Weekly Valuation – Valutico |  May 18, 2023

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About the company

IBM is a global technology company based in New York that specializes in computing solutions, cloud computing, data analytics, and artificial intelligence. With a strong commitment to research and development, IBM invests in emerging technologies like blockchain, quantum computing, and hybrid cloud solutions. The company has over 300,000 employees worldwide and is dedicated to using technology to make a positive impact on the world.

IBM Takes a leap with AI-Driven hiring strategy

IBM CEO stated that the company will not be hiring individuals for roles that it anticipates could be replaced with artificial intelligence in the future, potentially impacting non-customer-facing positions such as back-office functions and human resources. AI and automation could replace 30% of these positions, according to Krishna. Meanwhile, IBM has acquired three companies in Q1 to expand its capabilities in hybrid cloud and AI. During the Q1 conference call, the company emphasized how AI could boost productivity and reduce costs for enterprises and highlighted the company’s deployment of AI at scale in areas such as HR, finance, and end-to-end processes to speed up task completion and support margin expansion.

Recent Financial Performance

IBM reported steady revenue growth in the first quarter of 2023, with revenues of $14.3 billion, up 0.4% and up 4.4% at constant currency. The company’s software revenue increased by 3%, while consulting revenue increased by 3% and infrastructure revenue was flat at constant currency. Net cash from operating activities was $3.8 billion, and free cash flow was $1.3 billion. IBM expects constant currency revenue growth of 3-5% and $10.5 billion in free cash flow for the full year of 2023. The chairman stated that the company’s unique combination of an open hybrid cloud platform, AI, and business expertise will continue to drive growth and efficiency for clients.

Share Price Performance

IBM has seen a positive return of almost 20% in the past two years, largely due to favorable market trends and the normalization of monetary policy, which benefited value stocks in particular. However, IBM’s performance has lagged behind other value-oriented companies in the same industry, and the spin-off of Kyndryl did not address the company’s most pressing issues. Furthermore, there are concerns regarding IBM’s uncertain dividend and recent acquisition spree. While the stock price peaked at $150 in the past year, it is currently trading at USD122.84 per share.

Five-year share price chart is shown below:

Valutico Analysis

We analyzed IBM by using the Discounted Cash Flow method, specifically our DCF WACC approach, as well as a Trading Comparables analysis. The Discounted Cash Flow analysis produced a value of USD 222 billion using a WACC of 6.4%. 

The Trading Comparables analysis resulted in a valuation range of USD 106 billion to USD 235 billion by applying the observed trading multiples EV/Sales, EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as Oracle Corporation, Cisco Systems, Inc. and Alphabet Inc.

Combining our DCF WACC and Trading Comparables analysis results in a valuation range of USD 129 billion to USD 218 billion. In comparison to IBM market capitalization of USD 114 billion we suggest that the company is undervalued. Could the IBM share price break out of its recent sideways trading pattern to the upside to reflect its intrinsic valuation? Let us know in the comments.

Link to the valuation

Disclaimer 

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post IBM hits pause on human hires appeared first on Valutico.

Weekly Valuation – Valutico |  April 21 2023

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About the company

Incorporated in 2015, The Kraft Heinz Company (KHC) is a leading American multinational food company with co-headquarters in Chicago and Pittsburgh. It was formed by merging two renowned entities, Kraft Foods and H.J. Heinz Company. KHC stands out as the fifth-largest food and beverage company worldwide, and third-largest in North America. The company boasts eight iconic brands with revenue of more than $1 billion.

Recent M&A deals

KHC has been making headlines with strategic moves like acquiring Cerebos Pacific in 2018 and selling off assets such as its Indian nutritional beverage and Canadian natural cheese businesses in 2019. In addition, the company partnered to produce Kraft and Velveeta cheeses and sold part of its cheese business to Lactalis for $3.2 billion in 2020. While expanding its portfolio in 2021 and 2022 with acquisitions like Brazil’s Hemmer condiment and sauce company and an 85% stake in Germany’s Just Spices GmbH, the company has also recently agreed to sell its Russian baby food business to Chernogolovka. This move allows local firms to capitalize on the departure of Western brands.

Recent Financial Performance

Kraft Heinz reported a 1.7% increase in net sales to $26.5 billion, with organic net sales up 9.8% in the last year . However, volume/mix declined 3.4%, with declines in both reportable segments primarily driven by supply constraints and elasticity impacts from pricing actions. Net income increased 131.3% to $2.4 billion, driven by lower interest expense and lower non-cash impairment losses, offset by lower Adjusted EBITDA, an accrual related to the securities class action lawsuit, and higher supply chain and commodity costs. Adjusted EBITDA decreased 5.8% to $6.0 billion.

Share Price Performance

KHC’s heavy debt load following its merger in 2015 was lightened by the pandemic’s increased demand for food, lower interest costs, and opportunities for divestment. Despite a flat operating performance in 2021, the company successfully reduced its net debt to $22 billion. The company’s stock price has fluctuated between $35 and $45 over the past year, with its current trading price at $39.08 per share.

