Tuesday, February 25, 2020

A Current AIM Small Cap Equity Holding: Iridium Communications (IRDM, $31.88): “Out of This World Opportunities”

Iridium Communications (IRDM, $31.88): “Out of This World Opportunities”
By Andrew Hoy, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary:

IRDM communications has secured a position as a leader in mobile voice and data communication services using a network of orbital satellites. They provide secure and reliable network access to regions not connected via traditional land network. Iridium derives much of its revenue from the provision of data transmission for governments and businesses, and the rest from selling and servicing equipment through a network of partners.

On January 28, 2019 Iridium announced the launch of CloudConnect, their satellite cloud based IoT application solution. The product combines with Amazon Web Services to extend customers’ reach to 80% of previously unreachable territory. Bryan Hartin, executive vice president of sales and marketing at Iridium described the project as “a direct, private connection between our gateway and AWS, making it secure and redundant. This is now a premier satellite cloud-based IoT service."
The company is undergoing a financial transformation. Management has indicated their commitment to de-lever the balance sheet after IridiumNext. The project’s implementation involved taking on a significant amount of debt, much of which they refinanced near the close of FY19. To date, they have reduced their obligation to the credit facility by $199M.

As of September 30, 2019, Iridium had 1,269 million subscribers globally, representing an increase of 16% YoY. The firm is riding out tailwinds from demand for reliable remote communication services, their growing portfolio of products and services, and their broad wholesale distribution network.

Key Points:

The launch of CloudConnect is designed to realize the benefits of management’s investment in the IridiumNext project. Completed in 2019, the project replaced the company’s first-generation satellites with new ones supporting new services and higher data speeds. The project involved nearly $3 billion in expenditures and is expected to be a significant contributor to growth.

To provide stability to their cash flows, Iridium has an agreement with third-party Aireon related to hosting fees of $200 million. The opportunity with respect to Aireon is significant because the Federal Aviation Administration has recently emerged as a likely end-market. Using Iridium’s network of satellites, Aireon provides the capability to track any ADS-B enabled aircraft in real-time. The FAA began field testing Aireon’s ADS-B tracking service this quarter.

The company’s core services segment, representing over 50% of revenues, is thriving. Investor sentiment was supported earlier this year by the company’s announcement of its GMDSS certification. Global Maritime Distress and Safety System provides a safety net for mariners in emergency situations. The process to get certified involved a multi-year review and positions IRDM to continue growing its portfolio. Further, the company renewed a contract with the U.S. government for unlimited voice, data, and access to their secure government gateway.

What has the stock done lately?

Iridium was recommended as an addition to the AIM Small Cap Portfolio on November 27, 2019 at a price of $23.80, and has since risen to a $31.88 valuation representing a 33% return to date. Lately, the stock has been trending up and broke above its 52-week high around $28.00. It is volatile with a Beta of 2.11.

Past year performance:

The company’s stock has returned 29% since the beginning of 2020, nearly doubling since January 2019. It is now trading above its previous valuation levels, reflecting the market’s bullish sentiment.

Source: FactSet 
My Takeaway:

The company’s earnings announcement on February 25, 2020 is likely to reflect the realization of benefits from the renewal of government contracts, investment in IridiumNext, the company’s contract with Aireon, a broad increase in voice, IoT data, data, and hosted payload demand. The company was pitched to the portfolio with the idea that these factors would ultimately drive growth, and they continue to do so.
Source: FactSet

  

A Current AIM International Equity Holding: IHS Markit Ltd. (INFO, $80.37): “Information Overload”


IHS Markit Ltd. (INFO, $80.37): “Information Overload”
By: Sean O’Leary, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

IHS Markit, Inc. (NYSE:INFO) participates in the provision of information, analytics, and solutions to customers in the finance, business, and government sectors in the United States, Europe, and Asia. IHS Markit operates in four segments of business financial services, transportation, resources, and consolidated markets & solutions.

• INFO products continue to face little direct competition, in the strong ability of creating information and data set’s that are difficult to replicate. INFO has an economic Moat through having customers that don’t leave because of the high switching costs to competitor products and quality products that INFO provides.

