British American Tobacco – Invest With Care, But Upside Remains (NYSE:BTI)

Obviously, my previous purchase of British American Tobacco (BTI) in January of 2020 currently stands at negative returns – though this is only part of my rather respectable, 0.8%-weighting British American Tobacco stake. The pandemic threw everything into chaos, and this included the tobacco giants, all 3 of which – Philip Morris International (PM), Altria (MO), and British American Tobacco – I own.

However, what’s important here are the underlying fundamentals and the valuation we’re seeing for the company, as well as how the safeties during and after the pandemic are looking.

And as far as those things go, things aren’t just looking good, they’re looking pretty great for this tobacco giant.

British American Tobacco – How has the company been doing?

In my latest article, I showed you a quick overview of the company as well as its businesses, safeties, and everything related to it which I viewed to be relevant to investment consideration. The company that owns Lucky Strike needs little introduction, but it’s sometimes healthy to just go back and see exactly how a company’s portfolio looks.

Like other large tobacco companies, BTI walks the tightrope between appealing to vaping/smokeless product users and traditional users of combustible tobacco products such as cigarettes and related products. And like its two peers, the company does this remarkably well if we look at overall company performance.

Reporting-wise, we have a very recent market update as of the period commencing during 1st of July 2020. As of this time, BTI sees:

  • Continued volume growth across the combustible business, indicating a development opposed to overall expectations (where combustible consumable products would be expected to decline).
  • Continued growth in the three new categories of sales, vapour tobacco heating and modern oral products.
  • Excellent results in developed markets, with strong pricing and very little downtrending acceleration. The business performed particularly well in the US segment, which BTI considers extremely resilient in the face of COVID-19.
  • Negative impacts and flow can be seen more in markets like Asia (Bangladesh, Vietnam, Malaysia), and closing measures in South Africa, Mexico and Argentina have persisted longer than BTI expected, affecting overall sales. In South Africa, there is a COVID-19 tobacco sales ban which currently shows no sign of being lifted.

The company has announced an impact on international travel retail sales, which means that the current FY guidance as of essentially 1H20 is expected to be around 3% on a constant currency basis. Because of this, the company now “only” expects a constant current adjusted Rev. growth of 1-3%. I consider this still to be very positive all things considered.

BTI’s focus is increasing on its new categories business, with share growth (as mentioned) across all categories. The company has recently launched products in THP, and while COVID-19 has disrupted expected growth and led to some scaling back and postponements of launches, things in these categories are going well, and BTI is expected to grow more into these categories with its £5B target for 2025.

Given these headwinds yet continued expected industry development, BTI guides for:

  1. Mid-single figure FX-adjusted EPS growth (down from high single figure).
  2. Continued deleveraging with the goal of 3X adj. net debt to adjusted EBITDA by FY21 (previously below 3X).
  3. Continued dividend payout of 65% of adj. diluted EPS, keeping dividends stable.

The company expects continued growth in cigarettes, strong US growth, good operating margins, and strong cash flow conversions above 90% of adj. profits from operations – all more or less as expected before, with the added problems of COVID-19 lockdowns in key markets.

(Source: CNC markets)

So – BTI has done well overall, with volume and sales growth, yet some issues persist and have been added to by the coming and persisting effects of COVID-19. The market-changing trends in tobacco haven’t materialized in key markets (such as the US), and there are no signs that such trends would materialize in markets that are as yet shut down, once they open back up.

During the depths of COVID-19 (here in Europe/Sweden, the USA can still be said to be in the depths of the COVID-19 crisis, while as of writing this article, numbers and deaths are down to single digits in Sweden, at least), there was an extensive argument against tobacco as a whole and a somewhat illusory expectation that the crisis would cause an en masse exodus from the usage of tobacco.

There is no evidence or indication as of yet that this is the case.

With that said, let’s move onto valuation.

British American Tobacco – What’s the valuation?

Things are continually looking good here in terms of company valuation. Take a look at what’s happened to the company as of late.

(Source: F.A.S.T Graphs)

The valuation has become completely disconnected from the earnings trends and growth expectations. Yes, we won’t be seeing 20-30% earnings growth trends like we did 10+ years ago, which drove the company to at times trade at a premium. However, the company dropped essentially at a time when they came out of an earnings slump, growing EPS by 28% back in 2017. For some reason, the market believes that BTI simply won’t be succeeding all that much going forward. Trends and forecasts at this time do not support this conclusion, marking the company as an undervalued investment.

(Source: F.A.S.T graphs)

Even trading perfectly sideways in terms of valuation, and expecting only the sort of single-digit EPS growth the company forecasts, your returns investing today would be in double digits. If we start to expect the company moving back towards normal valuation multiples, returns start to move into the 15-20% annual range, with a return to “fair” value generating a 25% annual rate of return based on current earnings forecasts.

