Investment research into UK Stocks by Walbrock Research

This is a discussion on Investment research into UK Stocks by Walbrock Research within the Daily Analysis forums, part of the Commercial category; Here are my findings. (P.S. All data got converted back to British Pounds.) The company has been through a rough ...

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Old Apr 19, 2017, 12:11pm   #9
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For those interested in Tullow Oil

Walbrock Research started this thread Here are my findings.

(P.S. All data got converted back to British Pounds.)

The company has been through a rough three-year patch that saw long-term shareholders lost all capital appreciation dating back to 2006!
Recently, Tullow Oil asked its shareholders to fork out $750m in a Rights Issue at a discount of £1.30/share.
Is this the turning point for Tullow and a change in fortune for its shareholders?
First, Tullow’s shares didn’t initially fall because of collapsing oil price. It fell because operating profits collapsed to £245m in 2013 from £700m, along with large capex spending in the future.
But declining oil price did exacerbate the shares lower by another 60% from £6-£7 per share.

To explain my answers in a concise and clear answer I want to dissect Tullow Oil into two sections:
1. Operational;
2. External.


(Period discussed is from 2006): -

A. Tullow Oil spends £9.6bn in finding the replacement of oil sold and building up its reserves.
That resulted in oil reserves & resources increasing by 686m to 1,193m. Given that Tullow sold 243m over this period, then the capital spend per barrel is £9.6bn ($14bn) divided by 929m = $15 per barrel.
The $15 per barrel capex doesn’t include the operational costs of extracting the oil on an annual basis. Add in operational costs per barrel, the cost of oil totals $71.9 per barrel in 2016.

B. Despite the big spend, sales volume of oil increased by 2,600 bopd, a 5% growth.
C. Despite years of producing oil, Tullow Oil has rarely generated positive free cash flow. In fact, it lost a total of £4.4bn. (Data from Tullow Oil annual report)
D. Last year, oil production came to 71,700 bopd in 2016. A year ago, it gave a production for 2016 of between 78,000 to 87,000 bopd, a 10%-24% miss.
One big reason is down to its Jubilee field in Ghana. That oil field contributes around 26,000 bopd to Tullow Oil (or, around 35% of total oil production).
E. With this year oil production guidance of 88,000 bopd, it already downgraded this by 5,000 bopd.
F. As mentioned earlier, the level of total debt grew from £214m to £4bn, while sales doubled.

External Factors
Now, for the external factor, mainly the role of WTI/Brent Oil.

(Unless stated this period is from 2011)

The collapse in oil price has affected Tullow Oil business in the following ways:
A. Tullow generated sales of 25 pence for every pound it holds in assets. Now, it does 10 pence.
B. With capital turnover, Tullow is returning less than half of its investment.
C. Net cash earnings fell to £417m from a peak of £1.1bn.
D. Tullow, also written-off impairment charges totalling £5bn.
E. In 2016, half the oil was hedge at $75 per barrel, this enables the firm not to experience the full impact of adverse oil prices. Today, it can only get $60 per barrel for 45% of oil production.

For 2017

Reasons to be optimistic are: -

A. Capex spending cut to $500m this year, down from $900m last year.
B. Hopefully, it could achieve higher oil production of at least 80,000 bopd.
C. OPEC oil production cut to maintain oil prices.

Reasons to be pessimistic are: -

A. This year oil hedge is 20% lower than 2016, it puts pressure on margins.
B. U.S. oil production dampening price increase.

C. Further operational production disruption possible.
D. The North Korean crisis looking likely as both sides won’t back down. That would dampen trade and economic activities.
E. New share outstanding of 1.38m values Tullow at £3bn. It would limit any gains in the share price.
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Old May 16, 2017, 5:58am   #10
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1Spatial, a business for employees

Walbrock Research started this thread 1Spatial is a phoenix rising from the ashes with its extraordinary sales growth. But the problem is it never made a penny in profit for shareholders.
One obvious reason with most “techies” is the cost of hiring to find talent proves expensive. Although I regard the firm ability to find new businesses, it’s an employee-base business.
Think of Premier League Football where the players get all the dough, but leaves the club (vis-à-vis Billionaires owners) with the losses.
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Old May 19, 2017, 11:45pm   #11
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Kainos Group a software firm you can trust?