Five-year share price chart is shown below:

Source: Yahoo Finance, https://yhoo.it/3V1pfmA

Valutico Analysis

We analyzed KHC by using the Discounted Cash Flow method, specifically our DCF WACC approach, as well as a Trading Comparables analysis. The Discounted Cash Flow analysis produced a value of USD 75.3 billion using a WACC of 6.3%.

The Trading Comparables analysis resulted in a valuation range of USD 45.7 billion to USD 74.5 billion by applying the observed trading multiples EV/Sales, EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as The Hain Celestial Group, Inc., The Simply Good Foods Company and Campbell Soup Company.

Combining our DCF WACC and Trading Comparables analysis results in a valuation range of USD 53 billion to USD 73 billion. In comparison to Kraft Heinz Company market capitalization of USD 47.4 billion we suggest that the company is undervalued. Could the KHC share price break out of its recent sideways trading pattern to the upside to reflect its intrinsic valuation? Let us know in the comments.

Link to the valuation

Disclaimer

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post Breaking Ties: Kraft Heinz Closes Business Operations in Russia appeared first on Valutico.

In this article, we’ll explain what the Weighted Average Cost of Capital (WACC) is, by breaking it down into its components, and highlighting its role in valuing a company through the Discounted Cash Flow method (DCF).

What is the Weighted Average Cost of Capital (WACC)? Determining a company’s „Cost of Capital“ is vital in corporate finance and valuation, and the Weighted Average Cost of Capital (WACC) provides a specific way of doing so. WACC considers the costs associated with different components of a firm’s capital structure, such as debt, equity, and preferred stock, and weighs them according to their proportion. These costs are then combined into a „weighted average“ which represents the overall cost of financing a business. WACC is a valuable tool in discounted cash flow analysis for finding the value of a company.

First we provide a quick WACC overview, then we explain step-by-step how the WACC works.  

QUICK OVERVIEW

• The Weighted Average Cost of Capital (WACC) is a popular way to measure Cost of Capital, often used in a Discounted Cash Flow analysis to help value a business.
• The WACC calculates the Cost of Capital by weighing the distinct costs, including Debt and Equity, according to the proportion that each is held, combining them all in a weighted average.
• The resulting WACC represents the average cost of all the types of capital a company uses to finance its operations.
• The WACC is used as the discount rate in a DCF analysis.
• The higher the WACC, the higher the discount rate, and so the lower the value of the business.
• WACCs in certain industries may be higher or lower in general, depending on the risk associated with that industry. Riskier industries, may have a higher Cost of Capital.

What is the WACC? A Short Summary

The Weighted Average Cost of Capital (WACC) is an important tool for business valuation. It is a metric used to calculate the Cost of Capital for a company based on its specific financing mix (debt, equity and/or preference shares). The Cost of Capital is then used to discount future expected cash flows to arrive at a present value – the valuation of the business using the Discounted Cash Flow method, a leading valuation technique.

The WACC formula derives the current cost of each form of finance, starting with the risk-free rate, the expected return on equity, and the costs associated with debt financing. To calculate the WACC, you must first determine each source’s „costs,“ which are expressed as percentages. You then weigh each source by its relative importance in terms of debt or equity.

In order to understand this, it may help to know the following: 

What is the Cost of Capital?

The Cost of Capital is how much it costs to obtain debt and equity capital, which is used to finance the operations of a business, including business growth. This is an important metric in business and finance. Businesses that are considered less predictable or more risky may have to face higher costs to obtain capital, as the providers of capital consider themselves taking onboard extra risk of losing their money, and want to be rewarded for their exposure to this risk. 

Why is Cost of Capital Important for Business Planning?

Broadly speaking, the company’s Cost of Capital shows how much money new endeavors must generate to offset these upfront costs, in order for the business to generate money. 

Cost of Capital is important in business planning as it represents the minimum return a company must earn on its investments in order to satisfy its creditors and equity investors. This helps the company determine the feasibility of new projects and investments, set a proper pricing strategy, and make informed decisions on allocating resources. By considering the Cost of Capital, a company can ensure it is using its funds in the most efficient manner and maximizing returns for its stakeholders.

Cost of Capital vs. WACC

The cost of capital is the total cost of debt and equity that a company incurs to run its operations. This method doesn’t consider the relative proportion of each source of financing. WACC, on the other hand, goes a step further by considering the proportion of each financing source used by the company.

How is the WACC Used?

The Weighted Average Cost of Capital, and its related concept, Cost of Capital, are used when making important financial decisions, including for mergers and acquisitions, investment decisions, as well as evaluating a company’s financial performance and stability.

How Do You Calculate WACC?

To calculate WACC, one must first find the cost of debt and then determine the required rate of return for equity.