Analysts aren’t historically poor at forecasting BTI, having an 82% accuracy ratio on a 1-year basis with a 10% margin of error, and over the past 10 years, they’ve never been off more than 14% back in 2014. This is a pretty good track record, and a pretty good return potential, looking at this company.

So, what is the reason I’m not endorsing or often buying more BTI as opposed to some of the other companies I often write about? Well, BTI does come with some caveats which need to be considered, beyond the simple fact that it’s a tobacco company. These are considerations I make according to my system, which I’ve come to call QO-system (standing for Quality/Opportunity).

First, and perhaps most damning, there’s the fact that BTI shares an almost Swedish-like lack of care for its dividend record. The current interrupted dividend streak for BTI is a whole, whopping 2 years. This immediately disqualifies it as any sort of reliable stock in terms of DG investment, and pushes it down to class 4, regardless of its BBB+ credit rating, relatively acceptable payout ratio and high yield. The dividend safety is paramount when it comes to my rating a stock in the QO-system, and the low dividend streak also means BTI sports a “Borderline” dividend safety with a fairly low dividend growth, all things considered.

This pushes BTI – different than Altria and Philip Morris – into what I would consider more speculative territory. Not because the segment is speculative or because I believe the company may face trouble – there’s simply very little saying how the company will perform for shareholders in the long term, or when it decides to once again cut the dividend in accordance with its policy.

Otherwise and other than that, BTI is actually quite an excellent stock and seems to be an excellent investment. The problem here is relational – relational in the sense that you can buy 6.56%-yielding Philip Morris, with a better credit rating, dividend streak, and management considered “Exemplary” by Morningstar. In my system, this simply makes Philip Morris, a class 2 stock, the better choice. Even class-3 stock Altria, with its 50-year dividend streak (class 3 due to payout ratio and considered dividend safety at “borderline”) and a yield of 8.53% is better compared to this tobacco company at this time if I go by my way of judging stocks.

In a world by itself, BTI is a “BUY” and a qualitative stock, even if it’s marred by dividend safety issues. Its products aren’t going anywhere, and I own a sizeable 0.5% stake in BTI in my portfolio.

However, I didn’t invest in BTI until my stakes in Altria and Philip Morris were at a size where I considered them “filled”. That’s the real rub here, and it brings me to my thesis.


If you’re at a maximized exposure to companies like Altria and Philip Morris, yet feel as though you want more tobacco, then BTI becomes an excellent potential choice for you at a superb yield. Despite lacking the same sort of dividend safety, this company will no doubt (in my mind) succeed in the long term, and the fundamental risks to the company are ones I considered comparatively “small”. Because of this, BTI becomes a “BUY” – and that’s also the stance of this article. There is a 26% upside to the stock at a conservative target, as I see it.

However, if you take a look at your portfolio and see that Altria and Philip Morris aren’t either in it, or at a lacking size, then I would consider you look at these companies before looking at British American Tobacco. From a dividend safety, quality, and fundamental perspective, I see very little reason to pick BTI over these two – this is also how I’ve invested in Tobacco.

Let me know if you agree or disagree, and how you’ve invested (if at all) in the sector – and send me any questions or comments you may have here.

Thank you for reading.


British American Tobacco is a “BUY” with a 26% potential upside at an excellent yield with acceptable safeties, even if other tobacco companies should be considered first.

Disclosure: I am/we are long BTI, MO, PM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.

I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles.

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Major Upside In Eldorado Gold As Billions Of Dollars Of Assets Are Being Valued At $0 (NYSE:EGO)

In this current gold bull market, I want to own a solid basket of gold miners that not only provide compelling value, but that have bullish catalysts that could quickly unlock that value.

One stock in my portfolio is Eldorado Gold (EGO).

In 2017-2018, the market became overly bearish on Eldorado, as investors assumed that key assets (Kisladag, Skouries, and Olympias) suddenly had zero value. EGO was being priced as if none of these mines would ever generate a single dollar of free cash flow in the future. The market cap of the company plunged, which was preposterous considering that: 1) Eldorado had many outs, as at least one of these mines was going to work (and likely all three within time), and 2) Even if the trio of aforementioned assets never produced an ounce of gold from that point forward, EGO was still trading under fair value given the remaining assets.

The more EGO declined in 2018, the more I added because I felt the bearish thesis was way off the mark.

The HUI is an index of gold stocks. Eldorado’s stock has almost tripled the performance of this index since the start of 2019. At one point, EGO was up 300% from the lows of early last year. In this article, I will explain what caused the resurgence in the shares, and how the market is still underpricing EGO.

Data by YCharts

Kisladag Responded To Longer Leach Cycles, Allowing Eldorado to Forgo Building $500 Million Mill

In 2017, Eldorado’s flagship Kisladag gold mine in Turkey started to experience much lower recoveries from the heap leach. Normal recoveries were in the 60-65% range at the mine; suddenly the company was only seeing them in the low 40% range.

