Ovintiv: January 19

…Nine months free cash flow (cash flow from operations less capital spending) after dividends swung $352 million to a shortfall of $290 million (but was a positive $118 million in the third quarter) before $50 million of net asset sales. Total debt rose a modest $168 million YTD to $7.1 billion but was down $224 million on a sequential basis reflecting the repurchase of $252 million principal amount of its senior notes at a small discount. In addition to possible capital market refinancing transactions, third quarter liquidity of $3.1 billion was sufficient to manage late 2021 and early 2022 senior note maturities of $554 million and $605 million, respectively. After its second quarter voluntary shut-ins in response to lower oil prices, the company resumed third quarter well completions on more than 100 drilled but uncompleted wells (DUCs), most of which should commence production by year-end 2020 (about 30 DUCs will be carried into 2021). By the end of the third quarter, OVV reached its 2020 goal of cutting more than $200 million of costs and looks to benefit from an additional $100 million of savings as legacy costs expire in 2021. As of October, the company had hedges for 180,000 Mbbls/d of crude and condensate, or 90% of expected fourth quarter volume (as well as 40% of expected 2021 volume). The company’s four priorities remain reducing debt, maintaining scale, driving efficiencies, and returning cash to shareholders. Longer term at mid-cycle pricing, OVV is targeting a net leverage ratio of 1.5x or less. We look for 2020 net leverage to increase to 3.4x, before receding to 2.8x in 2021, and possibly lower if oil prices move higher. Liquidity remains strong and debt maturities manageable. The 6.5% senior notes due 2034 yield 4.375%. Maintain outperform with limited upside.

TV Azteca SAB: January 19

…The capital structure is not looking good. With no equity left and an increase in debt due in part to the lower Mexican Peso, the credit profile has been under pressure. Luckily, the maturities falling due in 2021 are small and it will be only in 2022 that local debentures will need to be repaid, before the international bonds will be due in 2024. We do not expect an imminent default. The covenants on Azteca’s debt make it impossible to incur additional debt, but it does not force the group to maintain leverage below a maximum level, giving it some breathing space for now. In terms of asset sales, the company has limited options, including the sale of the football clubs it owns in Mexico. We also believe that the broadcasting business could become an attractive target for an international group to expand, although the limitations of the listing rules in Mexico limit the ability of foreign investors to own a majority stake in Mexican companies. We had been cautious on TV Azteca’s bonds, given the economic crisis in Mexico and the deterioration of the credit metrics, but expect the situation to improve in 2021. TZA 8.25% 08/2024s have a cash price of $57 now, yielding 28.2% (z-spread: 2.790bps). The competitor Televisa already had a solid recovery, with its 4.625% Jan-2026 bonds yielding 1.4% (z-spread: 96bps). Part of the Salinas group, Grupo Elektra was able to raise $500 million last week with a 7-year maturity and a 5% yield via a securitization of US-originated remittances and a corporate guarantee. We expect TV Azteca to recover gradually in 2021 and some strategic changes to bring some positive news. Change to BUY.

Intel: January 19

…Speaking of which, the short term does not appear all that attractive. We estimate that revenue will plunge more than 13% in the fourth quarter. First quarter results will probably be even worse. We do think revenue will rebound modestly over the remaining quarters. But we expect revenue to decline roughly 4% in 2021. That follows our projection for a nearly 5% increase for 2020. Since revenue soared tremendously in the Data Center Group in the first half of 2020, creating tough comparisons, we expect revenue in this segment to fall considerably in early 2021. Given the weaker revenue, we estimate that gross margins will be down. Costs associated with the ramp of 10-nanometer production will constrain margins also. These should more than offset the benefit of selling the NAND operations, resulting in a 60-basis point decrease in overall operating margins. Considering the expectations for lower revenue and weaker margins, we suspect free cash flow will drop substantially versus 2020. Yet we still project free cash flow of nearly $9 billion. Admittedly, a good portion of that may go towards share repurchases. Some is likely be used for acquisitions, as historically the company has made deals, although it did not complete any transactions in 2020. However, Intel has no need to reduce debt. We estimate that leverage at the end of 2020 was likely 1.1x. The decrease in EBITDA we are anticipating will likely drive leverage to 1.2x by the end of this year. That is still quite low by any standard. In addition, the company will likely have close to $6 billion in cash, along with $3 billion in short-term investments and almost $12 billion in trading assets. As we have noted many times in the past, we are skeptical that a new CEO can rapidly right the ship and increase sales and margins. We still expect revenue, market share, and operating margins to drop in the near term. But free cash flow should remain enormous, while leverage is very low compared to most of its rivals. We like the longer-term prospects for a company that still captures tremendous market share. We maintain our outperform recommendation, with the 2030 notes trading at a spread of +50.