In order to calculate WACC, we use the following equation:

WACC = (E/V x Re) + ((D/V x Rd) x (1-T)).

In this equation, „E“ stands for „Equity“, „V“ stands for „Value“, „Re“ stands for „Required Rate of return for Equity“, „D“ stands for „Debt“, „Rd“ stands for „Cost of Debt“, and „T“ stands for „Tax Rate“.

The cost of debt, or Rd, is the rate at which a company can borrow money from its creditors. This rate is typically determined by the length and size of the loan, as well as credit ratings associated with the company.

The required rate of return for equity (Re) is generally calculated using the Capital Asset Pricing Model (CAPM). This model takes into account a variety of factors, such as risk-free rate, beta, and expected market returns.

Finally, tax rate (T) represents taxes associated with interest payments on debt or dividends on equity.

WACC – Key Components

WACC is calculated using a variety of factors, including these main factors. 

Cost of equity (or „discount rate“), which considers the expected rate of return given current market conditions and the risk associated with investing in the company. 

• Beta factor:
  The beta factor is part of the Weighted Average Cost of Capital (WACC). It is a measure of the volatility of a stock in relation to the market as a whole. The beta factor is used to calculate the cost of equity in the WACC formula and is a measure of a stock’s systematic risk, or the risk associated with the overall market. A beta of 1.0 indicates that the stock moves in line with the market, while a beta greater than 1.0 indicates a stock that is more volatile than the market. A beta of less than 1.0 indicates a stock that is less volatile than the market. The higher the beta, the higher the required return for the stock, and the higher the cost of equity in the WACC formula.

Cost of debt is typically determined by interest rates on loans or other financing instruments. 

Sometimes, other factors are considered, such as:

Preferred stock that a company may have issued, which pays out dividends at predetermined rates regardless of how well a business is performing. 

Weighted average shares outstanding which reflects how many shares are currently outstanding for each type of security held by investors. 

Valuing a Business – WACC in a DCF

Weighted Average Cost of Capital (WACC) is an important concept when it comes to valuation. WACC is essential in a Discounted Cash Flow (DCF) analysis, as it serves as the „discount rate“. A DCF requires projecting future cash flows and then discounting them back to their present-day values using the WACC rate as the „discount rate“. The sum of all projected future cash flows (discounted by the WACC) gives an estimate of the „fair value“ for a company.

What Does a High WACC Mean?

WACC is calculated as a weighted average of all sources of capital, including debt and equity, used to finance investments. A high WACC indicates that financing costs are higher and reduces the valuation of any given project through discounted cash flow analysis. It also means that investors may be less willing to allocate funds to such projects due to the high cost associated with them. In conclusion, a high WACC can have serious implications on an organization’s ability to obtain funding and accurately evaluate potential investments or projects.  Understanding the impact of WACC is key when considering a company’s overall financial health and future prospects.

What Does a Low WACC Mean?

A low WACC is beneficial to any company and its stakeholders. It represents the rate of return that a company must pay for all its financial sources such as debt and equity. A lower WACC means that there is less risk associated with the financing and so the expected return on investment (ROI) will be higher. This makes it more likely for shareholders or other financiers to invest in a company as they have confidence in their returns.

Having a low WACC can also have implications when it comes to valuation. Low Cost of Capital lowers the discount rate used in discounted cash flow models meaning there is an increased value for future cash flows leading to higher valuations for firms with lower Cost of Capital. A low WACC is important for any company’s financial performance and is something that should be monitored closely. Companies should strive to maintain a low Cost of Capital in order to attract investment, reduce the risk associated with their financing and significantly increase their valuation.

Do Different Industries Typically Have Different WACCs?

The industry in which a firm operates can have a significant effect on its WACC. Industries with higher levels of risk often require companies to take on more debt or pay higher interest rates when borrowing money, resulting in a higher WACC. On the other hand, firms operating in less risky industries may have access to lower cost financing options and consequently have a lower WACC.

For example, some of the industries with the highest WACCs include telecommunications, technology, utilities, media, pharmaceuticals, and oil & gas. These industries tend to require significant investments in research and development in order to remain competitive and therefore demand higher returns for investors. On the other hand, industries such as retail, transportation services, leisure/hospitality and banking typically have lower WACCs due to their relatively predictable business operations and low levels of risk.

Ultimately, it is important for companies to understand their individual WACC as well as how it compares to those in their industry in order to gain insight into their financial health and potential value. By analyzing the WACC, firms can gain a better understanding of their overall financial position and make more informed decisions when it comes to investing in growth and other opportunities.

Making Investment Decisions Based on the WACC

The WACC is expressed as a percentage, like interest of return on an investment. If a company has a WACC of 8%, this would mean that company should make investments that give a higher return than 8%, in order to grow. Any investments that give a lower return than 8%, may mean that it is therefore costing the company more money to finance its operations, than it is making from the operations themselves. 