Eldorado explored options to boost recoveries and determined that building a mill would be the best path forward. The mill, however, would cost over $500 million, take several years to complete, and be a significant drain on the company’s sizable cash position.

Investors severely punished EGO and treated the news as if Kisladag was a worthless asset at that point. But as I stated after this news was released:

Either way, it’s likely that Eldorado will be mining Kisladag for many years to come. The only question is how will the ore be processed in the future? The market is punishing EGO and treating this news as if Kisladag will be a total loss. But I don’t believe that will be the case. I don’t think it’s accurate to place zero value on this asset. I don’t know how you make that jump.

This is an operation that at the start of the year had an expected 20-year mine life remaining, and it has already produced 2.5-3.0 million ounces of gold since it first entered production 11 years ago. There is a proven track record here.

While the decision to build the mill was being contemplated (and then ultimately approved by the board), Eldorado was testing to see if the ore at Kisladag would respond to longer leach cycles. The company was originally testing using 90-day leach cycles, which produced recoveries in that low 40% range. However, they kept adding solution to the test pad and column tests and discovered that a 250-day leaching cycle resulted in 58% recoveries — very close to where recoveries were a few years ago before this problem presented itself.

(Source: Eldorado Gold)

This positive recovery data was coming in right about the time that the board approved the mill project. Over the months that followed, the company conducted additional test-work and analysis on the viability of resuming mining and heap leaching at Kisladag. It was determined that a revised heap leaching plan resulted “in favorable economics when compared to milling,” and Eldorado announced in early 2019 that they were suspending the mill project at Kisladag and instead would be resuming mining and heap leaching.

EGO surged on this announcement.

Before the news, the mine was expected to see a sharp drop off in output during 2019 and 2020 while the mill was being built. Production would eventually recover in 2021 when the mill came online, but negative free cash flow leading up to that point would be ~$500 million due to the Capex requirements for the mill.

(Source: Eldorado Gold)

With the mill now not needed, the updated three-year outlook was radically different. Total production from the company would be sharply higher during 2019-2021 compared to the previous guidance, and most important, AISC were expected to come in at $800-$1,000 per ounce during those years. Instead of $500 million of negative free cash flow, Kisladag would be generating close to $200 million of pre-tax cash flow at $1,300 gold over that period.

(Source: Eldorado Gold)

It’s important to note that the entire reserve pit still hadn’t been fully tested at that point. The cross-section below indicated only a small part of the reserves were showing improved heap leach recovery from the longer leach cycles—the remaining ore required further test work. However, the company seemed confident that they would have similar successful results from this ore. If most of Material B responded favorably, then not only would there be drastically higher output in 2021 than the 75,000-95,000 ounce estimate above, but there would be many years of mine-life added to Kisladag.

(Source: Eldorado Gold)

Earlier this year, Eldorado announced that based on the completed long-cycle heap leach test work, it’s now estimated that Kisladag has a 15-year mine life (through 2034). This news resulted in a near-vertical, 65% move in the share price.

ChartData by YCharts

Proven and Probable mineral reserves at Kisladag now amount to 4.0 million ounces of gold. With a ~56% recovery expected for those ounces, the mine will produce 2.25-2.50 million ounces of gold over those 15 years. The average annual production is 160,000 ounces at an AISC of $800-$850 per ounce. The company provided the following 5-year outlook for the operation.

(Source: Eldorado Gold)

At a gold price of $1,750, the after-tax NPV (5%) is just over US$950 million. There is upside to this NPV as there is potential for further increases in recovery via optimizing the HPGR circuit that is being installed.

(Source: Eldorado Gold)

George Burns, President and CEO of Eldorado, stated:

We are pleased to announce a mine life extension at Kisladag that puts this asset back in the core of our portfolio.

In my opinion, Kisladag never left that core.

The Lamaque Mine In Canada Lowers Jurisdictional Risks And Adds Low-Cost Growth

Eldorado’s Lamaque gold mine in Quebec, Canada, has reached commercial production, with output currently at around 130,000 ounces of gold per year. The company also received the permit to increase output from the Triangle deposit from 1,800 tpd to 2,650 tpd, which will take production to 145,000-155,000 ounces per annum. The company is constructing a decline from the Sigma mill to the Triangle deposit, which will allow for the increase in output while also providing easier access to the recently discovered Ormaque zone and other adjacent exploration targets.

(Source: Eldorado Gold)

The announcement of the Ormaque discovery was made earlier this year, and the overhead map below shows where Ormaque is in relation to the Sigma mill, Triangle deposit, and proposed decline.

(Source: Eldorado Gold)

Both the grade and thickness of some of the intercepts at Ormaque are stout, with the more standout drill results being 16.25m @25.53 g/t and 12.3m @26.82 g/t (true thickness is just over 80% for both drill holes). To put this in context, the current reserve grade at Lamaque is just over 7 g/t. Ormaque will be incorporated into the updated study on Lamaque and represents upside to the current mine plan.

