Valuentum Exclusive Analysis for the Discerning Investor

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Jan 15, 2021

Steris Ties the Knot with Cantel Medical
Image Shown: Cantel Medical Corp is getting bought out by Steris PLC through a cash-and-stock deal. The image up above highlights Cantel Medical’s promising long-term growth outlook, though its performance in 2020 was subdued due to headwinds created by the coronavirus (‘COVID-19’) pandemic. In our view, Steris was attracted to Cantel Medical’s improving outlook (the latter started to stage an impressive rebound in the second half of calendar year 2020) and the ability for the combined firm to generate substantial synergies. Image Source: Cantel Medical Corp – December 2020 IR Presentation. On January 12, Steris PLC announced it had reached an agreement with Cantel Medical to buy the company through a cash-and-stock deal worth ~$3.6 billion (~$4.6 billion when including the assumption of debt and convertible notes) that valued CMD at $84.66 per share based on the closing price of STE on January 11. The deal includes $16.93 in cash and 0.33787 share of STE for each share of CMD. Steris is heavily focused on sterilization products for hospitals and laboratories (it also provides related services). The company intends to fund the cash component of its deal for Cantel Medical with new debt issuance and committed bridge financing, which will also be used to refinance most of Cantel Medical’s existing debt. Shares of Cantel Medical have advanced ~38% (as of the end of normal trading hours January 13) from when we first wrote about the idea back in early December 2020. Even before the acquisition was announced, investors started to warm back up to the company due to expectations that the headwinds that held the firm back last year would start to dissipate this year. In our view, Steris’ acquisition of Cantel Medical is highly complementary. It appears Steris was optimistic that Cantel Medical’s long-term growth outlook remained bright even though the firm had a rough 2020.

Dec 13, 2020

7 Hidden Dividend Aristocrats in Industrials
In the world of dividend growth investing, when a company hits the mark of raising its dividend for more than 25 consecutive years, it garners the coveted title of a Dividend Aristocrat. The accomplishment is so rare that only 65 companies in the S&P 500 have achieved this commendable feat--just 13%. Our strategic focus in the Dividend Growth Newsletter portfolio is to identify companies with attractive valuations, respectable dividend yields and strong expected dividend growth prospects for the next 25 years. This perspective is embedded within the construct of our proprietary and forward-looking Dividend Cushion ratio that can be found in each company’s Dividend Report. In this article, however, let’s cover seven hidden and relatively overlooked Dividend Aristocrats from our Industrials coverage that have promising prospects to continue raising their dividends for many more years to come (three on the list have already raised their dividends for more than 60 consecutive years). The valuations of these seven companies may be a little stretched for our taste (at the time of this writing), but we think these stocks are worth keeping on your radar given their resilient business models, shareholder-friendly management teams, notable competitive advantages, and praiseworthy status as Dividend Aristocrats. Each of the companies’ 16-page Stock Report and Dividend Report can be downloaded following their respective profiles.

Dec 8, 2020

Cantel Medical Surges Higher
Image Shown: Shares of Cantel Medical Corp popped higher during normal trading hours December 8 after the firm’s latest earnings report indicated its recovery was well underway. On December 8, Cantel Medical Corp reported first quarter earnings for fiscal 2021 (period ended October 31, 2020) that beat both top- and bottom-line consensus estimates. Furthermore, Cantel Medical’s $297 million in GAAP revenues last fiscal quarter exceeded the top end of its forecast that was published on October 22, which had been raised above the revenue guidance range management put forward during the firm’s fourth quarter of fiscal 2020 earnings call that was held on September 17. We published a note back on December 2 highlighting that “we think Cantel Medical is one for the radar of a risk-seeking investor” on the back of its improving near-term revenue outlook. In that article, we mentioned that it was crucial for Cantel Medical to show signs that its margins were moving in the right direction after deteriorating over the past couple of fiscal years. During its latest earnings report, Cantel Medical’s financial performance clearly indicated that a recovery was well underway.

Dec 2, 2020

Things Are Looking Up at Cantel Medical But Many Risks Remain
Image Source: Cantel Medical Corporation – Fourth Quarter and Full Year Earnings for Fiscal 2020 IR Presentation. Medical device and instrument maker Cantel Medical will be a major beneficiary of recent news regarding the growing chances that a safe and viable COVID-19 vaccine will potentially get approved soon. Though the company’s financial performance has deteriorated in recent fiscal years and organic revenue has faced headwinds, the firm’s upwardly-revised guidance (particularly its sales guidance) for the first quarter of fiscal 2021 was a highly encouraging sign, and Cantel noted that the level of elective medical procedures are starting to stabilize. Its recent October 2019 acquisition of Hu-Friedy’s dental operations will put the company in a better position to compete for business as well, though we note rising confirmed COVID-19 hospitalizations around the world continue to pose a threat to the pace of elective surgeries/procedures. Cantel’s near-term outlook is looking up, in our view, but high financial leverage (net debt to adjusted EBITDA), weak organic growth trends, rising expected operating expenses and capital spending, stronger and larger rivals that compete through bundling partnerships across the medical device/instrument arena, moderate customer concentration risk, and recent capital-spending cutbacks (coupled with a suspended dividend) to shore up capital put this idea firmly in the high-risk/speculative category. Nonetheless, given signs of a turnaround based on the recent guidance raise, we think Cantel Medical is one for the radar of a risk-seeking investor. We’ll be paying close attention to its revenue and margin performance when it reports fiscal first-quarter 2021 earnings December 8.

