitecap" or the "Company") (TSX: WCP) is pleased to announce its 2022 budget, an accelerated fourth quarter 2021 capital program and 38% increase to its dividend.

Highlights

2022 Budget. Capital spending of $470-$490 million is expected to generate average production of 121,000 – 123,000 boe/d (73% liquids). The budget is lower than preliminary expectations, with approximately due to acceleration of capital into late Q4/21 to solidify service sector requirements while optimizing the 2022 capital program, and approximately from continuation of the capital efficiency improvements achieved during 2021.

Revised 2021 Guidance. Capital spending is now expected to be $425-$435 million which adds 39 (34.7 net) wells to our Q4/21 program. Starting our 2022 capital program early and locking in key services will help to ensure the efficient execution of our 2022 capital plans. We are also increasing our 2021 average production guidance to 111,000 – 112,000 boe/d (76% liquids) primarily due to the continued outperformance of our base 2021 program and from the increase in fourth quarter capital.

Dividend Increase. The Board of Directors has approved an increase to the monthly dividend to $0.0225 per common share from per common share which equates to an annual dividend of $0.27 per common share. The increase will take effect beginning with the October dividend payable in November. Inclusive of the dividend increase, Whitecap expects to be able to fully fund its 2022 capital program and dividend with funds flow down to approximately /bbl WTI and at /bbl WTI the dividend represents only 12% of 2022 funds flow, highlighting the sustainability of the increased dividend level.

2022 Budget

Our 2022 budget includes capital spending of $470-$490 million to drill 163 (131.8 net) wells, resulting in average production of 121,000 – 123,000 boe/d (73% liquids). With the strategic acquisitions completed in 2021, our natural gas production in 2022 is expected to be approximately 198,000 mcf/d, allowing our shareholders to also benefit from the currently strong natural gas prices in conjunction with increasing crude oil prices. In addition to our drill, complete, equip and tie-in costs, we will be spending approximately on waterflood/enhanced oil recovery ("EOR") initiatives, including $28 million for CO 2 purchases, along with health, safety and environmental initiatives.

Our budget is designed to generate significant free funds flow by advancing our growth projects while maintaining our low base decline rate of approximately 20%. At US$70/bbl WTI and C$3.75/GJ AECO, we forecast 2022 1.4 billion funds flow of and discretionary funds flow (after capital spending and the increased dividend) of approximately $740 million, resulting in net debt of $260 million and a debt to EBITDA ratio of 0.3x providing us with significant optionality for continued enhancement to shareholder returns.

Further budget details and our breakdown by business unit is as follows:

Northern Alberta & B.C. We expect to spend $165-$170 million to drill 18 (14.8 net) wells, including 10 (6.8 net) wells at Kakwa and Karr. Along with maintaining one rig throughout the year at Kakwa and Karr, we anticipate spending $15-$20 million to develop water handling infrastructure to further improve operating costs, completion costs and water management in the area. Our remaining 8 (8,0 net) wells will target the Cardium and formations.

Eastern Saskatchewan. We expect to spend $135-$140 million to drill 62 (51.5 net) wells. At , we anticipate drilling 15 (9.8 net) wells, including 10 (6.5 net) wells as part of our next CO 2 EOR expansion phase along with 5 (3.3 net) infill wells. Following up on our very successful 2021 conventional program, we plan to drill 39 (33.8 net) wells, including 26 (22.3 net) multi-leg horizontal wells. Our remaining 8 (7.9 net) wells are targeting other Mississippian formations along with 1 (1.0 net) well.

Western Saskatchewan. We expect to spend $95-$100 million to drill 60 (49.8 net) wells. Our Viking asset continues to mature and along with operational improvements, its base decline has shallowed, and it contributes strong free cash flow for the Company. We anticipate drilling 35 (32.1 net) wells in the Viking in 2022 and 25 (17.7 net) wells in , with most drills targeting the Atlas and Lower Shaunavon formations.

Central Alberta. We expect to spend $75-$80 million to drill 23 (15.6 net) wells in . This business unit will utilize two rigs running through the first and third quarters, with a program focused on further evaluation of the multi-zone potential across our expanded land base. We plan to drill 12 (10.0 net) Cardium wells, 9 (3.6 net) Glauconite wells and 2 (2.0 net) wells as part of our 2022 program.