(Source: Eldorado Gold)

For a company that has suffered because of the jurisdictions it operates in, an asset like Lamaque lowers the overall regional risk.

Not A Strong Start To 2020, But Steady Production Expected For The Foreseeable Future

Below is the 5-year outlook for Eldorado. 2020 is expected to see production increase to 520,000-550,000 ounces of gold, and then settle in a range of 450,000-500,000 ounces over the following four years. Kisladag is the difference maker this year, but ~250,000 ounces won’t be sustainable as grade drops. However, as discussed above, output at Lamaque will increase, and there will also be a sharp jump in production at Olympias. Efemcukuru remains a steady, low-cost operation for the company.

(Source: Eldorado Gold)

2020 production was tracking below plan at the end of Q1. All mines except for Lamaque remained online during COVID-19, and Lamaque was only shut down for a few weeks before ramping back up in mid-April. For Kisladag, the company said that heavy rainfall in Q1 led to increased solution volumes from the heap leach, but once the excess solution is processed, all of the gold contained in the solution will be recovered over the spring and summer months. Investors should pay close attention to Q2 and Q3 results from Kisladag; I wouldn’t want to see the mine have recovery issues again. Efemcukuru and Olympias are on target, and I was positively surprised to see Olympias so strong in Q1 (on pace to be at the high end of annual guidance). However, due to low base metal prices and increased treatment charges, AISC for that mine was disappointing. Q2 should be a stronger quarter in terms of production, but Lamaque will likely see a QoQ decline because of the temporary shutdown. I would expect AISC to drop from Q1 levels as well, which means at the current gold price of $1,750+, margins and cash flow will be exceptional.

(Source: Eldorado Gold)

What’s most important for EGO is generating free cash flow and lowering net debt. That’s what’s been missing from this story for the last few years — as spending was out of control. Now spending is well contained, and the company generated $7.2 million of free cash flow in Q1. They also issued about 2 million of stock during the quarter. Overall, net debt declined by about $25 million.

(Source: Eldorado Gold)

The current production profile, though, doesn’t include one key asset.

Skouries Has Been Stalled For Years, But It Could Be The Next Major Bullish Catalyst

For years, the Government of Greece wasn’t issuing the required permits for Eldorado’s Skouries gold/copper project in the country because of disagreements about the flash smelting process that would be used at the metallurgical plant. Eldorado kept going to court over this matter and was victorious each time. Yet, the government still refused to issue the required permits that would allow the company to complete construction of the project. At that point, the entire project was stalled. Eldorado had sunk over $1 billion into infrastructure in the country and little to show for it. The market has been assigning zero value to Skouries over the last several years.

Kyriakos Mitsotakis is a Harvard-educated politician and became the new Prime Minister of Greece in July 2019 after defeating the left-wing Syriza party — which was opposed to Skouries. Mitsotakis is pro-Skouries, and even before the election, he stated that he would issue the permits for the mine within his first month of office if he became PM.

Last September, Eldorado received the electromechanical installation permits for Skouries, which would allow it to restart construction. However, given the company’s past troubles in the country, and considering that it’s not clear how long Mitsotakis will remain PM, Eldorado wants a “stable regulatory framework and assurances that provide appropriate foreign direct investor protection and dispute resolution as well as regulatory approval for subsequent permits and technical studies.

You can’t blame Eldorado for not wanting to sink more money into Skouries and not have any safeguards in place. Skouries will remain on care and maintenance until the company reaches an agreement with the Greek government that establishes an investment framework that protects Eldorado.

Talks with the government are currently on hold as the country deals with COVID-19. A positive resolution this year will be a major bullish catalyst for EGO, but reaching an agreement with the new, pro-business, pro-Skouries administration has taken much longer than expected. There are no guarantees that any progress will be made in 2020.

Eldorado did provide an update last month on several recent developments in Greece, including the announcement that it purchased the 5% of Hellas Gold shares that it didn’t own (giving EGO 100% control of Skouries and the other assets in Greece), as well as the stating that the relocation of certain archeological items from Skouries is to commence (and this was “per the local archeological chamber’s instructions”). Things appear to be happening behind the scenes, perhaps signs of progress. I don’t believe that Eldorado would otherwise be granted permission to relocated archaeological items from Skouries.

The 5-year outlook discussed above doesn’t include Skouries. As to the impact the project would have on Eldorado’s production and cash flow, the mine is expected to produce 140,000 ounces of gold per year at an ASIC of just $215 per ounce thanks to the significant copper by-product credits, and this will be sustained over an exceptionally long 23-year mine life. Development capital remaining is a hefty $700 million, and it will take two years to reach production after construction is restarted. Once the mine is online, it will generate more cash flow than any of Eldorado’s current operations.

(Source: Eldorado Gold)

While the average annual production for Skouries is 140,000 ounces of gold per year over its mine-life, the output is front-end loaded, as during the first three years the mine will produce over 200,000 ounces annually. This is because of higher mill feed grade early on in the mine plan.

