Offshore
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Dimitry Nakhla | Babylon Capital®
Two months ago I stated:
“I’d be more interested in $TMO closer to $500💵 (8% below today’s price) where I can reasonably expect ~11% to ~12% CAGR while assuming a 23x - 24x end multiple, ensuring a margin of safety”
$TMO traded at my target price for less than 24 hours 📈 https://t.co/r2awaMkY7L
A sober valuation analysis on $TMO 🧘🏽♂️
•NTM P/E Ratio: 23.68x
•5-Year Mean: 24.92x
•NTM FCF Yield: 4.09%
•5-Year Mean: 3.59%
As you can see, $TMO appears to be trading near fair value
Going forward, investors can receive ~5% MORE in earnings per share & ~14% MORE in FCF per share 🧠***
Before we get into valuation, let’s take a look at why $TMO is a great business
BALANCE SHEET🆗
•Cash & Short-Term Inv: $6.65B
•Long-Term Debt: $31.20B
$TMO has a good balance sheet (acquisitions a big growth driver), a A- S&P Credit Rating & 6x FFO Interest Coverage
RETURN ON CAPITAL✅*
•2019: 8.3%
•2020: 13.4%
•2021: 12.8%
•2022: 10.3%
•2023: 8.7%
•LTM: 8.6%
*lower ROIC due to acquisition strategy
RETURN ON EQUITY✅
•2019: 12.9%
•2020: 19.9%
•2021: 20.5%
•2022: 16.4%
•2023: 13.1%
•LTM: 12.9%
$TMO has strong return metrics, highlighting the financial efficiency of the business
REVENUES✅
•2013: $13.09B
•2023: $42.86B
•CAGR: 12.59%
FREE CASH FLOW✅
•2013: $1.73B
•2023: $6.93B
•CAGR: 14.88%
NORMALIZED EPS✅
•2013: $5.42
•2023: $21.55
•CAGR: 14.80%
SHARE BUYBACKS❌
•2013 Shares Outstanding: 365.80M
•LTM Shares Outstanding: 384.25M
MARGINS✅
•LTM Gross Margins: 40.7%
•LTM Operating Margins: 17.4%
•LTM Net Income Margins: 14.5%
***NOW TO VALUATION 🧠
As stated above, investors can expect to receive ~5% MORE in EPS & ~14% MORE in FCF per share
Using Benjamin Graham’s 2G rule of thumb, $TMO has to grow earnings at an 11.84% CAGR over the next several years to justify its valuation
Today, analysts anticipate 2025 - 2026 EPS growth over the next few years to be less than the (11.84%) required growth rate:
2024E: $21.70 (0.7% YoY) *FY Dec
2025E: $23.58 (8.7% YoY)
2026E: $26.37 (11.8% YoY)
$TMO has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $TMO ends 2026 with $26.37 in EPS & see its CAGR potential assuming different multiples
27x P/E: $711.99💵 … ~14.0% CAGR
26x P/E: $685.62💵 … ~12.0% CAGR
25x P/E: $659.25💵 … ~10.0% CAGR
24x P/E: $632.88💵 … ~7.9% CAGR
As you can see, $TMO appears to have attractive return potential IF we assume >26x earnings (a multiple above its 5-year mean & multiple that may be slightly demanding given its growth rate
However, $TMO is an excellent business with a wide moat & will benefit from future ongoing sector demand
Yet, those buying $TMO today at $541💵 are buying it for a fair price, with little margin of safety
I’d be more interested in $TMO closer to $500💵 (8% below today’s price) where I can reasonably expect ~11% to ~12% CAGR while assuming a 23x - 24x end multiple, ensuring a comfortable margin of safety
#stocks #investing
___
𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.
𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.
𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢[...]