The Weighted Average Cost of Capital helps investors make informed decisions about where to allocate their resources for maximum return on investment. 

Investing in a Company: WACC is used for this purpose as it takes into account both debt and equity financing costs and in this way provides a measure of required return for investors in order for them to be willing to invest in a company. This is because  higher WACC means that the Cost of Capital is higher and the investor will demand a higher return on their investment to compensate for the increased risk. Thus, knowing the WACC of a company can help investors make more informed decisions when investing in that company.

WACC Example

For example, say a company has total equity of $400 million with a cost of 12% and total debt of $600 million at a 6% cost. The WACC can be calculated by weighting these components appropriately:

WACC = (.4 x .12) + (.6 x .06) = 9.0%

This tells us that the company must earn an expected return of at least 9% on any new investments in order to create value from its capital structure. This is a critical metric for investors to analyze when assessing a company’s discounted cash flow or overall valuation.

What are the Limitations of WACC?

 Although WACC is a valuable tool for valuing companies, it has some drawbacks. The calculation of several elements in the WACC can be subjective and subject to different interpretations, leading to varying results among analysts. For instance, the effective tax rate or risk-free rate may be calculated differently or based on proprietary methods.

Therefore, it is crucial to use the WACC in conjunction with other financial instruments when assessing valuations. While it is useful in determining the minimum acceptable return on investment, other factors such as market conditions, competition, and company-specific risks should also be taken into account. With a platform like Valutico, a broader range of tools can be used to perform a more thorough and detailed analysis of companies.

The post Weighted Average Cost of Capital Explained – Formula and Meaning appeared first on Valutico.

Weekly Valuation – Valutico | April 7 2023

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Interior Empty Modern Loft Office open space modern office footage.Modern open concept Lobby and reception area meeting room design.4k . 3d Rendering and drawing line sketch.

Context

First Citizens BancShares, Inc announced on March 27, 2023 that it has entered into an agreement with the Federal Deposit Insurance Corporation (FDIC) to purchase Silicon Valley Bank after a wave of withdrawals that caused the largest banking collapse in the US in over ten years. The agreement is expected to alleviate some of the chaos that has been shaking the financial system, and the announcement has caused local bank stocks to rise significantly.

About the buyer

First Citizens Bank, is a US-based North Carolina state-chartered commercial bank that was founded in 1898. With over USD 218 billion in total assets, the bank has expanded its presence across 23 states, operating a network of more than 500 branches as well as a nationwide direct bank. Its growth strategy has included the acquisition of distressed banks, having purchased 12 banks out of receivership since the global financial crisis. In its most recent acquisition, the bank acquired CIT Group in a highly accretive deal, combining CIT’s specialized commercial lending portfolio with First Citizens Bank’s strength as a deposit-gathering franchise.

Recent Financial Performance

First Citizens BancShares, saw significant growth in net interest income after the recent merger, with net interest income jumping from USD 1.39 billion to USD 2.95 billion in the past year. While the bank serves small and medium businesses, it has less exposure to vulnerable businesses than Silicon Valley Bank. However, the bank carries risks, particularly with its USD 29.1 billion in uninsured deposits. To strengthen its financial position, First Citizens Bank increased its borrowings from the Federal Home Loan Bank to USD 9 billion, effectively increasing its pre-acquisition cash position from USD 4 billion to USD 10 billion. The bank has also made other moves to enhance its financial position and has seen a USD 1.3 billion increase in deposits since the end of last year.

About the deal

First Citizens Bank acquired Silicon Valley Bank’s branches, loans, and deposits in a complete purchase and assumption agreement with loss share coverage. The FDIC retained about USD 90 billion of SVB securities and agreed to share any potential losses or gains on SVB’s commercial loans with First Citizens. The FDIC will provide a USD 35 billion loan over five years to finance the deal and a USD 70 billion line of credit to cover potential deposit flight. The estimated cost of the bank’s failure to the Deposit Insurance Fund is about USD 20 billion, and the FDIC will receive equity appreciation rights in First Citizens with a potential value of USD 500 million. First Citizens will assume USD 56 billion in deposits, and 17 branches will operate as Silicon Valley Bank, a division of First Citizens, with no immediate changes to customer accounts.

Share Price Performance

In the last five years, investing in First Citizens stocks, like other banks, has been unprofitable for investors with only marginal returns. The Covid-19 crisis in 2020 led to a marked decline in the stock price, but financial stimuli from the FED helped to reverse this situation in 2021. However, the bank faced challenges in 2022 due to the same monetary policy and high interest rates. Despite this, the bank’s stock price has rallied to as high as 49%, with shares gaining 13.3% over the past six months, outpacing the industry’s decline of 15.1%. The recent acquisition of the failed SVB has boosted investor confidence in the North Carolina-based bank, and as of April 7 their stocks are trading around USD 998.