Revised 2021 Guidance

Our 2021 capital program has been increased to $425-$435 million, adding 39 (34.7 net) wells into the fourth quarter. The accelerated capital allows us to mobilize equipment and crews prior to providing us with access to top tier equipment and labour for a larger portion of our capital program. As a result, we now expect 2021 production to average 111,000 – 112,000 boe/d (76% liquids). The accelerated Q4/21 program includes 2 (2.0 net) conventional oil wells at , the first well of a 4 (4.0 net) well pad targeting the , 3 (3.0 net) Cardium Wells in the Kaybob Area, 17 (17.0 net) Viking wells, 4 (1.9 net) wells in , 5 (3.3 net) wells in and 7 (6.5 net) horizontal wells.

Corporate Priorities

Whitecap's corporate priorities are balance sheet strength, modest growth (3-5%) and sustainable and growing return of capital to shareholders through dividends and share buybacks.

In 2022, we anticipate generating approximately $740 million of discretionary funds flow after capital investments of and dividend payments of at /bbl WTI. We expect to direct approximately 50% of 2022 discretionary funds flow towards our balance sheet to continue to build dry powder for disciplined and targeted acquisitions, as well as New Energy initiatives. The remaining 50% will be returned to shareholders through dividends and targeted share buybacks. The base dividend is an integral part of our return of capital priority and based on the current commodity price environment, we will have the ability to significantly increase the dividend again in 2022. We currently have 26.3 million shares available to acquire on our NCIB which expires and could repurchase approximately 30 million common shares or 5% of our common shares outstanding on an annual basis.

On behalf of our management team and Board of Directors, we would like to thank our shareholders for their ongoing support.

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Source

https://money.tmx.com/en/quote/WCP/news/4556656875502689/Whitecap_Resources_Inc_Announces_2022_Budget_2021_Guidance_Update_and_Increased_Cash_Returns_to_Shareholders

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Update...Dateline...October 16, 2021

Insiders buy as Whitecap Resources makes new highs

Whitecap Resources Inc... The stock has broken out to new 52-week highs over the past month, and insiders have bought the rally. On Oct. 8, vice-president Michael Nerbas bought 2,000 common shares in the public market at $7.63. Later, on Oct. 12, senior officer Travis Bjarne Tweit also bought 2,000 shares at $7.52. Insider buying near 52-week highs is generally a bullish sign. So far this year, there have been no senior officer or director public market sales reported.

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Insider report, Ted Dixon

Three mid-sized U.S. stock picks from Mawer portfolio manager Jeff Mo

Three mid-sized U.S. stock picks from Mawer portfolio manager Jeff Mo

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Portfolio manager Jeff Mo believes investors should take a closer look at U.S. mid-capitalization stocks, in particular what he calls “American Dream” companies, which aren’t household names yet but are set on becoming large-cap companies in the near future.

His firm, Mawer Investment Management Ltd., has been investing in U.S. mid-capitalization stocks within its U.S. and global equity strategies for years, but decided recently to focus on this segment of the market. The firm recently launched the Mawer U.S. Mid Cap Equity Fund to give investors concentrated exposure to some of these names.

“We felt that there were many interesting companies in the U.S. But we had never offered a dedicated product for our clients to invest in these companies,” says Mr. Mo, who manages about $3.5-billion in assets including the Mawer New Canada Fund, which has been closed to new investors since 2005.

The New Canada Fund has a management expense ratio of 1.35 per cent and total return of 33 per cent over the past year, after fees, as of Sept. 29, according to Morningstar.

The U.S. Mid Cap Equity Fund was launched on Sept. 27 and has an MER of 1.45 per cent. Below are three of Mr. Mo’s picks from the new U.S. mid-cap fund:

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Charles River Laboratories International Inc. (CRL-N)

The company, founded in 1947, is an early-stage contract research company that provides drug discovery, non-clinical development, and safety testing services worldwide.

“Because pharmaceutical research is highly regulated, you need to have a very deep expertise and experience in this industry and Charles River has that,” he says. “They do all of the services a biotech company would need to take a drug to Phase 1 of a clinical trial.”

For instance, he says Charles River has worked on about 80 per cent of the drugs approved by the U.S. Federal Drug Administration over the past three years.

