Growth Stock Thoughts

An Investment in Knowledge Pays the Best Interest

Benjamin Franklin

 

Video: Civitas CIVI Permian Pivot Yields Massive 9% Dividend Yield

• 2.9% Base Yield, paying out 50% of average TTM quarterly Free Cash Flow as a variable dividend bringing full yield to 9%.
• 582k acres in low-cost basins in the US, expecting to have 280 Mboe/d in production by the end of 2023.
• Total 2024 production is expected to increase significantly, with quarterly production growing by at least 16% to 325 Mboe/d (thousands of barrels of oil equivalent per day).
• Entered the oil-rich Permian basin, significantly increasing its production targets by 101 Mboe/d in 2023 and 168 Mboe/d in 2024.
• These recent acquisitions are expected to surge earnings above $15/share in 2024, with 2024 guidance pointing to $1.8 billion in free cash flow.
• OPEC+ production cuts and Mideast uncertainty could put upward pressure on pricing, bringing WTI oil back to the $80/bbl area.
• Strong balance sheet, targeting a debt-to-EBITDA ratio of 0.9x by the end of fiscal 2024.
• 15.6% pullback from its $82.63 high is an attractive entry point in our opinion.

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NVIDIA’s AI Boom and the Ghost of Cisco’s Internet Bust

• NVIDIA (NVDA) has established dominance in AI advancements, where it already had a foothold in the data center market. Prior to this, NVDA was a key player in the cryptocurrency mining and graphics card markets.
• Since 2019, NVDA has continued its upward trajectory with a remarkable 716% revenue growth. The share price during this time also saw an increase of 1,491%
• Cisco Systems (CSCO) experienced a similar boom in the 1990s, becoming the leading infrastructure provider for the global internet buildout. From 1996 to its peak in 2000, Cisco’s revenue grew by 498%, while its share price dramatically increased by 3,278%. Eventually, it would collapse by 83%.
• Dominant players in capital goods markets, like NVIDIA’s chips and Cisco’s network routers, often experience significant pricing power during boom periods. However, this is typically followed by a bust characterized by over-buildout and a subsequent revenue decline.
• NVIDIA enjoyed a surge in purchases from Chinese companies just before export restrictions were implemented. This has led to significant overbuying and stockpiling of reserves in China, a market now mostly closed.
• High Growth and Great Margins during this surge often attract new competitors, leading to a saturated market, more competition, fewer sales, lower prices, and lower profits.

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Video: NVIDIA’s AI Boom is Similar to Cisco’s Internet Boom. Will the Similarities Extend to the Bust?

• NVIDIA and Cisco have been leading players in their respective fields during periods of high capital expenditure and rapid industry expansion. However, they also share the likelihood of reaching a cyclical peak, which could lead to significant stock price corrections.
• Since 2019, NVDA has continued its upward trajectory with a remarkable 716% revenue growth. The share price during this time also saw an increase of 1,491%
• Cisco Systems (CSCO) experienced a similar boom in the 1990s, becoming the leading infrastructure provider for the global internet buildout. From 1996 to its peak in 2000, Cisco’s revenue grew by 498%, while its share price dramatically increased by 3,278%. Eventually, it would collapse by 83%.
• Given the historical patterns, we believe exercising caution with NVDA is the best action.

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Insuring Success Through $380 Million in Cost Savings

• 1.38% Yield, $1 billion left on repurchase authorization.
• Expecting an increase in free cash flow in to $1 billion in 2024.
• WTW’s strategic cost-saving program aims to deliver $380 million in annualized savings by fiscal 2024.
• Strength in every business, with new clients and higher fees driving results.
• Demographic trends provide secular tailwinds.

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HII Seas: Rearmament Continues to Propel Navy Spending and Improved Results

• 2.26% Dividend Yield.
• Total backlog of $49.5 billion up 5.7 % year over year. 5 years for shipbuilding and 2 years for Mission Technology.
• Naval shipbuilding is accelerating, with the Navy needing to build more than 55 ships to reach its 300-ship target.
• Mission Technology is an expansion area, with a segment book to bill of 2.4x.
• Largest military shipbuilder in the United States, benefiting significantly from naval rearmament.

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Everest Reaches Peak Performance with Rising Premiums and Business Expansion

• 1.9% dividend yield, EG is targeting >13% shareholder return.
• Natural disasters are becoming more frequent and more intense, with primary insurers facing restrictions on premium hikes.
• Reinsurance rates have sustained tailwinds, with Everest realizing a 26.9% increase in premiums.
• Even in the face of increased catastrophe claims, the combined ratio in all segments of the company has improved. Reinsurance combined ratio dropped 340 bps to 88.2%, and primary insurance dropped 120 bps to 91.5%.
• International expansion effort in the primary insurance area resulting in premium growth of 13.5% year over year.

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CVS Offers Recession-Resistant Growth with Transformation

• 3.5% Dividend Yield, $14.5 billion in stock repurchase remaining.
• M&A period over, now focusing on integrating new businesses and strengthening the balance sheet.
• Healthcare as a sector is recession-resistant.
• Sees cost recovery by 2H24, with the conclusion of a cost optimization program expected to yield $700-800 million in savings.
• Expected addition of $2 billion to EBITDA by FY26 from Oak Street and a significant internal referral network from Signify Health.

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Qualcomm Drives into the Future with Apple Renewal and Auto Deals

• 2.8% Dividend Yield, $5.5 billion in stock repurchase remaining.
• QCOM’s renewed agreement with Apple to supply 5G chips through FY26.
• The company anticipates significant growth in the Automotive sector, underscored by recent partnerships with BMW and Mercedes to supply infotainment chip systems.
• QCOM holds 140,000 patents across over 18 billion devices, an estimated 38% market share in RF IoT technology.
• Nuvia SoC ARM chipset to launch in FY24 for Windows, competing with Apple’s M1 and M2.

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Gold’s Resurgence in a De-Dollarizing World

• China/BRICS is actively working to reduce global trade’s dependency on the US Dollar, settling international agreements in their currency, the RMB.
• The US faces numerous economic problems, from the credit rating downgrade to ballooning debt and an aging population.
• Central banks have significantly increased their gold purchases, with a 152% year-over-year increase in 2022, primarily driven by countries like China and Russia seeking to move away from the US dollar.
• Gold has been a historically stable value asset, now being one of the only options now that Treasuries are falling out of favor internationally hinting at its potential to reach unprecedented price levels.

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Riley Exploration Explores New Area in New Mexico

• Strong expansion plans in the same basin in New Mexico, expecting 15% free cash yield from the project and the project being accretive in year 1.
• Expecting an 80% increase in production from FY22, with an 18% decrease in expenses.
• If oil prices stay in the $70 area, REPX expects $42-55 million FCF. Similarly, oil prices around $70 will have FY23 leverage at 1.8x debt to EBITDA.
• OPEC stated no oil output increases until FY24; EIA expects oil prices in the $80 range for 2H23 and 1H24.

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Generac Generates Significant Opportunity with Acquisitions

• Increasing demand for uninterrupted power in the industrial space due to data requirements and increase in consumer demand due to the above-average outage hours the US has experienced over the last 3 years.
• 10GWh of currently installed capacity, with addressable market set to expand by 5x by FY25.
• Aggressive M&A to penetrate new markets, with each 100 basis point increase in penetration equating to $3 billion in total addressable market.
• Strong international growth should offset weakness in US domestic consumer market.

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