Valuentum Exclusive Analysis for the Discerning Investor

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Feb 25, 2022

Update: Analyzing Valuentum’s Economic Castle Index: A Walk Forward Case Study
There are two things generally wrong with a pure economic moat assessment, or economic “moat factor.” First, it is much easier to assess outsize economic returns in the near-term than it is to assess outsize economic returns over the long haul. Quite simply, nobody can predict what will happen tomorrow, and they certainly don’t know what will happen 20 or 30 years from now. Second, a rational investor should generally prefer expected near-term outsize economic returns than expected long-term ones given the uncertainty of the latter--somewhat related to our first point, a bird in the hand (or large economic returns in the near term) is worth two in the bush (or large economic returns in the long run that may not materialize). The time value of money reinforces this notion. Near-term economic returns are generally worth more than long-term ones in real terms, even if they may be smaller nominally. This is where our Economic Castle rating comes in. The goal of the Economic Castle rating is to identify those companies that are likely to generate a lot (or not so much) shareholder value over the foreseeable future. Instead of pondering a guess as to how the landscape will look 20 or 30 years from now, something not even the Oracle of Omaha can do with any sort of certainty (e.g. IBM, KHC), the Economic Castle rating ranks companies based on near-term expected economic returns, or returns that are more likely to be realized as opposed to those that may be built on “castles in the air” over 20-30 time horizons. By evaluating companies on the basis of the spread between their forecasted future return on invested capital (‘ROIC’) excluding goodwill less their estimated weighted-average cost of capital (‘WACC’), we measure a company’s ability to generate an “economic profit” over the foreseeable future, which we define as the next five fiscal years. Companies that generate a forecasted spread of 50 percentage points or more are given a “Very Attractive” Economic Castle rating and firms that are forecasted to generate a spread of 150 percentage points or higher are considered “Highest-Rated”. Firms that carry an Unattractive Economic Castle rating are those that are forecasted to generate a forward ROIC (ex-goodwill) less estimated WACC spread that’s meaningfully below zero (firms near economic parity can receive a Neutral Economic Castle rating, assigned by the Valuentum team).

Feb 23, 2022

High-Yielding American Tower Is a Free Cash Flow Cow
Image Shown: American Tower Corporation operates the tower structure and related land parcel of cell tower assets, while its tenants handle the remainder. Image Source: American Tower Corporation – Third Quarter of 2021 IR Earnings Presentation. Rising geopolitical tensions, inflationary headwinds, supply chain hurdles, and pressures from the rising interest rate environment are all weighing negatively on equity markets. In our view, this sell-off presents an opportunity for investors with a longer-term focus to consider high-quality REITs such as American Tower Corp, which is now trading at a significant discount to our estimate of its intrinsic value.

Feb 16, 2022

Dividend Growth Idea Realty Income Makes an Intriguing Purchase
Image Shown: Dividend growth idea Realty Income Corporation is acquiring its first real estate property in the gaming realm through a sale-leaseback transaction with Wynn Resorts Limited. Image Source: Realty Income Corporation – February 2022 IR Presentation. On February 15, dividend growth idea Realty Income Corp announced its 620th consecutive monthly dividend. Since going public in 1994, Realty Income has increased its monthly payout over 110 times. Realty Income is a real estate investment trust (‘REIT’) focused on single-tenant commercial properties. We include the REIT as an idea in the Dividend Growth Newsletter portfolio and continue to be big fans of Realty Income. Shares of O yield ~4.4% as of this writing.

Feb 11, 2022

Dividend Increases/Decreases for the Week February 11
Let's take a look at companies that raised/lowered their dividend this week.

Feb 10, 2022

Chipotle Sees Bigger Unit Growth Opportunity in North America, Continued Pricing Power
Image: Chipotle’s shares look like they are poised to breakout of a downtrend on news that its long-term unit restaurant opportunity is bigger than expected and that its pricing power remains intact. Chipotle's fast-casual focus and premium food offerings coupled with its Chipotlane rollouts and its breakfast “call option” are a few things that give the company a runway for continued strength that may be unprecedented by an established brand, particularly as it sees an even greater opportunity for unit development in North America than it did before. Because it serves a higher-end fast-casual customer, we think product pricing ahead of inflation won’t be an issue (helping to augment margins), and we’re reiterating our fair value estimate of ~$1,640 per share, above where shares are currently trading at the time of this writing (~$1,580 per share). A more optimistic take on Chipotle could see shares reach the higher end of our fair value estimate range of ~$1,970 per share.