He says the company dominates the early-stage biotech space. However, that dominance is a potential risk for the stock should biotech companies receive less funding in a market downturn. “But so far they’ve done really well,” Mr. Mo says.

The stock is up 70.8 per cent over the past year.

FTI Consulting Inc. (FCN-N)

Washington-based FTI is the world’s largest provider of specialty consulting in areas such as business restructuring and bankruptcy, anti-corruption and anti-money-laundering investigations, and cybersecurity and forensic accounting.

“FTI has some of the strongest brands and some of the foremost experts in these areas,” Mr. Mo says.

He says the company is hired by law firms and Fortune 500 companies: “For example, many firms that have a corporate investigation going on, such as a data breach, or are being sued by the Department of Justice for anti-competitive behaviour ... would hire FTI to handle their case.”

He credits chief executive officer Steven Gunby for improving the culture and communications at the company and bringing in top talent since he took the job in 2014.

“This is a company with a very strong pedigree and strong competitive advantages,” Mr. Mo says. Since Mr. Gunby has joined, “they also now have a CEO that knows how to help the company increase its margins, diversify its business and grow organically in new areas.”

A risk for the company is losing top talent, but Mr. Mo says that has been less of an issue since Mr. Gunby took over. A drop in bankruptcy filings could also affect FTI’s bottom line, given they make up a large chunk of its business.

The stock is up 25.1 per cent over the past year.

XPEL Inc. (XPEL-Q)

San Antonio, Tex.-based XPEL Inc. is among the largest providers of protective films and coatings for automobiles. The protective plastic film is offered by dealers to new car buyers to protect the paint from dents and scratches.

Mr. Mo says the company’s competitive advantage is sophisticated software that provides custom cutting for almost every car model. “You need to make a film with adhesive on one side and cut it so it matches the contours of each vehicle. That’s a difficult thing to do, and the company’s software is very good at doing that,” he says.

Mr. Mo says the company is growing by about 30 per cent each year as the number of people who buy the protective coating increases. He estimates less than 10 per cent of new cars sold in North America today have the film, and the percentage is even lower elsewhere. “And so the opportunity for XPEL is to continue to knock on the doors of car dealerships around the world, and to introduce them to this product.”

A slowdown in new vehicle sales is a risk for the company, Mr. Mo says. Also, the stock price has had a run-up in the past year, increasing by almost 190 per cent.

“Investors have priced in some growth,” he says. Still, over the long term, “it’s a technology penetration game that we believe is in its early innings.”

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October 6, 2021

Source

https://webbroker.td.com/waw/brk/wb/wbr/static/main/index.html#/page/research?DESTINATION=MOD&PARTNER_FIELDS=markets/overview&uuid=8de84eb5-9386-e5d2-268d-22715fbfa9d5

New Holding...Vontier Corp. (NYSE: VNT)

New Holding...Vontier Corp. (NYSE: VNT)

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Company Profile

Vontier Corporation is an industrial technology company. The Company offers technical equipment, components, and software and services for manufacturing, repair and servicing in the mobility infrastructure industry worldwide. The Company supplies a range of solutions spanning environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management, software solutions for traffic light control and vehicle mechanics and technicians’ equipment. The Company markets its products and services to retail and commercial fueling operators, commercial vehicle repair businesses, municipal governments and public safety entities and fleet owners/operators. It offers a range of mobility technologies products, which includes retail/commercial fueling, telematics and smart city. its diagnostics and repair technologies products include vehicle repair and wheel-service equipment.

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Thumbnail Analysis

We recently raised our rating on the VNT shares to BUY. Vontier is a global industrial technology company focused on transportation and mobility solutions, an estimated $27 billion industry. It began trading as an independent company on October 9, 2020, and was formerly part of Fortive (which itself was spun out of Danaher in 2016).

Vontier has an experienced management team, a leading position in its market segments, and a solid balance sheet. President Biden’s focus on infrastructure and clean energy may provide a positive backdrop for Vontier. The company’s Gilbarco Veeder-Root subsidiary is addressing changing energy grid and transportation needs through ultrafast EV chargers, alternative fuels, emissions testing technology, and analytics. 

We think that valuations are attractive given prospects for improving EPS growth in 2021-2022, and as the nation addresses changing transportation needs such as electric vehicle charging stations.