Two months ago I stated:
“I’d be more interested in $TMO closer to $500💵 (8% below today’s price) where I can reasonably expect ~11% to ~12% CAGR while assuming a 23x - 24x end multiple, ensuring a margin of safety”
$TMO traded at my target price for less than 24 hours 📈 https://t.co/r2awaMkY7L
A sober valuation analysis on $TMO 🧘🏽♂️
•NTM P/E Ratio: 23.68x
•5-Year Mean: 24.92x
•NTM FCF Yield: 4.09%
•5-Year Mean: 3.59%
As you can see, $TMO appears to be trading near fair value
Going forward, investors can receive ~5% MORE in earnings per share & ~14% MORE in FCF per share 🧠***
Before we get into valuation, let’s take a look at why $TMO is a great business
BALANCE SHEET🆗
•Cash & Short-Term Inv: $6.65B
•Long-Term Debt: $31.20B
$TMO has a good balance sheet (acquisitions a big growth driver), a A- S&P Credit Rating & 6x FFO Interest Coverage
RETURN ON CAPITAL✅*
•2019: 8.3%
•2020: 13.4%
•2021: 12.8%
•2022: 10.3%
•2023: 8.7%
•LTM: 8.6%
*lower ROIC due to acquisition strategy
RETURN ON EQUITY✅
•2019: 12.9%
•2020: 19.9%
•2021: 20.5%
•2022: 16.4%
•2023: 13.1%
•LTM: 12.9%
$TMO has strong return metrics, highlighting the financial efficiency of the business
REVENUES✅
•2013: $13.09B
•2023: $42.86B
•CAGR: 12.59%
FREE CASH FLOW✅
•2013: $1.73B
•2023: $6.93B
•CAGR: 14.88%
NORMALIZED EPS✅
•2013: $5.42
•2023: $21.55
•CAGR: 14.80%
SHARE BUYBACKS❌
•2013 Shares Outstanding: 365.80M
•LTM Shares Outstanding: 384.25M
MARGINS✅
•LTM Gross Margins: 40.7%
•LTM Operating Margins: 17.4%
•LTM Net Income Margins: 14.5%
***NOW TO VALUATION 🧠
As stated above, investors can expect to receive ~5% MORE in EPS & ~14% MORE in FCF per share
Using Benjamin Graham’s 2G rule of thumb, $TMO has to grow earnings at an 11.84% CAGR over the next several years to justify its valuation
Today, analysts anticipate 2025 - 2026 EPS growth over the next few years to be less than the (11.84%) required growth rate:
2024E: $21.70 (0.7% YoY) *FY Dec
2025E: $23.58 (8.7% YoY)
2026E: $26.37 (11.8% YoY)
$TMO has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $TMO ends 2026 with $26.37 in EPS & see its CAGR potential assuming different multiples
27x P/E: $711.99💵 … ~14.0% CAGR
26x P/E: $685.62💵 … ~12.0% CAGR
25x P/E: $659.25💵 … ~10.0% CAGR
24x P/E: $632.88💵 … ~7.9% CAGR
As you can see, $TMO appears to have attractive return potential IF we assume >26x earnings (a multiple above its 5-year mean & multiple that may be slightly demanding given its growth rate
However, $TMO is an excellent business with a wide moat & will benefit from future ongoing sector demand
Yet, those buying $TMO today at $541💵 are buying it for a fair price, with little margin of safety
I’d be more interested in $TMO closer to $500💵 (8% below today’s price) where I can reasonably expect ~11% to ~12% CAGR while assuming a 23x - 24x end multiple, ensuring a comfortable margin of safety
#stocks #investing
___
𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.
𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.
𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢[...]
Offshore
Dimitry Nakhla | Babylon Capital® Two months ago I stated: “I’d be more interested in $TMO closer to $500💵 (8% below today’s price) where I can reasonably expect ~11% to ~12% CAGR while assuming a 23x - 24x end multiple, ensuring a margin of safety” $TMO…
𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲. - Dimitry Nakhla | Babylon Capital® tweet
Offshore
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Investing visuals
Tesla $TSLA key metrics overview: gross & free cash flow margins are stabilizing. Will 2025 be the year where margins will improve for $TSLA? https://t.co/Gr6DmxINir
tweet
Tesla $TSLA key metrics overview: gross & free cash flow margins are stabilizing. Will 2025 be the year where margins will improve for $TSLA? https://t.co/Gr6DmxINir
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Offshore
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Quiver Quantitative
RT @QuiverCongress: We just received text from the Laken Riley Act, introduced by @RepMikeCollins.