• Transportation segment (28% of total revenue in 2019) continues to be attractive, particularly through new markets in the automotive lineup that will be boosted through the Carfax lineup that includes vehicle listing and finance-related products.

• Management has indicated that there are struggles in facing long selling cycles to secure new contracts that require high amounts of resources and long lead times.

• INFO has about 85% of revenue coming from subscriptions that represent that customers are being loyal and are sustaining relationships.

Key points: 

IHS Markit remains a stock that has upside potential. Through the three main segments of business that INFO operates in, each has potential for growth. The financial services segment (39% of total revenue) shows promise in growth though its new lineup of products that are targeting primary issuance and alternative investments that complement INFO’s existing products. The Transportation segment (38% of total revenue) is predicted to post 7%-8% average organic growth till 2024. With the automotive products expansion and increased margin INFO will see growth through this segment of business. Growth will be seen in the new agribusiness unit that will complement the alternative energy offerings that INFO has in the resources segment (21% of total revenue).

INFO could face difficulties in a bear financial market through consumers conservative mindset that reduces client’s openness to new indexes and other investor facing products. This may decrease the amount of funds available for INFO’s trading system and enterprise risk management improvements and cause slow growth in new products they are trying to offer.

Recurring fixed revenue and variable revenue is approximately 85% of total revenue in 2019. With this mind, revenue is usually stable and easy to predict. This allows for INFO to develop strong long-term relationships with its customers and with the high cost of changing to a competitor product this allows INFO to have an economic moat currently and in the future.

The acquisition of Ipreo in mid-2018 will continue to produce cross-selling opportunities through leveraging its financial services ability to sell more existing products and create new products for capital and alternative investment markets. Through the ability to have a more comprehensive suite of products INFO has more valuable offerings that are embedded into client processes and long-term contracts.  

What has the stock done lately?

Since INFO was added to the portfolio at a price of $36.50 on September 23, 2016, it has risen 120% to $80.37. INFO has been recently beating earnings estimates and about a week ago beat there Q4 2019 estimates that helped stock performance. In the past three months INFO is up 12% through strong results in the end of Q3 and in Q4 and strong market performance.

Past Year Performance: 

Since last year INFO has increased 50.95% in value. From November 2018 to November 2019 sales have increased 10.11% and net income decreased by 7.30% due to increases in the amount of taxes that were paid. Net EBITDA Margin increased by 2.35% along with operating margin (EBIT) being up 2.77% due to increased revenues and lower cost initiatives.  Enterprise Value / Sales was up 1.02 on the year representing stronger growth in market value than sale growth. Due to lower labor inflation, SG&A expenses only grew .90% compared to sales growth of over 10%, which helped improve operating income margins.


Source: FactSet

My Takeaway

IHS Markit competitive advantage in its ability to provide products and services that are hard to imitate and compete with give INFO a big advantage. With majority revenues coming from subscriptions, INFO has fixed revenues that will allow for predictable and sustainable growth. INFO has growth opportunities with new products being offered in their financial segment of business that will allow for new markets to be a part of. These new products lines could have negative side effects as well if markets and consumers outlooks are negative, INFO’s products are very cyclical and can decline with the markets. INFO has been a strong performer and has potential to still have strong growth in the near future. I recommend that IHS Markit remain in the International Equity Portfolio.


Source: FactSet



Monday, February 24, 2020

Tom Eck, Managing Director of Silvercrest Asset Management, Spoke to the Students in the AIM Class of 2021 on Monday, February 24, 2020

Tom Eck of Silvercrest Asset Management Group Visited Marquette's AIM Program on Monday, February 24, 2020

 A Perennial Guest in the AIM Program - Tom Eck Discussed Equity Assessment and Valuation


Tom Eck
Silvercrest Asset Management

On Monday, February 24th, Tom Eck of Silvercrest Asset Management was the guest lecturer in the AIM program. 

The students in the Class of 2021 – similar to all of the other AIM classes over the years – were able to hear Tom’s insights on the investment industry and his approach to stock assessment and valuation.