Feb 10, 2022

Top ESG Idea South32 Getting Closer to Launching Major Mining Project in Arizona
Image Shown: South32 is targeting ample zinc, lead, and silver resources at the Hermosa project in Arizona that could be quite economical to extract should the Australian-based miner move forward with the endeavor. Image Source: South32 – January 2022 IR Presentation. Shares of South32, one of our favorite miners, are up over 50% during the past year as of this writing and that is before taking dividend considerations into account. The Australian miner has a bright outlook after shedding virtually all its thermal coal assets last calendar year (completed in June 2021) and announcing in October 2021 that it would acquire a sizable economic interest in a Chilean copper mine. We include shares of SOUHY as an idea in the ESG Newsletter portfolio and continue to be huge fans of the company. The miner has ample exposure to the “green energy” revolution and continues to pivot towards minerals that are expected to be in high demand in the future, which in turn supports the firm’s cash flow growth runway. South32 has exposure to attractive potential mining opportunities down in Arizona and recently provided a big update on these efforts that are worth going over. Let's dig in.

Feb 10, 2022

Dividend Growth and ESG Favorite Republic Services Is Buying U.S. Ecology
Image Shown: Republic Services Inc is one of our favorite waste management companies. On February 9, the company announced it was acquiring US Ecology Inc through an all-cash deal. US Ecology provides specialized waste management services and has an asset base that is nearly irreplaceable. We like the deal as it could generate meaningful cost saving and revenue synergies. Image Source: Republic Services Inc – February 2022 Infographic. On February 9, one of our favorite waste management companies, Republic Services announced a deal to acquire U.S. Ecology through an all-cash deal worth about $2.2 billion when including net debt considerations. Republic Services is paying $48 per share in cash to take over U.S. Ecology, which provides specialized waste management services. We like this deal as it will add nearly irreplaceable assets to Republic Services’ asset base and is expected to be immediately accretive to its adjusted earnings and free cash flow performance once the transaction closes.

Feb 8, 2022

Nutrien Benefiting from the Strong Global Farm Economy, Shares Yield ~2.5%
Image Source: Nutrien Limited – 2020 Annual Report. Nutrien Limited is benefiting from the strong global farm economy. The company sells tens of millions of metric tons of potash, nitrogen, and phosphate products every year, which are key ingredients used in the production of fertilizer. With geopolitical tensions building in Eastern Europe, Nutrien is preparing to bring idle potash production capacity in Canada back online while steadily expanding its nitrogen production capabilities. Nutrien is a great free cash flow generator with a promising growth outlook, though its net debt load is rather large. The firm is focusing on deleveraging activities in the near term, which we appreciate. Shares of NTR yield ~2.5% as of this writing, and we think it is one for your radar.

Feb 1, 2022

Structural Changes in the Airline and Aerospace Business
Image Source: Valuentum. The future profile for air travel demand will be negatively impacted in the long run (relative to pre-COVID-19 expectations) as increased leisure travel from the wealth effect may not completely offset reduced business travel growth impaired by digital solutions permanently disrupting the way companies conduct business. As with Warren Buffett, who recently wrote down the value of metal casting jet-engine supplier Precision Castparts (one of the best aerospace suppliers in the business), we believe intrinsic values of others in the aerospace supply chain have been permanently reduced as well. We’re staying away from airlines and aerospace with the exception of Honeywell, which offers diversified industrial exposure and a “call option” on a gradual aerospace recovery to a “new normal.” Honeywell is included in the Dividend Growth Newsletter portfolio and showed that it can thrive in a business environment where aerospace demand may not live up to pre-COVID-19 long-term expectations. Honeywell yields ~1.9% at the time of this writing.

Jan 14, 2022

Dividend Increases/Decreases for the Week January 14
Let's take a look at companies that raised/lowered their dividend this week.