Morningstar have coined the witty term flowmageddon, in this article, for the on-going outflows that many in the active asset management sector are experiencing. In the US, passive equity funds have doubled their market share over the past decade and now make up over 40% of invested assets whilst bond fund assets have grown to over a quarter of the market, as the graph below shows.
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The competition from passive investments such as ETFs has forced fees down for active managers. As per this FT article, Tim Guinness, chief investment officer of Guinness Global Money Managers Fund commented that “the days of great prosperity for active fund management may be behind us”. In other words, flowmageddon is leading to paymageddon!
According to this recent Economist article, the future for many active asset managers does not look too bright given the costs of increased regulation, such as the new fiduciary rules from the Department of Labour in the US, and the increased ability of technology to replicate complex investment strategies without the need for a load of vastly overpaid investment managers . Given that the majority of active managers consistently fail to beat their benchmarks after fees, the on-going shakeup is no bad thing.
Posted in Equity Market
Tagged active asset management, active managers, advances in technology, benchmarks, digital technologies, ETF, exchange traded funds, fintech, Flowmageddon, increased regulation, institutional investors, investing ideas, investment ideas, investment risks, investment strategy, market share, Morningstar, passive asset management, passive funds, passive managers, paymageddon, technology, Tim Guinness
The onset of a wobbly tooth from a year old crown caused me to have a look at Sirona Dental Systems (SIRO) again. I last blogged on it in August 2014 here. SIRO has had a good run since then moving from around $80 to $109 today. The recent increase is due to the announcement in September of a merger of equals with DENTSPLY which is expected to close in Q1 2016.
SIRO, with 65% of its revenues outside of the US, felt the impact of the dollar strength with flat line revenue growth in 2015 (year ending in September). In local currencies, SIRO achieved 9.8% growth which was broad based across the US and international markets with respective growth at 9.2% and 10%. Despite the FX headwind, and a volatile Q2, operating margins were impressive, as the graph below shows. Operating cash-flow after capital expenditure has also been strong closely running at approximately 65% of operating income.
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DENTSPLY (ticker XRAY) is a larger company in revenue terms with lower operating margins and a focus on dental consumable products. Dental specialty products such as endodontic (root canal) instruments and materials, implants and related products, bone grafting materials, 3D digital scanning and treatment planning software, dental and orthodontic appliances and accessories make up approximately 50% of revenues. Dental consumable products such as dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride make up approx 30% of sales. The rest of sales are split between dental laboratory products and consumable medical device products. Geographically DENTSPLY also sells its products globally with 65% outside the US. DENTSPLY’s historical results (with assumed Q4 to December for 2015) are as below and the net cash-flow profile of DENTSPLY relative to operating income is similar to SIRO in recent years.
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The investor presentation on the merger highlights further details. One interesting angle on the investment thesis is that the combined company is a good play on the aging population trend in the developed world. The $21 billion global dental market (of which the merged firm will have approximately 18%) is represented at increasing one to two times GDP. The plan also allows for a $500 million share buy-back programme post-closing with $125 million of operating costs savings (or approx 3% of operating margin based upon combined revenues) expected.
SIRO has approximately $500 million in cash with little debt. Goodwill and intangibles make up approximately 40% of SIRO’s total assets. DENTSPLY on the other hand has approximately $230 million in cash with $700 million in debt. Goodwill and intangibles make up nearly 60% of DENTSPLY’s total assets.
Based upon 5% top-line growth, my rough estimates for 2016 for the combined entity are a 21% operating margin post savings or approximately $830 million of operating income and $560 million of net income. Assuming 250 million shares (not taking the buy-back into account) I estimate an EPS of approximately $2.40. These are real back of the envelop calculations so I would caution against any rash conclusions. They do indicate a 25 times multiple of XRAY’s current share price around $60 which looks to me stretched given the integration risks. Still it’s a name for the watch list to monitor and wait for a better entry point.
In the meantime, it’s back to the dentist with this wobbly tooth.
Posted in Investing Ideas
Tagged advances in technology, dental CAD/CAM systems, dental instruments, dental sector, financial crisis, information technologies, Investing, investing ideas, investment ideas, shareholder returns, shareholder value, Sirona Dental, Sirona Dental Systems, stockmarket valuation, technology, technology advances, technology earnings