(Source: Eldorado Gold)

At $1,500 gold and $3.20 per pound copper, the after-tax NPV (5%) for Skouries is $1.4 billion. At current metal prices, the mine would generate over $1 billion of after-tax cash flow during the first four years. Meanwhile, EGO has a market cap of just under $1.6 billion at the moment.

(Source: Eldorado Gold)

While I discussed Olympias earlier, there is much more to this story. Margins are slim for the mine even at current gold prices, and production is only 50,000-60,000 ounces annually. But once the permit is received for the plant expansion, throughput will increase by more than 50%. When the mine ramps up to the new production level, AISC per ounce of gold will be in negative territory. Olympias, in effect, becomes a ~75,000 ounce per year gold royalty at that stage. The after-tax cash flow in the base case scenario ($1,400 per ounce Au, $18 per ounce Ag, and about 20% higher lead and zinc prices) is just over $1 billion.

(Source: Eldorado Gold)

Eldorado also owns the Perama Hill project in Greece, which had been mothballed, but is now being dusted off.

The ultimate goal for Eldorado is to form a joint venture on Skouries, but I also think it’s possible that any agreement with a strategic partner might be all-encompassing when it comes to the assets in Greece. Not only would this significantly mitigate the risk for EGO (both funding and portfolio risks), but it would also bring in upfront capital. The best news that could happen right now for EGO shareholders would be the announcement of a joint venture on all of the assets in Greece, along with a healthy monetary payment to EGO for any ownership stake that a partner takes.

Valuation Remains Excessively Low

While EGO has been a standout performer over the last year and a half, the enterprise value is only ~$1.85 billion. The assets in Greece alone are worth $2.5+ billion (discounted value) at today’s gold and copper prices. Given that the NPV of Kisladag is $950 million, and considering that Efemcukuru and Lamaque have a combined NPV of around $1 billion (not counting any upside), it can be argued that still no value is being assigned to the Greek assets.

What I said about Kisladag a few years ago applies today to the mines/projects in Greece. In other words, it’s wildly inaccurate to place zero value on these assets; I don’t know how you make that jump.

Skouries and Olympias should have a hefty discount applied to them until they become dependable cash flow generators, but they aren’t worthless.

Nothing is guaranteed when it comes to Greece, and Eldorado certainly hasn’t turned into a low-risk story. However, all signs are pointing to a bullish outcome for Skouries; I believe it’s only a matter of time. If there is positive news on the Greek front, then I believe another 50-100% re-rating in the shares will occur.

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Disclosure: I am/we are long EGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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SS&C Technologies: Steady Dividend Growth With Potential M&A Upside (NASDAQ:SSNC)


We maintain our overweight rating on SS&C Technologies (SSNC), a company developing various software solutions for financial institutions. In our first coverage on the stock last December, we highlighted the company’s strong balance sheet and moat, driven by its presence in a high-barrier and low-switching cost financial industry market. Furthermore, DPS (Dividend Per Share) has also been growing steadily, even during the recent crisis. Against the challenging macro backdrop, SS&C will expect a bit of a slowdown in new sales for the full year. Nonetheless, some catalysts, such as more tuck-in M&As, cost-saving initiatives, and a resilient revenue stream, should allow SS&C to maintain its consistent growth and profitability profile.


SS&C beat its guidance in Q1 and also announced three tuck-in acquisitions, Vidado, Capita, and Innovest. As stated in the company’s presentation, the guidance for the full year has not yet incorporated the revenues from these newly acquired companies.

(Source: Company’s earnings call slide)

Considering that Capita and Innovest generated $42 million and $20 million of revenues in 2019, the full-year revenue should see at least an additional +$62 million upside. Therefore, we think that the revenue outlook for the full year should look even better than the guidance. Despite the lower guidance outlook, profitability for the full year also looks solid across all the recovery scenarios.

Net Income and EPS

(Source: Company’s earnings call slide)

Even under the worst-case scenario, in which SS&C will realize a ~$1 billion net income, the company will still maintain its earnings, EPS, and net margin figures from last year. Furthermore, SS&C can also reportedly take another $50 million to $70 million out of its cost structure, which, in addition to the lowering of its credit facilities’ LIBOR rates from 2.25% to 1.75%, should provide another profitability upside. Nonetheless, we believe that Q3 and Q4 recoveries should look more likely and conservative enough. In June, for instance, SS&C has continued landing key deals such as Mid Atlantic Group, which has chosen SS&C to automate its FINRA reporting.