Maybe most importantly, Tom discussed the process of how to sell an existing holding. He said, "Everybody likes to pitch buy recommendations, but it is equally important to know how to hold and eventually sell stocks."

Tom Eck, a Managing Director, joined Silvercrest in 2019 as a result of their acquisition of Cortina Asset Management, where he was a founding principal.


Tom has more than 20 years’ experience in the investment industry. In addition to his broader portfolio management oversight, his deep research effort is directed toward health care, financial and media companies.

Tom Eck in the AIM Room at Marquette
Mr. Eck joined the State of Wisconsin Investment Board in 1997, spending two years as a Research Analyst, and from 1999 to 2001 he was an Analyst for a small/mid-cap domestic equities team at Strong Capital Management. 

In 2001, Mr. Eck joined U.S. Bancorp Asset Management, now known as Nuveen Asset Management, to co-manage the Health Sciences Sector Fund and began managing institutional and individual portfolios dedicated to the small cap asset class in 2003. 

Tom Eck - Friend of AIM 
He holds the Chartered Financial Analyst designation and is a member of the CFA Institute. Mr. Eck received a B.B.A. from the University of Notre Dame and an M.B.A from Marquette University.

Dr. David Krause, AIM program director said, “It is always a pleasure to host Tom. The AIM students enjoy his interactive style of presentation – he keeps them on their toes intellectually. He is very effective in bringing the world of investing to life. Besides discussing valuation in detail, Tom prompted the students to think about the sell decision – which is as important as the buy decision.”

Krause continued, “Tom is among the initial group of Milwaukee-area investment managers that meet at Mo’s in 2004 to discuss the creation of the AIM program. I consider him a good friend and have always valued his consul – I greatly appreciate his willingness to talk with students outside of his visits to campus. He has taught our Investments course at Marquette and has hosted numerous AIM gatherings over the years. He is a true Friend of AIM."


Sunday, February 23, 2020

A Current AIM Small Cap Equity Holding: John B Sanfilippo & Son Inc. (JBSS, $79.74): “In a Nutshell, Hold JBSS”


John B Sanfilippo & Son Inc. (JBSS, $79.74): “In a Nutshell, Hold JBSS”
By: Luca Cardamone, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

John B Sanfilippo & Son Inc. (NASDAQ: JBSS, $79.74) John B Sanfilippo & Sons Inc. is one of the leading distributors of raw and processed nuts, and dried fruit. The company also markets, other snack items such as trail mixes, candy, nut butter, and yogurt/chocolate coated products. The company sells under the brands of Orchard Valley Harvest, Squirrel Brand, Fisher, Sunshine Country, and other private brands. The NASDAQ listed company distributes its products to retailers, warehouses and distribution centers, both domestically and internationally. Besides, JBSS reaches its customers through the following channels: Consumer, Commercial Ingredients, and Contract Packaging. The company was founded in 1922 and is headquartered in Elgin, IL.

• JBSS operates through vertical integration which allows the company to have direct control over the various stages of supply-chain. Furthermore, this structure helps the company to have supervision over the quality of its products.

• JBSS has an on-site R&D test kitchen, where the team can create, test and tweak products all on the same day. Thanks to the company’s investments in equipment and technology JBSS is one of the leading innovators in the nut business.

• JBSS has to deal with cost volatility for raw nuts which can impact the sales as raw and processed nuts account for nearly 80% of the company’s sales.

• JBSS is reducing natural gas, and electricity usage while also being involved in a robust recycling program that reuses approximately 80% of the company’s waste stream.

Key points: 

John B Sanfilippo & Sons Inc. is one of the leading distributors of nuts and other snack products. Snacking is a growing industry that has a revenue of about $42.6B. Nuts and seeds, represent 32.2% of that revenue. Demand for nuts and seeds has been growing during the past years as consumers have shifted their interest over healthier snacking options. JBSS is doing a good job with enhancing its products offering with plant protein snacks, and other snacks that support healthier consumption trends which can represent profitable introductions.