The House is set to vote on it on Thursday.
Here it is: https://t.co/l2gDriL7z6
tweet
RT @QuiverCongress: We just received text from the Laken Riley Act, introduced by @RepMikeCollins.
The House is set to vote on it on Thursday.
Here it is: https://t.co/l2gDriL7z6
tweet
AkhenOsiris
UBER
Prashanth Mahendra-Rajah, a representative of Uber, expressed that the company is poised to increase its free cash flows substantially, which will support its strategy to enhance shareholder returns while sustaining growth investments. He also noted Uber's view that its stock is currently undervalued in relation to the robustness of its business operations.
tweet
UBER
Prashanth Mahendra-Rajah, a representative of Uber, expressed that the company is poised to increase its free cash flows substantially, which will support its strategy to enhance shareholder returns while sustaining growth investments. He also noted Uber's view that its stock is currently undervalued in relation to the robustness of its business operations.
tweet
Offshore
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AkhenOsiris
RT @RadnorCapital: Bullish Vertiv $VRT initiation at Morgan Stanley - summary below:
He says the opportunity is too attractive to ignore and the stock is trading at the lowest growth adj multiple across his universe w/ best-in-class revisions on the come….he is more confident than cons on the durability of the growth. Data Center Construction & Hyperscaler Capex have grown +200% since the start of 2020 vs. VRT organic rev growth of +90%, a lag that likely reflects construction bottlenecks + lead times. Given VRT's underlying content intensity, he expects company revenue to outpace construction activity (not lag) as VRT should receive higher revenue per gigawatt (GW) of capacity added w/ rising thermal requirements needed to support ever growing rack densities. After ramping incrementals at a 55% rate in 2023-24, cons forecasts a sharp fall-off to ~30% in 2025-26 despite accelerating topline. He thinks Consensus modeling under-appreciates the significant GM expansion that VRT through its innovation & ability to allow customers to scale quicker – his math supports sustained incrementals in the mid 30%+ range….his $150 base case PT (+15% upside) is ~33-34x ‘25/26 blended EPS of $4.47 I own Vertiv $VRT (leader in power / cooling solutions for several end markets, but most importantly, data centers) and will continue to own. I’d imagine the stock continues to run into earnings on 2/21 after strong data center capex commentary from the hyper scalers and robust trends from other AI / data center beneficiaries like Super Micro $SMCI (there is a very linear correlation between cloud capex and Vertiv demand).
Vertiv came public in February 2020 via SPAC. The sponsor was Dave Cote, the legendary CEO that turned around Honeywell $HON. This is like Satya Nadella forming a SPAC and buying an enterprise software company. These guys have domain expertise and domain dominance.
This is a good (not great) company benefiting from a massively rising tide. Its also the biggest pure play available to ride that tide. My thesis is based on a few key points: market for data center power / precision cooling is exploding, gaining market share, and upside to numbers (at a reasonable valuation). I say good (not great) because while their solutions are certainly not commoditized, they are replicable (more similar to Super Micro than Nvidia $NVDA in terms of proprietary technology / margin profile) and they also had some execution hiccups around the pandemic (although under a different management team). I will further discuss these points below:
The first point to mention is the durability of data center / AI capex, because everything else is downstream. Everyone from Microsoft $MSFT and Google $GOOGL to Super Micro and TSMC $TSM and Eaton $ETN / Trane $TT continues to be extremely optimistic about this trend continuing. Importantly, Microsoft spoke on their earnings call about inference use cases taking shape, showing the economic benefits of these outsized AI investments. This should put to bed the belief that there could be an “air pocket” in demand on the horizon. The transition from traditional CPU-focused servers to GPU-powered AI servers will take a long time and drive growth for the foreseeable future. My belief in this multi year wave is also underscored by record order pipelines and backlog – I expect orders to grow in excess of backlog again in 2024. Comments from management suggest current demand could take 3-4 years to work through.