Revenue Retention Rate

(Source: company’s earnings call slide)

As such, we also believe that SS&C is well-positioned to maintain its resilience during a challenging time. As per the management comment in Q1, the majority of SS&C revenues come from the recurring business, which has been less impacted by the crisis. The ~96% revenue retention rate has also been in line with the historical average, while SS&C’s strong cash flow generation and balance sheet should allow it to reduce its leverage and acquire new companies going forward. In Q1 alone, OCF (Operating Cash Flow) increased by 7.5% to ~$148 million. As the company should expect ~$1.25 billion of OCF for the full year, we think that other acquisitions may be on the map considering SS&C may now have enough room to lever up after paying down its debts. In Q1, SS&C finally completed +$2.1 billion of debt payments related to its takeover of DST Systems in 2018, which ended up reducing its secured net leverage ratio to 2.67x EBITDA.

Risk and Valuation

The lower rates environment is favorable to SS&C, given that it can lever up at a lower cost of capital to engage in potential M&As. However, we think that the situation will also be favorable to both its competitors or potential high-value targets, which should now have an easier time raising growth capital. With that in mind, we believe that key acquisitions will not be as straightforward as expected, despite the potential $5.8 billion dry powder.

SS&C Share Price YTD

(Source: Seeking Alpha)

SS&C share price has been under pressure in recent times, primarily due to the downward revision of the full-year revenue outlook to $4.5-4.6 billion from the previously $4.7 billion. The stock is currently trading at ~$55 per share, down ~20% from its YTD high, which we think presents a good entry point.

SS&C Dividend Growth

(Source: Seeking Alpha)

As we have discussed, SS&C remains a financial software giant with strong bottom line and cash flow profitability, both allowing the company to grow its dividend and acquire attractive M&A targets. SS&C has acquired companies like Intralinks and DST Systems, which provided a significant boost to revenue growth in the past. On the other hand, SS&C also maintains its $0.125 quarterly dividend payment even during the crisis. At ~3x P/S, the price is fair given the catalysts. We feel that the P/S can always retrace the ~4x-6x levels seen in recent times upon the DST System takeover, potentially once SS&C announces another key M&A deal down the line.

(Source: Stockrow)

On a more speculative note, SS&C remains in a good position to do another M&A this year given the $5.8 billion dry powder, though management has indicated that it will only selectively aim for one with a strong EBITDA in addition to revenue to ensure moving the needle on both ends. Conservatively, assuming SS&C can acquire an M&A target that allows it to maintain TTM growth at ~13% (higher than the previous FY 2020 guidance, but lower than the inorganic growth upon Intralinks, DST Systems, and EZE integrations), SS&C will be looking at a potential target with ~$600 million of revenue, which is a smaller business than either DST System or Intralinks. Furthermore, assuming the unchanged ~27x P/E, SS&C should then trade at a forward PEG of ~2x, making it equally attractive from this standpoint.

Disclosure: I am/we are long SSNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Retirement Strategy: A Safe Dividend King With An Upside Potential Of Nearly 50% (NYSE:JNJ)

It has been a very long time since I have gotten a “feeling” about the potential breakout of any stock.

To me those “feelings” are reserved for market speculators on small penny stock bets. Well this is not a high risk penny stock and even if my theory is off base, investors will still own a dividend king, mammoth global leading, healthcare stock that has fabulous fundamentals, if they choose to hold! Perhaps I am just excited to see one of my all time favorite companies have a shot at strong capital appreciation while continuing paying a very safe 2.85% dividend yield that has been increased and paid for more than 50 consecutive years!


My Thinking

We are in the grip of a pandemic that has turned the global economy up side down and has thrown 10s of millions of people out of work and many more living a very small life within the confines of their homes. Fearing simply going out to visit with family and friends! Combine that with having to wear a hazmat outfit just to throw the garbage out and We are left waiting for a miracle just to get back to our normal everyday lives.

We also know that there is a full court press for the pharmaceutical industry to come up with some sort of vaccine, quickly. Even our administration has developed a program called “Warp Speed” which has a short list of companies that have shown some real promise on some of their potential vaccines.

The finalists—from AstraZeneca, Merck, Pfizer, Johnson & Johnson and Moderna—have a clear Big Pharma slant, with biotechs like Inovio and Novavax being left off the list. Moderna is the smallest company among the group, but the biotech is pressing ahead into mid- and late-stage testing with its mRNA candidate at a record pace.

The vaccine programs selected will get access to additional government funding, clinical trial assistance and manufacturing help, the Times reports, citing senior administration officials. Already, Johnson & Johnson, Moderna, AstraZeneca and Merck have scored federal funding for their projects.

We’ve all heard the “buzz” about Moderna (MRNA), but there has not been that much talk about the biggest elephant in the room-Johnson & Johnson (JNJ). Its company CEO, Alex Gorsky, has promised to have human trials in JULY, and is confident it can produce a safe and effective vaccine by the end of the year at the latest! JNJ is already investing in the production of 1 BILLION vaccines in early to mid 2021!

J&J said earlier this year that if the vaccine works well and is safe it could produce 600 million to 900 million doses by April 2021. The company said Wednesday it is committed to the goal of supplying more than 1 billion doses globally through the course of 2021, provided the vaccine is safe and effective.