Walbrock Research started this thread Kainos Group has been listed on the market for two years at £1.35 per share. Now trading around £2.60 per share. The listing has made 9 millionaires for the owners and senior managers.

Looking towards their next report (end of May), they haven't given much detail away (apart from saying they are trading in-line with expectations), but might have let something in their latest trading update. That is Kainos has recruited 216 new staff since April 2016, which is a 25% increase. From my research, I have evaluated the revenue per staff growing from £81k to £104k in three years. Similarly, profit per staff rose from £10k to £19k.
So, using conservative estimates of £105,000 sales per staff and £20k profit per staff, then my forecast for Kainos Group’s 2017 is:
A. An approximate revenue of £102m from £76.6m;
B. And operating profit close to £20m from £14.2m.
These are impressive estimates and we will see by the end of this month.
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Old May 20, 2017, 2:51am   #12
Joined May 2017
Thanks for sharing. I even didn't heard about this firm before.
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Old May 24, 2017, 4:32pm   #13
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What you need to know about PayPoint ahead of tomorrow results

Walbrock Research started this thread PayPoint PLC results coming out tomorrow and here are a few things I have learned from the company: -

1. Apart from last year, PayPoint has made ROCE of 40% plus in the last decade;

2. It consistently generates more cash profits than accounting profits. Over a 10-year period, this averages 26% higher;

3. Since 2005, its dividends payments totalled £182m is fully covered by free cash flow generation £255m;

4. The disposal of its online and mobile payment services raised £40m. At the same time, it is upgrading their Epos platform for the first time in 12 years.
It means PayPoint would need to invest substantial amounts of money for manufacturing because there are no upfront payment costs if retail agents were to upgrade their PayPoint system. Instead, there would be a milestone payment of £20 per week for the next two years.


Analysts are expecting 63 pence per share earnings, this gives a forward-PE of 15 times.
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Old Jun 1, 2017, 7:16pm   #14
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The Good, The Bad and The Ugly of WH Smiths

Walbrock Research started this thread The post is originally from and I have full authority to re-post as I am the author. All images links are charts I've created and helps to interpret the text.

Sometimes if you want to pick the right stock for your portfolio, then you need to study successful companies that deliver to shareholders. One company that has delivered is WH Smiths. Now, we need to dissect the key drivers that drove WH Smiths share price to record highs.

N.B.: This post isn’t recommending WH Smiths shares, but it is an education.

How did WH Smiths defy the odds

WH Smiths is one of the oldest businesses in the UK (Founded in the 18th Century). Having survived the financial crisis, it makes hay and grew from strength to strength.

Click the image to open in full size.

Trading profits from both divisions grew by £87m in eleven years. One huge factor is due to winding down its high-street division (or, so we believed).

WH Smiths has drastically cut down their high-street division as sales collapsed from £1,112m to £639m, a near 50% drop.

Lesson: - When you see declining revenue, don’t assume the business is bad.

Always look at their gross and operating margins.
Their travel division has doubled in sales, with profits more than tripling. This is because more people are travelling via rails and planes.

The rebirth of British Rail

Click the image to open in full size.

The growth of air travel

Click the image to open in full size.

Okay, we know the basics on how WH Smiths have turned around their business. Now, we turn our attention to the details of their financials and operations.

WH Smiths Good Points

Increasing Profitability

One key attribute behind WH Smiths increasing operating margins have been their ability to reduce external costs. Increasing Gross Margins has helped Smiths to improve operating margins by 3-fold. That’s despite rising rental expenses and staff costs.

Click the image to open in full size.

Able to pay higher wages

Talking about staff costs, you would think the National Living Wage would pose a threat by increasing their operational expenses. So far, Smiths was able to raise average wages from £10,600 to £14,700. You might think this is still low for annual pay, but, you have to take into account the part-timers, under 21s, etc. Those working part-time could be earning £7k per annum (I’m guessing here). Meanwhile, you have store managers and high ranking staff members who are paid higher salaries, which helped to lift the average cost per employee.