The data centers running those AI servers generate 5x more heat / power than traditional CPU servers and require 10x more cooling per square foot. ~75% of Vertiv’s business is power and cooling related infrastructure, with the balance largely being services like maintenance, installation, remote monitoring, etc.
Vertiv has announced plans to double its production capacity for electrical switchgear and busway over the 2023-[...]
RT @RadnorCapital: Bullish Vertiv $VRT initiation at Morgan Stanley - summary below:
He says the opportunity is too attractive to ignore and the stock is trading at the lowest growth adj multiple across his universe w/ best-in-class revisions on the come….he is more confident than cons on the durability of the growth. Data Center Construction & Hyperscaler Capex have grown +200% since the start of 2020 vs. VRT organic rev growth of +90%, a lag that likely reflects construction bottlenecks + lead times. Given VRT's underlying content intensity, he expects company revenue to outpace construction activity (not lag) as VRT should receive higher revenue per gigawatt (GW) of capacity added w/ rising thermal requirements needed to support ever growing rack densities. After ramping incrementals at a 55% rate in 2023-24, cons forecasts a sharp fall-off to ~30% in 2025-26 despite accelerating topline. He thinks Consensus modeling under-appreciates the significant GM expansion that VRT through its innovation & ability to allow customers to scale quicker – his math supports sustained incrementals in the mid 30%+ range….his $150 base case PT (+15% upside) is ~33-34x ‘25/26 blended EPS of $4.47 I own Vertiv $VRT (leader in power / cooling solutions for several end markets, but most importantly, data centers) and will continue to own. I’d imagine the stock continues to run into earnings on 2/21 after strong data center capex commentary from the hyper scalers and robust trends from other AI / data center beneficiaries like Super Micro $SMCI (there is a very linear correlation between cloud capex and Vertiv demand).
Vertiv came public in February 2020 via SPAC. The sponsor was Dave Cote, the legendary CEO that turned around Honeywell $HON. This is like Satya Nadella forming a SPAC and buying an enterprise software company. These guys have domain expertise and domain dominance.
This is a good (not great) company benefiting from a massively rising tide. Its also the biggest pure play available to ride that tide. My thesis is based on a few key points: market for data center power / precision cooling is exploding, gaining market share, and upside to numbers (at a reasonable valuation). I say good (not great) because while their solutions are certainly not commoditized, they are replicable (more similar to Super Micro than Nvidia $NVDA in terms of proprietary technology / margin profile) and they also had some execution hiccups around the pandemic (although under a different management team). I will further discuss these points below:
The first point to mention is the durability of data center / AI capex, because everything else is downstream. Everyone from Microsoft $MSFT and Google $GOOGL to Super Micro and TSMC $TSM and Eaton $ETN / Trane $TT continues to be extremely optimistic about this trend continuing. Importantly, Microsoft spoke on their earnings call about inference use cases taking shape, showing the economic benefits of these outsized AI investments. This should put to bed the belief that there could be an “air pocket” in demand on the horizon. The transition from traditional CPU-focused servers to GPU-powered AI servers will take a long time and drive growth for the foreseeable future. My belief in this multi year wave is also underscored by record order pipelines and backlog – I expect orders to grow in excess of backlog again in 2024. Comments from management suggest current demand could take 3-4 years to work through.
The data centers running those AI servers generate 5x more heat / power than traditional CPU servers and require 10x more cooling per square foot. ~75% of Vertiv’s business is power and cooling related infrastructure, with the balance largely being services like maintenance, installation, remote monitoring, etc.
Vertiv has announced plans to double its production capacity for electrical switchgear and busway over the 2023-[...]