The company disposes of a strong financial position that has allowed JBSS to reward the shareholder with special dividends. Regular dividends have also been constantly increasing since 2017 when they were first paid to both Common Stock and Class A Stock. For this year the company declared a special dividend of $2.40 per share and a regular dividend of $0.60 which represents a 9.09% increase since last year. In the past several years the company has always been able to award its shareholders with a special dividend varied bases on the amount of free cash flow available.

JBSS has five facilities that are strategically located in nut growing regions. The facilities are equipped with the latest technologies and have enough capacity to handle the aforementioned operations. On October 7, 2019, the company experienced a fire in the North Carolina facility, located in Garysburg. No person was injured but the fire caused the destruction of equipment and caused JBSS to contract with a third party to meet the production requirements. The company currently plans to permanently cease all operations at this facility after the current shelling is over which is estimated to take approximately sixteen months. This event did not have repercussions on the stock price as after the accident the stock reached all times highs.

The company is working on expanding its reach. JBSS is doing so by promoting its products in airports, fitness centers, hotels and by building a strong social media presence through influencers. JBSS has also expanded its branded portfolio on Amazon which allows them to have an eCommerce presence. In my opinion, this is something that in the future will be very important for the company as people’s shopping habits are slowly changing and moving towards digital channels.

What has the stock done lately?

JBSS was incorporated into the AIM small-cap equity fund on April 20th, 2018. The stock was purchased at a price of $58.33 and since then it increased to $77.18 surpassing the estimated price target of $70.49. Since its addition, JBSS contributed to the small-cap portfolio with a 32.3% upside. After reaching an all-time high of $107.86 in November 2019 the stock sank 27%. This is mainly due to insiders selling. The COO, Jasper Sanfilippo, sold in a single transaction $923k worth of shares at a price of US$98.15 each. The stock is currently trading at $79.74.

Past Year Performance: 

Since last year, JBSS has increased ~10% in value. Net sales have decreased by 12.7 million, or 1.4%. This was mainly driven by customer shift in buying lower-priced nuts instead of higher-priced ones. This was offset by an increase in sales volume that allowed gross profit and diluted earnings to grow by respectively 18.1% and 21.8 %. During the past year, the company’s strong financial position allowed to pay $29.1 million worth of cash dividends.


Source: FactSet
My Takeaway

With the stock relying on the variable price of the nuts, I believe that the stock can be threatened by a future increase in the rise of the crops.  Besides, the stock heavily depends on a few customers: Walmart accounts for one-third of the sales while Target accounts for about 10%. A possible rupture in one of these connections might affect the company ability to keep increasing margins. I believe that the recent drop in stock price reflects these risks and the insider selling might be the sign of a lack of confidence in the company. However, I think that the stock has shown what is capable of, and I believe that the company’s strong brand portfolio and good recognition are going to help JBSS to reach its previous 52-weeks high. In addition, the strong financial position, allowing to pay special dividends and increasing regular dividends are reasons why I rate this stock a hold.


Source: FactSet

A Current AIM International Equity Holding: Nippon Telegraph and Telephone Corporation Sponsored ADR (NTTYY, $25.50): “Strategic Shifts Complement Original Drivers as Company Begins an Exciting Year”


Nippon Telegraph and Telephone Corporation Sponsored ADR (NTTYY, $25.50): “Strategic Shifts Complement Original Drivers as Company Begins an Exciting Year”
By: Adán Jiménez, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Nippon Telegraph and Telephone Corp. (OTCM: NTTYY) is the fourth largest telecommunications company in the world with a market cap of 92 Billion USD. The company was founded as a state monopoly in 1952 but was later privatized and began trading publicly in 1987. Naturally, it has remained the largest telecom company in Japan and currently serves about 80 million individuals and organizations including over 80% of the top 100 companies in the Global Fortune 500. It is headquartered in Tokyo.

• NTT operates globally but generates about 80% of its revenue from Japan, where companies and individuals alike value internet technology tremendously. NTT largely focuses on the provision of fiber internet connections instead of traditional cable packages. Fiber internet is much quicker and more reliable than cable, warranting premium pricing.