Source

Argus Market Watch, October 5, 2021

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Business Strategy & Outlook Krzysztof Smalec, CFA, Equity Analyst, 11 Feb 2021

Vontier’s business model is an iteration of the Danaher Business System playbook, which the firm inherited from its former parent companies, Danaher and Fortive. Vontier Business System focuses on acquiring moat-worthy companies, boosting their operating margins through continuous improvement, and reinvesting cash flows in further M&A deals.

The Danaher blueprint has generated impressive results, driving significant operating margin expansion in Vontier’s underlying businesses. For example, the formula has steadily improved Gilbarco VeederRoot’s operating margins from single digits to over 20% since the business was acquired by Danaher in 2001. Vontier has a strong record of continuous improvement, and we believe that management can continue to boost core operating margins by roughly 25-50 basis points per year.

In the near term, Vontier faces top-line headwinds in its retail fueling business due to the upcoming fraud liability shift (commonly referred to as EMV, which stands for Europay, Mastercard, and Visa) in April. That said, even though we expect EMV-related sales to ramp down from the peak, we still think that Vontier can deliver GDP-type growth over our five-year explicit forecast term.

Since Fortive was spun off from Danaher in 2016, Vontier’s parent company prioritized growth in its professional instrumentation business, which left the industrial technology business (now Vontier) with less than 5% of Fortive’s M&A capital. Therefore, we believe that the spin-off from Fortive will allow Vontier to redeploy capital back into its business and accelerate growth through M&A. We expect the firm to focus on bolstering its presence in high-growth markets, expanding into adjacent end markets, and investing in digital solutions that complement its installed base of equipment. Vontier is led by an experienced management team that is well versed in the Danaher playbook, and we believe that it will continue to drive profitable growth by successfully implementing the Vontier Business System.

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Economic Moat Krzysztof Smalec, CFA, Equity Analyst, 11 Feb 2021

We believe that Vontier, spun off from Fortive in 2020, merits a narrow moat rating based on customer switching costs and intangible assets. Vontier is a diversified industrial technology firm focused on transportation and mobility solutions. In both of its business lines, transportation technologies and franchise distribution, Vontier has developed recognizable brands and has built a large installed base of equipment that generates a healthy recurring revenue stream composing roughly 25% of its sales. Many of Vontier's products perform mission-critical functions, and the firm's reputation for quality and reliability is a key differentiator. Vontier generates gross margins in the low 40s and operating margins in the low 20s, and we think it is well positioned to outearn its cost of capital over the next decade.

Within transportation technologies, Vontier's Gilbarco Veeder-Root business offers retail fueling operators a wide range of solutions, including fuel dispensers, payment technologies for retail petroleum stations, and leak detection systems. Gilbarco is one of the two largest players in the retail fueling space (alongside Dover) and has established a recognizable brand as a leading provider of dispensers, payment solutions, and point-of-sale systems. The business has built a large installed base of equipment that includes around 650,000 pay-at-pump devices and 69,000 point-of-sale systems at convenience stores. Gilbarco generates healthy recurring revenue from multiple sources, including enterprise license fees for indoor point-of-sale solutions as well as its Insite360 platform, a SaaS-based offering that provides a suite of solutions to retail petroleum stations, including fuel management, logistics, and environmental compliance. We believe that Vontier's strategy of tapping into its large installed base by adding complementary software reinforces customer switching costs by offering petroleum stations a comprehensive package of solutions.

Vontier's transportation technologies portfolio also includes Teletrac Navman and Global Traffic Technologies. Teletrac Navman is one of the leading players in the telematics space, offering vehicle tracking, fleet management, and fuel consumption management solutions. It has an installed base of roughly 0.5 million vehicles and generates a steady stream of recurring revenue through its SaaS-based telematics platform. GTT is a provider of traffic management systems aimed at minimizing traffic congestion and providing prioritization for emergency vehicles. It has a leading position in 41 of the 50 largest U.S. cities and an installed base of over 90,000 intersections. GTT has a portfolio of patents and decades of experience that allow it to safely manage traffic, and we think the business is well positioned to capitalize on growing demand for smart city technologies.

