Companies securing the bag
The global economy is changing, and in between it all, companies are repositioning themselves for the future, while the bullish environment brought forward by geopolitical factors and more, continues to create opportunities for investors.
We look into growing industries that may be profitable to investors in the short to long term as regulations come into play and markets adapt.
EasyUSD:
3D Printing 🔬: 3D Systems Inc (DDD)
3D printing may not be a popular thing right now, but as commoditisation of technology comes into play, it may become the new way we do printing on a day-to-day basis.
3D Systems is a 3D printing company with at least 1 000 issued patterns and millions of products are printed daily using its technology.
Investing in "the future", especially in tech-associated stocks, may be associated with chasing "another bubble that's expected to burst like the dotcom". However, it’s important to note that a major contributor to the dotcom bubble was the fact that the innovative tech companies of the time had little to no cash, only websites and .com domains associated with their names. In the case of 3D Systems, which is focused on 3D printing, the company has been in operation for some time with solid revenue coming in. Although the company reported lower revenue during the first quarter of its 2022 financial year whereby which included divestiture; excl divestiture, revenue was up by 10% from $120 million PCP. The company further added: "This growth was led by our Industrial Solutions business, which delivered over 15% revenue growth year-over-year when adjusted for divestitures, reflecting the increased adoption of additive solutions in production environments across the
world’s manufacturing community",
Despite trading at a loss per share during the period compared to the previous year, 3D Systems saw strong growth in the last year, with a net income of $322 million from losses reported in the previous period. The company had a 50% profit margin with a 30% return on equity (ROE) by the end of Q1 FY22.
In addition, the company added that reported costs and revenue in Q1 FY22 were heavily affected by the divestitures, its exit from Russia, and foreign currency factors. Cash and short term investment opportunities by Q1 FY22 were valued at $745 million, representing an increase of $613 million on the PCP.
Outlook
While the company remains under criticism for its losses during the period, the market in which the company operates is expected to reach $63.46 billion by 2026. In addition, Nasdaq estimates also seem more optimistic about the company showing an upward trend in expected earnings per share.
Given the current market sensitivity, 3D Systems may experience high volatility as we move closer to the period when it reports its latest earnings. Investors continue to be more cautious about future earnings as inflation and interest rates rise. While earnings may have dropped during the period, the company has been making significant moves, securing two acquisitions that expand its portfolio to consumer goods, service bureaus, transportation & motorsport, aerospace & defence, and general manufacturing.
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EasyZAR:
Cannabis🍀: British American Tobacco PLC (BTI)
Over the years, tobacco use has been under scrutiny; this was heavily influenced by multination organisations and local governments adding more pressure through sin taxes.
British Tobacco has been busy securing the bag in the cannabis industry. Notwithstanding uncertainties from laws on cannabis use, in March 2021, the company expanded its cannabis portfolio, investing a total of $175 million in the cannabis market by acquiring 126 million shares, or a 20% stake, in Organigram, a cannabis-focused company. In April 2022, British Tobacco acquired an additional 2.6 million shares at an average price of CA$2.6 per share, as the company tries to move away from traditional cigarette sales.
From a financial perspective, adjusted revenue for FY21 was up 6.9% (vs FY20) to £25 billion; revenue from new categories grew by 50% from the previous year to £2 billion; total profits from the company's operations were £11.1 billion. Rewarding investors in that regard, the company announced a £2 billion buyback for the 2022 calendar year (CY22) and a dividend of 217 pence per share, which is being paid out on a quarterly basis.
Outlook
While the company continues to operate in two industries that may become more volatile as uncertainties take a toll on the sentiments of investors, beyond its recreational use, the company's investments are well diversified within the cannabis market. This, combined with the brand and distribution networks of British Tobacco, may allow the company to leverage growth from the growing markets' demand in the long term
Given its current financial position of £2.4 billion in cash equivalents, the company is well-positioned to continue expanding and rewarding investors as earnings grow from the company's core businesses.
Using the current exchange rate, the company has an EPS of R58 per share while trading at R688 as of writing; the company has a PE ratio of 8x, which using the 5% growth rate in earnings, gives us a price-to-earnings growth (PEG) ratio of 1.6. This indicates that the stock may be slightly overvalued compared to the growth of its earnings, although we may see a catch-up as it expands its portfolio.
The company further noted that it expects cigarette sales to drop during FY22.
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EasyAUD:
Graphite 🔋 : Ecograf Ltd (EGR)
Have some graphite in your portfolio? The demand for graphite is set to increase along with the demand for the global economy to go green. This may require more graphite than the current demand with the market expected to reach $26 billion by 2025.
Trading at $0.49 a share, Ecograf is a graphite exploration mining company that has received leading ESG credit for its Epanko Graphite Project located in Tanzania. The company has several mining licences in the jurisdiction. This project will enable the company to contribute to the global graphite feeding stock, while at the same time supplying both its lithium-ion/alkaline battery production and industrial products.
The company continues the year with a cash balance of $41 million, with expenses for the quarter reaching $1.8 million.
Outlook
For its Epanko project, after completing a bankable feasibility study, the company had a forecast of US$44.5 million annual EBITDA. Notably, the company invested approximately US$30 million, which will help it to position itself in energy storage and green steel. In addition, during the period – when commodities demand is expected to rise excessively in the medium to long term, fuelled by the commoditisation of technology and economic demand – EcoGraf may continue to issue additional shares through placements offers, which may be dilutive to shareholders.
Adding to the above, as more countries are expected to embark on the Russian energy embargo, this may cause energy prices to reach new highs, further pushing governments and companies to fast-track energy security. This would include the transition to renewables that will require energy storage.
Given that spot prices remain relatively high, this may enable EcoGraf to leverage higher profit margins after the company highlighted that it is "completing its review of the large 'fresh rock' graphite zone within the Epanko Mineral Resource to define the potential to deliver a high purity 99% carbon graphite, without additional processing."
Using the company's cash balance and expenses on a monthly basis, we can see that the company still has more than 80 months or six and half years to run before running out of cash. Moreover, the company expects operations to commence in H1 2023 at the EcoGraf battery facility. To expand, the company also received conditional approval for a loan of up to AU$40 million from the Australian government, helping the company develop its battery facility in Australia.
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Informed decision
While markets remain volatile during these times of uncertainty, for investors with a long term picture, these markets may present an opportunity to lower the purchase average.Adding to the above, in the real world, changes come with high prices. In the case of the above-mentioned companies, the innovation and new markets the companies are operating in may not be accessible to the broader consumer market. Still, they may become more accessible, which may give the companies added pricing power as the consumer market gains more access and becomes more competitive..
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Sources – EasyResearch, Ecograf Ltd, British American Tobacco PLC, 3D Systems Inc, Nasdaq, ASX, JSE Sens, The Assay, MJBizDaily
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