Five-year share price chart is shown below:

Valutico Analysis                                           

We analyzed First Citizens BancShares, Inc. by using our Flow-to-Equity simplified approach, as well as a Trading Comparables analysis. The Flow-to-Equity analysis produced a value of USD 12.66 billion using a Cost of Equity of 9.0%.

The Trading Comparables analysis resulted in a valuation range of USD 10.58 billion to USD 14,05 billion by applying the median of the observed P/E and P/B multiples of the peer group. For our Trading Comparables we selected similar peers such as M&T Bank Corporation, Huntington Bancshares, Inc. and Commerce Bancshares, Inc.

Combining our Flow-to-Equity and Trading Comparables analysis results in a value range of USD 10.91 billion to USD 13.28 billion. In comparison to BP’s market capitalization of 14.36 billion we suggest that the company is slighty over valued.

Link to valuation 

Disclaimer

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post SVB – Done deal appeared first on Valutico.

Weekly Valuation – Valutico | 28 March 2023

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View from the castle with old town, river Aare and Lake Thun in Thun in the Bernese Oberland in Switzerland

Context

In recent days, the financial markets have experienced increased turmoil, causing growing concerns about financial stability. The collapse of SVB had a ripple effect through the banking sector, leading investors to fear that other banks could follow suit. As a result, they have been pouring into money market funds at the highest rate since the COVID pandemic began. Deposit holders are fleeing the banking chaos, and investors are seeking stable havens until the storm passes. However, this has put pressure on banks, including Credit Suisse, a globally systemically important bank. Credit Suisse’s investment banking unit had already been tarnished by a series of high-profile scandals, and its share price took a hit when the leading shareholder ruled out further investment due to regulatory issues.

About the deal

UBS Group AG, a Swiss investment bank, has reached an agreement to purchase Credit Suisse in an all-stock deal, as announced on March 19th, 2023. The acquisition was facilitated by the Swiss government and the Swiss Financial Market Supervisory Authority. To support the deal, the Swiss National Bank provided over CHF 100 (USD 104) billion in liquidity to UBS following its takeover of Credit Suisse’s operations. The Swiss government also offered a guarantee to UBS, covering potential losses of up to CHF 9 (USD 9.6) billion in the short term. As part of the agreement, CHF 16 (USD 17.2) billion worth of Additional Tier 1 bonds were written off completely.

Recent Financial Performance

In January 2023, UBS released its annual results, showing a 14% year-on-year increase in net profits to USD 7.6 billion. The bank also attracted USD 60 billion in net new fee-generating assets in GWM for the full year, USD 25 billion of net new money in AM and CHF 2 billion of net new investment products for Personal Banking, an 8% growth rate. UBS maintained a strong capital position, ending the year 2022 with a CET1 capital ratio of 14.2% and a CET1 leverage ratio of 4.42%.  As of now, UBS is offering a dividend of USD 0.55 per common stock, with a dividend yield of 2.70%. The company repurchased USD 5.6 billion of shares in 2022, and expect to repurchase more than USD 5 billion of shares during 2023.

Share Price Performance

Between February 2018 and February 2020, UBS saw a decline of over 35% in its share price due to weaker profits, which worsened during the pandemic. Despite investor concerns over significant financial market disruption, the markets proved resilient thanks to sufficient capital levels and unprecedented government support for companies, which mitigated the pandemic’s economic effects. UBS’s share value rose in the second half of 2020, and by November 2020, it had recovered its pre-pandemic value. The following year saw sustained price growth with UBS shares increasing from USD 14 to USD 18. Currently, UBS stock is trading at USD 19.43, a 1.04% increase from the beginning of the year when it was trading at USD 18.67.

Five-year share price chart is shown below:

Source: Yahoo Finance, https://yhoo.it/3zf2Gks

Valutico Analysis

We analyzed UBS Group AG by using our Flow-to-Equity simplified approach, as well as a Trading Comparables analysis. The Flow-to-Equity analysis produced a value of CHF 120 (USD 130.5) billion using a Cost of Equity of 7.9%.

The Trading Comparables analysis resulted in a valuation range of CHF 72.8 (USD 79.1) billion to CHF 94 (USD 102.2) billion by applying the median of the observed P/E and P/B multiples of the peer group. For our Trading Comparables we selected similar peers such as Morgan Stanley, Deutsche Bank Aktiengesellschaft and DWS Group GmbH & Co. KGaA.

Combining our Flow-to-Equity and Trading Comparables analysis results in a value range of CHF 77 (USD 83.7) billion to CHF 114 (USD 124.0) billion. In comparison to BP’s market capitalization of CHF 55.1 (USD 59.9) billion we suggest that the company is slightly undervalued.

Link to the valuation

Disclaimer

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post Crash and Bailouts appeared first on Valutico.