Dec 1, 2020

Walking Through the Calculation of the Dividend Cushion Ratio
Image shown: An image found on page 2 of Valuentum's Dividend Report on Kimberly-Clark. The 'Dividend Cushion Ratio Deconstruction,' shown in the image, reveals the numerator and denominator of the Dividend Cushion ratio. At the core, the larger the numerator (or the healthier a company's balance sheet and future free cash flow generation) relative to the denominator (or a company's future expected cash dividend obligations), the more durable the dividend. In the context of the Dividend Cushion ratio, KimberlyClark's numerator is larger than its denominator suggesting strong dividend coverage in the future. The 'Dividend Cushion Ratio Deconstruction' image puts sources of free cash flow in the context of financial obligations next to expected cash dividend payments over the next 5 years on a side-by-side comparison. Because the Dividend Cushion ratio and many of its components are forward-looking, our dividend evaluation may change upon subsequent updates as future forecasts are altered to reflect new information.We believe the Dividend Cushion ratio is one of the most helpful tools an income or dividend growth investor can use in conjunction with qualitative dividend analysis. The ratio is one-of-a-kind in that it is both free-cash-flow based, considers balance sheet health, and is forward looking. Since its development in 2012, we estimate its efficacy at ~90% in helping to forewarn readers of impending dividend cuts. For companies where Valuentum reports are available, the Dividend Cushion ratio can be found in a stock's Dividend Report or in the table on the company's stock landing page. We use Kimberly-Clark as an example of how we calculate the Dividend Cushion ratio and how useful it is for investors of all types.

Nov 6, 2020

Dividend Increases/Decreases for the Week November 6
Let's take a look at companies that raised/lowered their dividend this week.

Nov 2, 2020

ICYMI -- Dividend Growth Strategies Struggle
Image: A large cap growth ETF (orange) has significantly outperformed an ETF tied to a dividend growth strategy, the SPDR S&P Dividend ETF (SDY), which mirrors the total return performance of the S&P High Yield Dividend Aristocrats Index. To no surprise to many members, several dividend growth strategies have faced tremendous pressure during 2020. The Journal recently wrote a piece on the topic, but from our perspective, the problem with many dividend growth strategies is that they tend to be balance-sheet agnostic and pay little attention to traditional free cash flow expectations, focusing only on the yield itself, sometimes dismissing future fundamentals in favor of historical growth trends and the inferior EPS-based dividend payout ratio. In many dividend-targeted ETFs, for example, it may not matter to the index creator whether a firm has $10 billion in net debt or $10 billion in net cash; as long as management has a track record of raising the dividend in the past, it is included. To us, however, there is a world of difference between a company that has a huge net cash position and a huge net debt position. The more excess cash on the balance sheet a dividend payer has, for example, the more secure its payout. In some cases, entities held in high-yielding ETFs don't even cover their dividends or distributions with traditional free cash flow generation, despite having ominous net debt loads. A look at the high-yielding ALPS Alerian MLP ETF, for example, shows a number of entities that are buried under a mountain of debt and are generating meager free cash flow relative to expected distributions. The lofty yield on that ETF should therefore be viewed with a very cautious eye. If the yield weren't at risk for a big cut, the market would bid up the stock, and down the yield would go. In no way should you believe that you can sleep well at night holding stocks yielding north of 10% when the current 10-year Treasury is well below 1%. The market is just not that inefficient. A dividend growth strategy can never be a passive one either. Only through constant attention to the balance sheet (net cash) and future free cash flow expectations can investors truly sleep well at night. At Valuentum, we do the balance sheet and cash flow work and summarize it succinctly in a key ratio called the Dividend Cushion ratio.

Sep 3, 2020

3 Lessons in Portfolio Management Over 10 Years
Image Source: http://www.epictop10.com/. "When I left as director in the equity and credit department at Morningstar in 2011, I thought I knew a whole heck of a lot about investing. I felt like I was one in the top 5-10 in the world as it relates to the category of practical knowledge of enterprise valuation (maybe include Koller at McKinsey, Mauboussin at Counterpoint, and Damadoran at Stern on this list). After all, I oversaw the valuation infrastructure of a department that used the process extensively, and the firm was among just a few that used enterprise valuation systematically. Then, at Valuentum, our small team would go on to build/update 20,000+ more enterprise valuation models. There can always be someone else out there, of course, but I don't think anybody has worked within the DCF model as much as I have across so many different companies. That said, through the past near-10 years managing Valuentum's simulated newsletter portfolios, I've also learned a number of things to become an even better portfolio manager." -- Brian Nelson, CFA

Jan 4, 2020

Valuentum Exclusive Success Rates Trump Even the Best Quant Hedge Funds
Image: President of Investment Research Brian Nelson, CFA. A new book, “The Man Who Solved the Market,” hit bookshelves last year, and thus far it has been a hit. The text goes into the story of quant hedge fund Renaissance Technologies and its hedge fund, the Medallion Fund, which has put up mammoth returns since inception.

Nov 29, 2019

Dividend Increases/Decreases for the Week Ending November 29
Let's take a look at companies that raised/lowered their dividend this week.