Within Vontier's franchise distribution business, Matco Tools is a franchise-based distributor of tools and diagnostic solutions to the automotive aftermarket. We believe the unit has dug a narrow moat based primarily on intangible assets, including its strong brand and customer relationships. Matco's business model is based on franchise-operated vans that cover exclusive routes and sell tools directly from their trucks. Matco representatives regularly visit dealerships and repair shops along their van routes and develop lasting relationships with technicians. Mechanics often purchase their own tools, and our research indicates that over the course of their careers they typically spend well over $5,000 on tools, with some technicians spending as much as $30,000-$40,000. Tool distributors like Matco offer credit programs and set up customized payment plans for students and full-time mechanics. We believe this arrangement drives customer loyalty as mechanics rely on Matco's financing, and the company ensures that they have all the necessary tools to avoid any work delays.

We expect the rising complexity of vehicles to continue driving demand for Matco's diagnostic solutions. Matco sells diagnostics scan tools that allow customers to purchase a single piece of hardware and run diagnostics using different sets of software bought through a digital marketplace, either through a single-use fee or a monthly subscription. We see some evidence of customer switching costs as technicians become familiar with Matco's platform, and we expect the firm's SaaS-based offerings to help increase the business' recurring revenue stream and increase customer stickiness in the long run. Matco faces formidable competition, both from rival tool truck brands like Snap-on and Mac Tools as well as retail and online channels, but we believe that the business is more likely than not to continue out-earning its cost of capital over the next 10 years. We expect Matco to be able to ward off competition thanks to its exclusive van route network, frequent interactions with mechanics that drive customer loyalty, and growth in diagnostic solutions that become embedded in a repair shop's operations.

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Capital Allocation Krzysztof Smalec, CFA, Equity Analyst, 11 Feb 2021

We assign Vontier a Standard capital allocation rating, which reflects our overall assessment of the company’s balance sheet, management’s investment decisions, and shareholder distributions.

Vontier has a sound balance sheet, which we think well positions the company to pursue growth through M&A. Given Vontier's limited history as a stand-alone public company, we rate its investment history as fair. That said, we believe that the firm has inherited a proven business system of continuous improvement and disciplined capital allocation from its former parent, Fortive. Lastly, we view Vontier's shareholder distributions as appropriate.

Mark D. Morelli took the helm in January 2020. Before joining Vontier, Morelli served in a variety of leadership positions at large industrial corporations, including chief executive officer of Columbus McKinnon, president and chief operating officer of Brooks Automation, chief executive officer of Energy Conversion Devices, and president of United Technologies.

Chief financial officer David Naemura is well versed in the Danaher Business System philosophy as he spent eight years at Danaher, including serving as the vice president finance and group CFO from 2012 to 2015. Before joining Vontier in 2020, he spent five years as chief financial officer of Gates, where he played an instrumental role in the firm’s IPO.

Vontier’s business model is rooted in the philosophy of its former parent companies, Danaher and Fortive. Vontier Business System is an iteration of the Danaher playbook of acquiring moat-worthy companies, boosting operating margins through continuous improvement (for example, through improved supply chain and inventory management), and reinvesting cash flows in additional acquisitions. We believe that Vontier’s management team has the experience to continue to successfully implement the Vontier Business System and drive profitable growth through disciplined capital allocation and continuous improvement.

Source

Morningstar Equity Analyst Report

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Recent Developments

Vontier Announces Completion of DRB Systems Acquisition

Vontier Corporation (“Vontier”) (NYSE: VNT) announced today that it completed its previously announced acquisition of DRB Systems, LLC (“DRB”), a leading provider of point of sale, workflow software, and control solutions to the car wash industry, effective September 13, 2021. DRB will function as a standalone operating company within the Mobility Technologies platform.

As previously announced, Vontier expects DRB to generate approximately $170 million of revenue in 2021 with mid-20% operating margins and is expected to have a high-single digit long-term growth rate. Vontier expects the transaction to be immediately cash accretive and to contribute approximately $0.04 to $0.05 to adjusted net earnings per share in 2021.

Mark Morelli, President and Chief Executive Officer of Vontier, stated: “We are excited to announce the closing of the DRB acquisition and welcome the DRB team to Vontier. This is an important initial step towards diversifying the Vontier portfolio, enhancing our profitable growth profile, and accelerating our retail solutions strategy."

Business Wire, Sept 13, 2021

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