Weekly Valuation – Valutico | 20 March 2023

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Context

The past weeks, the financial market was rattled by the collapse of Silicon Valley Bank, the go-to bank for tech startups, serving half of America’s venture capital-backed tech firms. SVB had been grappling with liquidity concerns in the US, which sparked a massive bank run last week, resulting in its collapse on Friday, March 10th. In response to concerns of contagion, US financial regulators acted quickly over the weekend, assuring customers of the failed bank that they would have access to all their money starting Monday.

HSBC saves the day

HSBC, one of the world’s largest banking and financial services organizations, swiftly acquired the UK division of Silicon Valley Bank in response to the crisis, securing the deposits of numerous British tech firms that had invested their money in the failed bank. This acquisition is expected to strengthen HSBC’s commercial banking franchise and enhance its ability to serve innovative and fast-growing firms, particularly in the technology and life science sectors, both domestically and globally.

About the deal

HSBC Holdings plc announced that its UK ring-fenced subsidiary, HSBC UK Bank plc, was acquiring Silicon Valley Bank UK Limited for GBP 1. As of 10 March 2023, SVB UK had loans of approximately GBP 5.5 (USD 6.7) billion and deposits of around GBP 6.7 (USD 8.1) billion, according to the HSBC statement. It recorded a profit before tax of GBP 88 (USD 106.5) million for the financial year ending 31 December 2022, and its tangible equity is expected to be around GBP 1.4 (USD 1.68) billion. The assets and liabilities of SVB UK’s parent companies were excluded from the transaction, which will be funded from existing resources.

Recent Financial Performance

In late February 2023, HSBC released its 2022 annual results, showing strong financial performance and higher capital distributions. They announced a 50% dividend payout ratio projected for 2023 and 2024 as well as a return to quarterly dividends from Q1 this year. HSBC is also planning a special dividend of $0.21 to be paid in Q1 once the Canada disposal is completed as well as additional share buybacks. Finally, it indicated that it will also bring forward the announcement of buybacks to the Q1’2023 earnings results.

Share Price Performance

Over the last 5 years, investing in the ADR of HSBC Holdings PLC (NYSE:HSBC) has proven to be less than profitable for investors, with only marginal returns realized. Although in 2018, HSBC’s stock was performing well and traded around USD 55, the Covid-19 crisis in 2020 affected the entire market, and HSBC was not the exception, leading to a marked decline in its stock price. This was further exacerbated in September of the same year, because of a leak revealing that HSBC, alongside other banks, had allegedly moved large sums of illicit funds for almost two decades, despite alarms about the money’s origins. This situation resulted in a significant decline in investor confidence. Since then, the stock price of HSBC has fluctuated between USD 25 and USD 37. As of the date of this valuation, the current price stands at USD 33.24.

Five-year share price chart is shown below:

Source: Yahoo Finance, https://yhoo.it/42ogu9F

Valutico Analysis

We analyzed HSBC by using our Flow-to-Equity simplified approach, as well as a Trading Comparables analysis. The Flow-to-Equity analysis produced a value of GBP 116(USD 142.07) billion using a Cost of Equity of 7.6%.

The Trading Comparables analysis resulted in a valuation range of GBP 89.6 (USD 109.7) billion to GBP 123 (USD 150.6) billion by applying the median of the observed P/E and P/B multiples of the peer group. For our Trading Comparables we selected similar peers such as AIB Group plc, Lloyds Banking Group plc, NatWest Group plc, Standard Chartered plc.

Combining our Flow-to-Equity and Trading Comparables analysis results in a value range of GBP 88 (USD 107.7)  billion to GBP 120 (USD 147) billion. In comparison to BP’s market capitalization of GBP 112 (USD 137.2) billion we suggest that the company is fairly valued.

Link to the valuation

Disclaimer 

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post HSBC: Chance for Success or Misstep? appeared first on Valutico.

Weekly Valuation – Valutico | 6 March 2023

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About LVMH Moët Hennessy – Louis Vuitton

LVMH is a Paris-based luxury goods conglomerate. With a market capitalization of €395 billion, it is the most valuable company in Europe. Several luxury brands like Christian Dior, Givenchy, Fendi, Marc Jacobs and about 71 others are housed under the umbrella of LVMH. 

Recent Financial Performance

In late January 2023, LVMH released its 2022 annual report, posting record revenue and income levels. The company made €79.2 billion in revenue and €21.1 billion in profit from recurring operations in 2022, an increase of 23%in both metrics. In terms of business groups, the company increased revenue in the Wine & Spirits segment by 19% year over year and 25% in the Fashion & Leather group. Perfumes & Cosmetics increased by 17% and the Watches & Jewellery segment grew by 18% – an excellent performance across the board.. 