I am the last person to take on huge risk, however, just think about this for a second: Let’s say my opinion doesn’t work out and the vaccine fails. What do we have left? Well how about a dividend king that has paid and increased its dividend for 57 consecutive years and still has a payout ratio in the 50’s.

ChartData by YCharts

  • $3.80/share annual dividend paid as of now.
  • 58% FORWARD payout ratio right now
  • A nearly 6% annual dividend growth rate over 57 YEARS!
  • A huge pharmaceutical company that has faced all of its headwinds and has come out whole on the other side.
  • Is off its 52 week high by 8-10%, and has a fundamental chart as per Fidelity Investments that looks like this:

I couldn’t make a chart up in make believe land like this! Valuation is LOW, Quality is HIGH, and JNJ is MORE than simply financially healthy!

How about an ESS rating, also provided by Fidelity, of this:

Some More Key Stats To Pick Over

Why not just have a look at this chart:

More than impressive, even though they have talcum powder issues!

What If JNJ Comes To Fruition?

Well that is the trillion dollar question isn’t it? If the vaccine JNJ is working on turns out to be safe and effective, and already has production ramped up what will the share price do? I have no idea, but look at it this way. The median cost of a virus hospitalization is enormous! Check this out right here:

The median cost of a coronavirus hospitalization is $14,366.

Multiply that by millions of patients and the potential savings alone to our healthcare costs would be astronomical. Even though right now JNJ has promised to provide the vaccine on a cost basis, what do YOU think the share price of JNJ would climb to just based on this victory alone? In my mind, the share price might just be priceless!

Is $175/share silly? How about $250/share? Well as far as my prediction, I think a share price of $200 is not unrealistic for a company that has saved the world! Both health-wise, and economically.

Yes, I Know That JNJ Is Above The PRIP “Buy Zone”

The new Pandemic Retirement Income Portfolio does show that JNJ is somewhat above its buy zone price. That being said, if you do your own research you might conclude, as I have that the stock is a BUY right now with a strong potential for capital appreciation IF my thesis proves to be correct.

PRIP consists of the following stocks: Johnson & Johnson (JNJ), Procter & Gamble (PG), Microsoft (MSFT), Apple (NASDAQ:AAPL), AT&T (T), Walt Disney (DIS), PepsiCo Inc (PEP), Con Edison (ED), Exxon Mobil (XOM), Realty Income (O), and Altria (MO).

Here is the most current chart as of 6/11/2020, 11:00 AM:

(This will be updated in my next article)

Just take a peek at some of the ETFs that are currently invested in JNJ:

Now, How about total ownership of all shares:

Nearly 70% of all outstanding shares are held by institutions. Another 3% owned by mutual funds. The float of shares for “us” retail investors is just 25-30%! As far as I am concerned, this stock has the potential to become a double whammy…..a dividend king of 57 years, AND a capital appreciation potential it has not seen in a very long time!

My Bottom Line

Obviously there are risks. You now will have a choice of holding the shares within your new core portfolio and having one of the greatest dividend kings of all time as a steady income producer for retirement, if the vaccine fails and the share price takes a hit, or you can take your lumps and dump the “speculative” shares.

If I was still in the market, my choice would be to hang on to JNJ, forever anyway…..even though in this case you will be buying at a share price above my personal buy zone price.

To me, this is the type of risk I can even live with and I am a big “scardy cat”!

So, tell all of Seeking Alpha what YOUR thoughts are about this potential opportunity. I have already said, that to me, it’s a buy!

Not To Bore You, But…

Knowledge is power, and many folks shy away from the investing world because that very world makes it more confusing each and every day in an effort to sell you something.

My promise to you is that my work here will remain free to all of my followers, with the hope of giving to you some of the things that took years for me to learn myself. That being said, let me reach out to you with my usual ending:

One final note: The only favor I ask is that you click the “Follow” button so I can grow my Seeking Alpha friendships. That is my personal blessing in doing this, and how I can offer my experiences to as many regular folks as possible who might not otherwise receive it.

Additional disclosure: Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author used in his past worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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AUD/JPY: Likely To Revert To The Upside

The AUD/JPY currency pair, which expresses the value of the Australian dollar in terms of the Japanese yen, has recently fallen after tepidly yet nevertheless succeeding in exceeding its 2020 high of approximately 76.50. In a recent article of mine, I suggested this was a level at which AUD/JPY was likely to correct, considering multiple factors, but most importantly that while risk sentiment was proving positive, U.S. equity volatility was indicating a greater-than-average chance of rising on the back of apparently excessive optimism.

The chart below illustrates AUD/JPY price action, using daily candlesticks. I use the same chart template as used in my prior article; evidently, my first target has been reached already (of approximately 73.65). My second target of 70.70 was not a target I predicted to be achieved in a ‘base case’, but it nonetheless still remains in full view.