Royal Caribbean: January 15

…RCL has managed to shore up liquidity for this non-revenue scenario by increasing debt significantly. At the end of the most recently reported third quarter, RCL’s debt had increased to near $19 billion from $11 billion prior to the pandemic. Third quarter results were unsurprising given the cessation of operations with an operating loss of almost $1 billion, but the company ended the quarter with $3.7 billion of liquidity. In October it issued $575 million of convertible notes due 2023 and also $575 million of common stock. Thus, it appears that RCL would have sufficient liquidity to operate through 2021 (earlier estimates of peak cash burn were $250-290 per month and this likely has ameliorated given a big cut in capex and other spending). RCL also has received covenant waivers from its banks for its export credit facilities and certain other bank debt through the end of this year. We expect the banks will continue to provide flexibility, barring some geopolitical event or disastrous pandemic development, that will afford the company sufficient runway to restart normal operations. The soon to be reported 2020 fourth quarter is likely to mimic the third (a non-revenue scenario), and credit measures are not meaningful given negative EBITDA in 2020. However, operating results likely will be dismal through the first half of 2021 and challenged in the second half as well, so we don’t think RCL will achieve 50% of peak EBITDA in 2021. Our projections currently are for 2021 adjusted EBITDA of near $800 million leading to leverage in the double digits and about 1x interest coverage. Free cash flow will approach negative $1 billion. RCL has significant maturities starting this year and over $4 billion comes due in 2022. The company has had smooth access to the capital markets so far and bank support has been encouraging. Bond prices have been supported by these factors and the expectation that 2022 forward bookings will strengthen nicely. The 2028 bonds continue to trade at a 5.6% y.t.w. We rate them outperform with limited upside.

Visa Inc.: January 15

…Despite the impact of the pandemic, Visa generated $9.7 billion of free cash flow in fiscal 2020, net of capital expenditures ($736 million). The company returned $10.8 billion to shareholders, including $2.7 billion in dividends and $8.1 billion in common stock buybacks. As of September 30, there was $5.5 billion in remaining authorization under the current share repurchase program. Visa issued $16 billion of debt in December 2015 (FY2016) to fund its purchase of Visa Europe. In fiscal 2020, it issued $7.3 billion in senior notes in April and August, with maturities ranging from seven to 30 years. A portion of the proceeds was used to pay off a $3.0 billion maturity in December 2020. There are no maturities in 2021; $3.25 billion in notes mature in 2022. Remaining maturities are well-laddered and extend out through 2050. There is also a $5.0 billion revolving credit facility, which was untapped at the fiscal year-end.  Given the prefunding for the Plaid deal and for the December debt maturity, debt/EBITDA was somewhat higher than normal as of September 30 but will likely revert to a more normal run-rate in 2021 of around 1.0x (see datasheet). Cash and equivalents totaled $16.3 billion at the end of September, up year-over-year from $7.8 billion. While Visa will not now be buying Plaid, it seems likely that it will redeploy funds into other uses, including organic growth, acquisitions, and/or buybacks. We expect that Visa will remain strongly capitalized, given the high profitability of its core business. The 1.1% notes due 2/15/31 are seen at T+26. Opinion: buy.

Constellation Brands: January 11

…The Wine segment is smaller going forward and although the “premiumization” strategy appears to be working given double-digit growth of higher end brands Kim Crawford, Meiomi and The Prisoner, we continue to project an 8-10% decline in Wine segment sales given the divestment. In the recent third fiscal quarter Wine and Spirits reported a 13% increase in organic net sales but segment operating income was up just 1%. While Constellation believes its power brand strategy is gaining momentum (its higher-end wine brands are outpacing the premium segment), management is guiding to a 16-18% operating income decline for fiscal 2021. By our calculation LTM adjusted EBITDA is near $3.2 billion, leading to both leverage and net leverage of 3.4x. We are adjusting our fiscal 2021 projections upward based on the good year to date results and management’s recent guidance update. Constellation now projects for the full fiscal year 2021 operating cash flow (midpoint) of $2.6 billion, capex of $850 million and free cash flow of $1.75 billion. Our adjusted EBITDA projection is increased to near $3.3 billion that leads to free cash flow in line with current guidance. We project net leverage in the lower 3x range at year end. Although Constellation can afford slightly elevated leverage due to its resiliency during recessions, its current financial policy has become more aggressive and bonds have continued to increase in price with the 3.5% of 2027 now priced at 1.3% y.t.w. Maintain underperform on the unsecured notes.

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