New Acquisitions and Famous Directors

LVMH has recently been linked with the acquisition of Aesop, an Australian luxury cosmetics, shampoo and body care brand. The acquisition price is roughly €2 billion but the company is facing stiff competition from other bidders, L’Oreal and the Japanese brand Sisheido. There have also been rumors about LVMH making a bid for the Swiss based luxury brand Richemont. Richemont is especially interesting for the conglomerate, as it owns Cartier, which would fit perfectly into the watches and jewelry business group of LVMH. The company has also been in the news lately as the long term CEO Bernard Arnault appointed popstar Pharrell Williams as the new head designer for the core brand LVMH. 

Share Price Performance

LVMH had an exceptional performance over the last five years on the Paris Stock Exchange. In early 2018 the company traded at €250 per share. After reaching new highs in early 2020 of €420 per share, the share price fell due to economic conditions and Covid-19. Since trading at €320 in mid 2020, the share price has more than doubled to its current level of €780 per share. 

LVMH’s five-year share price chart is shown below:

Source: Yahoo Finance, https://yhoo.it/3Sf5y84

Valutico Analysis

We analyzed  LVMH Moët Hennessy – Louis Vuitton by using the Discounted Cash Flow method, specifically our DCF WACC

 approach, as well as a Trading Comparables analysis. The Discounted Cash Flow analysis produced a value of €330 billion using a WACC of 9.3%.

The Trading Comparables analysis resulted in a valuation range of €305 billion to €492 billion by applying the observed trading multiples EV/Sales, EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as Burberry, Kering, Moncler and Hermes.

Combining our DCF WACC and Trading Comparables analysis results in a value range of €305 billion to €492 billion. In comparison to LVMH’s market capitalization of €395 billion we suggest that the company is fairly valued. 

Will the strong demand for luxury goods continue and therefore continue LMVH’s strong share price performance? Let us know in the comments.

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Disclaimer

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post Will luxury brand LVMH continue to outpace the stock market? appeared first on Valutico.

Weekly Valuation – Valutico | 21 February 2023

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About Alphabet

Alphabet Inc. is an American tech conglomerate, operating in various industries, including technology, advertising, autonomous driving, entertainment, and many more. The company is one of the world’s largest companies with a market capitalization of $1.34 trillion and competes via its famous subsidiary companies Google, Youtube and Waymo, amongst others. Recently the Google search engine was subject to many discussions due to rising perceived threats from Artificial Intelligence (AI) technology. 

Recent Financial Performance

Three weeks ago the company released its 2022 annual report, which showed strong revenue figures – growing by 10% to $283 billion compared to 2021. Despite this revenue growth, Alphabet was unable to maintain its healthy net profit margin, as net profit fell by around 5% to $75 billion. During this event, the company also published its fourth quarter results of 2022 showing an increase in revenue by 1% and a worrying decrease in revenues by 8% for the important YouTube segment. 

Chat GPT Threatening Traditional Search Engines

AI models like Chat GPT, provided by OpenAI, have the potential to disrupt traditional search engines as these models are able to provide more accurate and efficient information. Google proclaimed code red as this could lead to decreased usage of the company’s search engine, which is its highest revenue producing stream, contributing about 60%. However, Alphabet is also heavily investing in AI and could potentially integrate similar capabilities into its products to remain competitive. Last week, the company held a conference to talk about the threat of Chat GPT. There, Bard A.I., which can be seen as Alphabet’s answer to Chat GPT, was announced, but investors did not seem to be satisfied with Alphabet’s presented approach, as the share price has fallen by 10 % since then. 

Share Price Performance

Alphabet was an exceptional performer on the stock exchange over the last 5 years with a total increase of over 100%, even 200% before the recent pull-back. Currently the company is trading at $95 per share. Will Alphabet be able to leverage AI technology and therefore reach new heights soon?

Alphabet’s five-year share price chart is shown below:

Source: Yahoo Finance, https://yhoo.it/3jI8z5l

Valutico Analysis

We analyzed Alphabet Inc. by using the Discounted Cash Flow method, specifically our DCF WACC approach, as well as a Trading Comparables analysis. The Discounted Cash Flow analysis produced a value of $1,373 billion using a WACC of 9.9%.

The Trading Comparables analysis resulted in a valuation range of $1,517 billion to $2,344 billion  by applying the observed trading multiples  EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as Meta, Apple and Microsoft.

Combining our DCF WACC and Trading Comparables analysis results in a value range of $1,373 billion to $2,344 billion. In comparison to Alphabet’s market capitalization of $1,210 billion we suggest that the company is undervalued. 

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Disclaimer

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post AI technology, a serious threat for Alphabet? appeared first on Valutico.

Weekly Valuation – Valutico | 8 February 2023

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About Visa

Visa is an American payment technology company headquartered in California, offering electronic transactions between merchants, financial institutions, and cardholders, facilitating billions of transactions each year. Last week the company was also in the media as it created a loophole with PayPal and the Argentinian peso, resulting in cheaper online shopping for foreigners.  