Japan continues to face low economic growth, even more so after a sales tax increase from 8-10% in October. An aging population and plans of hiring more skilled employees in an extremely low unemployment environment presents further challenges. Internationally, the company has continued to increase its footprint and has stated that they have plans of increasing capital investment significantly in 2020.

Key points: 

NTT has established itself as a massive value company. It controls most of the market in Japan and has a stake in over 70 countries in the world. Still, the telecom industry is well into its maturity stage and revenue growth is low. Management has stated that they are shifting their strategic focus on rationalization of company operations as well as expansion in high margin segments. In FY Ended March 2019, NYY increased operating profit in each of its major segments—including a 20% increase in the data communications segment.

The telecom industry is facing increasing competition from tech companies like Google, who have recently launched an initiative to supply companies with fiber optic internet services. NTT has recognized that they need to make innovative strides to combat new competition and have done so in a several ways. NTT has signed an agreement with Yokohama, the second largest city in Japan, to implement AI and big data to provide government solutions that match the needs of its residents. The company also has plans to have 5G coverage across Tokyo this year and unveil its smart stadiums at the 2020 Olympics which will provide fans Wi-Fi connectivity, the ability to livestream multiple events at once, and even order food from their phones.

NTT has rapidly increased its strategic focus on building data centers internationally. Data centers are physical spaces that house the computer technology that serve as the infrastructure for many business networks. There is currently a high level of competition in this space, but management recognizes it as an opportunity for bottom line growth.  In order to rationalize operations, the company plans to expand these operations in areas that clients have expressed high demand and sell off centers in underperforming segments.

What has the stock done lately?

Following the Q3 earnings call on February 6th NTT stock dropped 2%, likely because the company reported a decrease in operating income of 70 million USD YoY. This drop is largely immaterial as short-term volatility in a large cap stock is expected.


Source: FactSet

Past Year Performance:

NTT stock has increased 23% this year and is hovering near its all-time high of $26.27 in November of 2017. The stock price rose steadily following the end of FY2018 and especially after the annual report was released in early May 2019. Some of the highlights of the annual report include a 3.2% increase in operating profit, a 5.8% increase in revenue and 20% increase in operating profit of the Data Communications segment, and strong plans of global expansion, rationalization, and innovative transformation.
Source: FactSet
My Takeaway

Nippon Telegraph and Telephone Corp. was added to the AIM International Equity Fund in February 2018 at $23.90* with a price target of $25.96*. Although the stock has only returned 6.7% since its addition, the original drivers continue to yield value. One of these drivers is Nippon’s B2B2X (Business to Business to End User) strategy in which NTT provides the infrastructure necessary for service providers to better serve their customers with high-speed fiber networks. This is playing a major part in the company’s involvement in the 2020 Olympic Games in Tokyo, which will be a time of high visibility where NTT can showcase its powerful technology. Nippon also shows promise of increased global expansion as management has recognized opportunities in high margin areas (particularly data centers) and plans to make major capital investments in strong markets. If the company continues to implement innovative strategies that combat the changing industry with the power of their massive resources, it will be well positioned to derive shareholder value. 2020 looks to be a promising year where many of the original drivers of this stock will begin to unfold more visibly and for these reasons, it is recommended that NTT be held in the AIM International Equity portfolio.
*these numbers have been adjusted following a 2-for-1 stock split in December 2019

A Current @MarquetteAIM International Equity Holding: Manulife (MFC, $19.95): “Can Manulife Bring the Industry Back to Life?”

Manulife (MFC, $19.95): “Can Manulife bring the industry back to life?”
By: Joseph Vitrano, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

Manulife (NYSE:MFC) provides insurance products for individuals and businesses. Their products include health, travel, and life insurance, group benefits, group retirement, investments, wealth management, and banking. These products are offered in Canada where Manulife is headquartered. They also offer various services across the twenty-two countries they are in.
• Canada’s Central Bank Rate is still 1.75% since October 8, 2019. Canada’s yield curve is inverted by 14.6 bps (10-2yr).
•MFC missed Q3 earnings projections, actual EPS was 30 cents, while forecasted EPS was 78-79 cents.
•The Coronavirus Could have a negative impact on Manulife’s Asian branches, due to an increase in claims.
•Slowing GDP growth may lead to Central rate cut. There is consistent unemployment at 5.5% and inflation at 2.2%.
•John Hancock a Manulife subsidiary will collaborate with Human API to create an easier life insurance buying process.