(Chart created by the author using TradingView. The same applies to all subsequent candlestick charts presented hereafter.)

The question now becomes, will AUD/JPY trade lower, or will risk sentiment revert back into the positive direction? The latter seems more likely. Risk sentiment remains strong. The trend is clearly currently in favor of upside across global financial markets at present. While certain safe-haven commodities such as gold are also holding up (gold prices are currently averaging around $1,700/oz; little changed over the past few weeks), as we saw in March 2020, the correlation between true risk sentiment and commodities such as gold is tentative at best.

Our primary focus should be on equities. As discussed in my previous article on AUD/JPY, I believed that VIX was likely to rise, following especially subdued levels (as the volatility of VIX itself was also falling measurably). The chart below illustrates the recent surge in the Volatility Index to well over 40.

VIX in June 2020

The chart above additionally includes Bollinger Bands, as I used in my previous article. This 20-day, two-standard deviation trailing measure of volatility (of VIX itself) enables us to monitor points at which volatility is more likely to rise or fall.

As you can see on the chart above, however, periods of high volatility (such as through late February and early March 2020) usually self-propagate until ‘exhaustion’, at which point volatility finally settles. Predicting the so-called ‘right tail’ (of the frequency distribution, conceptually speaking) is difficult, but the ‘left tail’ (on the downside) is easier to predict since volatility can only fall so far (where VIX has theoretically no limit on the upside).

Nevertheless, a useful rule of thumb is that for every 16 points on the VIX index, the options markets (upon which the VIX is based) are implying a daily move of approximately 1% in the S&P 500 index. You can ‘prove’ this by multiplying 1 percent by the square root of 253 (roughly the number of trading days in a given year) for an annualized measure of 15.90 (or about 16%).

While implied volatility (which is what VIX is) does usually tend to be higher than realized volatility, we can at least use this method to estimate the current VIX level of about 36 (at the time of writing) to be indicating daily moves (in the S&P 500 index) of well over 2%. For context, the table below shows the trailing 40 trading days of daily percentage moves in the S&P 500 index (see the far-right column).

S&P 500 Index, Daily Moves(Data source: Yahoo Finance.)

The far-right column highlights in red those days that exceeded the 2% mark. As you can see, the VIX can pick up dramatically in short bursts, on the back of sudden and “unexpected” bursts in realized volatility. However, while the sudden drop of -5.89% on June 11, 2020 was unexpected by many, and deep, this was followed by a rise of +1.31% the next day, and the average daily price move (in absolute terms) over the past 9 trading days is in fact +1.65%.

While this recent drop will remain in sight for a while, I believe that this recent correction was in fact predictable, broadly speaking (see my previous article). The extent of the volatility could not be predicted, but the increase was, because the market had become too one-sided (again, I relate the metaphor of a crowded room all reaching for the single-door exit at once). The move was not based on a sudden change in the market’s perception of underlying fundamentals. The difference between future realized volatility and current implied volatility is likely, I predict, to underwhelm the current VIX level.

Therefore, going forward, I expect VIX to gradually grind lower to between 20 and 30. This is likely to complement a rise in equities, and therefore AUD/JPY (which is a risk-on pair). The beauty of AUD/JPY is its ability to often predict the future direction of the S&P 500. As AUD/JPY recently fell off its 2020 high, the beginnings of this move occurred prior to the recent correction in equities.

As we saw on June 12, 2020, the market was, however, able to push equities higher following the recent correction, which is an indication that “balance has been restored to the force” (to unaccountably use a Stars Wars phrase). Provided that the fundamentals do not change significantly over the next trading week, and/or market liquidity does not deteriorate significantly (no signs suggest it is worsening beyond the recent move), a safer bet is to count on a reversal to the upside in line with the current trend and largely prevailing sentiment.

In summary, I believe AUD/JPY has recently served its function as a hedge against downside volatility in risk markets. I do not propose to be able to predict the future, and unforeseen events may arise next week (and beyond) that invalidate the trend. However, my personal bias moving forward is cautiously bullish (on both AUD/JPY and equities).

I will leave with a final point, that it is interesting that during this recent (but relatively minor) ordeal in equities and AUD/JPY, the one-year interest rate spread for AUD/JPY (i.e., between one-year government bond yields, reference Australia and Japan) in fact rose. This is the bond market’s way of saying that the equity downside was limited to short-term trading factors (excess optimism, etc.), not to fundamentals. If the one-year spread had fallen (i.e., in favor of the Japanese yen), it might have suggested that markets were more broadly pricing in economic risks, but this did not occur for AUD/JPY.

AUD/JPY vs. One-year Interest Rate Spread

As shown above, AUD/JPY fell as the one-year spread traded upward (and then horizontally), from +0.412% to +0.446%. At best, it rose, and at worst, we could say it was unaffected. In support of my general bias, I believe that risk sentiment should return in favor of the current trend, which is positive. While I could of course be wrong, I believe this is the more probable path forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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