Recent Financial Performance

Last week, Visa published strong first quarter 2023 financial results, increasing revenue by 12% to $7.9 billion and net income by 6% to $4.2 billion, with general payments volume rising by 7%. One of the  largest drivers for these good figures was the return of international travel and tourism, as activity in this segment is getting back to pre Covid-19 levels. 

Cheaper online shopping with Argentinian peso and Visa

By utilizing PayPal for e-commerce transactions, consumers have been eligible for a discount of up to 40% when using Visa as the payment option. This is due to favorable exchange rates offered by the Central Bank of Argentina for foreign credit cards. The Argentinian government has implemented this initiative to stimulate the economy by making local purchases more affordable for tourists, amidst high inflation rates of around 100%. However, this loophole has now been sealed and it is therefore no longer possible to take advantage of it.

Share Price Performance

Visa showed a great performance in the last 5 years as the share price rose by over 100%. After following the rest of the market down during the early Covid-19 period, the share price steadily increased, achieving an all time high of $250 per share in July 2021. Since then, the share price has sagged to $180 in September 2022. However, over the last four months the ticker performed well, increasing by ~30%to the current level of $230 per share. 

Visa’s five-year share price chart is shown below:

Source: Yahoo Finance, https://yhoo.it/3XWBIsF

Valutico Analysis

We analyzed Visa Inc. by using the Discounted Cash Flow method, specifically our Flow-to-Equity approach, as well as a Trading Comparables analysis. The Flow-to-Equity analysis produced a value of $308 billion using a Cost of Equity of 9.2%. 

The Trading Comparables analysis resulted in a valuation range of $257 billion to $296 billion by applying the observed trading multiples  EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as Mastercard, PayPal and American Express.

Combining our Flow-to-Equity and Trading Comparables analysis results in a value range of $257 billion to $308 billion. In comparison to Visa’s market capitalization of $471 billion we suggest that the company is significantly overvalued. Is Visa materially overvalued or will it continue its recent gains and supercede its all time high in the coming months? Let us know in the comments.

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Disclaimer

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post After reporting stellar quarterly results, can Visa close the gap to its all time high? appeared first on Valutico.

Weekly Valuation – Valutico | 1 February 2023

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About The Boeing Company

The Boeing Company is an American aerospace and defense manufacturer that designs, produces and sells commercial and military aircraft, helicopters, spacecraft and satellites, as well as military equipment such as missile launchers and missile weapons. However, in recent years, Boeing has faced significant challenges, including the grounding of its 737 MAX aircraft following two fatal crashes. Furthermore, the company’s last positive financial result was published four years ago.  

Recent Financial Performance

Last week, Boeing released its fourth quarter results which surprised analysts on the downside, as they expected earnings per share of $0.20. In fact, the company missed this number by $1.95 per share, as it reported earnings per share of -$1.75. Revenue was $19.98 billion which increased by 35% compared to last year. Despite this increase in revenue, Boeing reported a financial loss of $635 million, meaning that the anticipated turnaround failed for the fourth year in a row. According to Boeing, these losses are attributable to difficulties caused by the Covid-19 pandemic and their technical problems with models like the 737 MAX. 

Problems with development of airplanes

Boeing faces serious challenges not only because of its above-mentioned financial situation, but also due to problems with its developed airplanes. After the fatal crashes of two 737 MAX medium-range aircraft, the model was not allowed to take off anymore for a long time, which resulted in higher development costs and lower sales than expected. In addition, Boeing had to stop delivery of its 787 Dreamliner long-distance aircraft due to production shortcomings and delay its schedule for the revamped 777X jumbo jet by years, also negatively affecting future revenues. 

Share Price Performance

The counter had a very good start to 2019 with a new all time high of $440 per share. However, quickly after the deadly crashes of its 737 MAX in Indonesia, the share price declined to $330 per share. Financial and technological challenges paired with the Covid-19 pandemic led to further declines in value, resulting in a share price of $95 in early 2020. Since then, the price  has improved slightly to trade in a range of $150 and $250 per share. Can the company solve its problems and reach former highs again in the near future?

Boeing’s five-year share price chart is shown below:

Source: Yahoo Finance, https://yhoo.it/3kMbTNf

Valutico Analysis

We analyzed The Boeing Company by using the Discounted Cash Flow method, specifically our Simplified DCF WACC approach, as well as a Trading Comparables analysis. The DCF analysis produced a value of $93.5 billion using a WACC of 8.8%.

The Trading Comparables analysis resulted in a valuation range of $121 billion to $150 billion  by applying the observed trading multiples  EV/EBITDA and EV/EBIT. For our Trading Comparables we selected similar peers such as Airbus, Lockheed Martin and General Dynamics.

Combining our DCF and Trading Comparables analysis results in a value range of $93.5 billion to $150 billion. In comparison to Boeing’s market capitalization of $127 billion we suggest that the company is fairly valued. 

Link to valuation

Disclaimer

This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.

The post Can Boeing turn things around after reporting four consecutive years of financial losses? appeared first on Valutico.