Key points: 

Manulife’s most recent earnings miss was caused by investment-related experience charges, and a $0.5 billion charge due to a change in the Ultimate Reinvestment Rate. The Ultimate Reinvestment Rate is controlled by the Canadian Actuarial Standards Board. Since these charges appear to be non-recurring, this earnings miss isn’t a reason to sell. Core earnings also stayed consistent with 2018 Q3 numbers at $1.5 Billion. New business value improved by 14% compared to 2018 at $526 million.

The Coronavirus death toll has rose to 908, which is higher than the SARS epidemic according to The New York Times. If the Coronavirus death toll continues to rise it could affect life insurance claims in Asia. At the moment it looks like the Coronavirus is being identified quickly and infected are being quarantined. This factor will need to be monitored in the future.

Although Canada is not a center for growth, the US and Asia look to be more promising markets in the future. Manulife CEO Michael Doughty has been focusing on the future of technology as it relates to Manulife. They partnered with Apple to give deals on Apple Watches. Now they are working with Human API to connect health data and life insurance. The collaboration will allow health records to be instantly sent to John Hancock a subsidiary of Manulife. This will make insurance purchases significantly easier. Michael Doughty wants people to choose to pay for life insurance over the other common subscription services. To do this he knows that it will take ease of use, and assurance of value. This process should boost sales in the US, and if it can be replicated elsewhere should help to gain Manulife market share.

What has the stock done lately?

The Stock has fallen from $21.16 to $19.95. This is a decrease of 5.7 percent. This decline can possibly be explained by the Coronavirus outbreak. The decline started early January, and it happened after hitting an all time high since the 2008 recession.

Past Year Performance: 

Manulife’s stock price has grown from $16.23 to $19.95, a 22.9% increase. It continues to perform well due to its cost cutting measures and growth opportunities in Asia. Manulife outperformed the MSCI Canada Index which grew 9.9% over the past year. Manulife is able benefit from outside growth while being in a stable country like Canada.

Source: FactSet

My Takeaway
It is my recommendation that Manulife continue to be held in the AIM International Equity Fund. Robby Metcalf had it right when he described Manulife’s commitment to innovation and technology. While life insurance as an industry seems unexciting and low in growth potential, Manulife is discovering ways to get past that. CEO Michael Doughty knows that they need to justify monthly premiums that millennials could be spending on entertainment subscriptions. To do that they are moving to make purchasing it as easy as possible and keep premiums affordable based upon updated health information. While the Coronavirus may initially increase claims in Asia, it also likely will encourage the purchase of life insurance policies and eventually create opportunity for Manulife.

Source: FactSet


Marquette AIM Students Have Generated Strong Performance in the AIM Small Cap Fund - 2020 Returns Besting the Benchmark

Marquette AIM Small Cap Equity Fund Performance and Holdings - Strong Long-Term Returns

Marquette AIM Students Have Generated Strong Performance in the AIM Funds

View the returns and holdings here.

On a year-to-date basis the AIM Small Cap Equity Fund is up 3.35% versus the benchmark (+0.74%). The 3-year, 5-year and 10-year returns are excellent.

 The following tables show the returns as of 2/22/2020 and the current holdings.



Saturday, February 22, 2020

Marquette AIM International Fund Performance and Holdings - Excellent Returns and Broad Diversification

Marquette AIM Students Have Generated Strong Performance in the AIM International Fund

View the returns and holdings here.

On a year-to-date basis the AIM International Fund is up 0.62% versus the benchmark (-1.71%). The 1-year and 3-year returns are excellent and hopefully the strong performance continues which can boost the 5-year and 10-year numbers.

The following tables show the returns as of 2/22/2020 and the current holdings.