One helpful factor is Smiths was able to keep up with the times and cut staff numbers.

Since 2005, Smiths has cut their workforce by 28% and that has given the company an ability to meet minimum pay increases. Also, it manages to help boost revenue productivity per worker.

Click the image to open in full size.

That saw an increase from £75.5k in 2005 to £88.4k in 2016.

How was WH Smiths able to achieve these efficiencies gains?

The obvious reason was to assume closure from loss-making stores in their high-street division (refer to the big falls in revenue). The other reason is the increased use of self-service checkouts. You can also point to factors like low inflation and closure of several competitors like Woolworths. Then there is the sales boost from their “busier” travel division.

A Stagnating Business requires less Capital Spending

A look at free cash flow would tell you if a business is spending “crazy” amounts of money or spending enough to maintain their assets.

In WH Smiths case, free cash flow is producing high cash inflows numbers. On average, it accounts for 70% of operating cash flow. And this shows in the capex/depreciation ratio (%). Since 2005, maintenance (depreciation) amounted to £439m vs. capex’s £422m, that’s 96% maintenance coverage!

Click the image to open in full size.

This gel well when you compare it to the change in sales from £1.423bn to £1.212bn in the same period, a shrinkage of 13%.

Knowing How to Reward its Shareholders

Whatever you think of WH Smiths, the retailer knows how to reward their shareholders. The dividend yield is 2.2%. Add in the share buybacks it is yielding “something” like 4.5%.

I say “something like” because shareholders need to sell their shares in return for cash. Every time, Smiths does a buyback, the shareholders hold fewer WH Smiths shares. Unlike, the dividends where you receive a straight-up cash payment without any strings attached.

Here is the change in Smiths share buybacks and dividends.

Click the image to open in full size.

How would you fair in ten years, as a WH Smiths Shareholder?

Imagine you purchase 100,000 Smiths shares in 2006 and you pay an average £3.12 per share. That amounts to an initial investment of £312,000 (ignoring transaction fees). After ten years, you would want to ask the following questions:

A. How much would you receive in dividends?
B. How has the share buybacks added to your returns?
C. The number of Smiths shares you will end up by 2016.
D. What is the total return from both the dividends and share buybacks? (In % and absolutes)
E. How much will your WH Smiths shares be worth?
F. What are the total returns after ten years from realised and unrealised gains?

Corresponding Answers

A. After ten years, you would receive a total of £198,908 in dividends.
B. Smith’s share buyback would have contributed a further £189,400 to your coffers.
C. By 2016, the amounts of WH Smiths shares in your portfolio has fallen to 61,749.
D. In ten years, you would have gotten back 63.75% of your original investment via dividends, and 60.7% via share buybacks. So, the total return comes to £388,300.
E. We know that the initial value of WH Smiths shares were £312,000 in 2006. By the end of 2016, your unrealised WH Smiths shares are valued at £1,004,965, a 222% appreciation.
F. Combining these returns (realised or unrealised), your total return is 346%.
The details of your £100,000 investment “year after year” is shown below:

Click the image to open in full size.

WH Smiths share price without the Buybacks

What would WH Smiths share price look like without the buybacks?
It would look like this:

Click the image to open in full size.

If we were to assume WH Smiths didn’t do any buybacks, but instead, pay it all in dividends, the number of share outstanding would remain the same.

And using the average market capitalisation in 2016 of £1,839m, then Smiths shares would be worth £10.04 each, instead of £16.27.

That’s enough praise for WH Smiths. Now we search for any possible red flags or weakness in Smiths business model.

WH Smiths Bad Points

When you see growing profits and increasing shareholders return, you can be forgiven for overlooking any weaknesses in the WH Smiths business model.

But, one thing I noticed or doesn’t gel well with the company increasing profitability is their collapsing inventory turnover. That is a concern if you consider that the majority of its business relies on selling goods, rather than services.

Click the image to open in full size.

One reason is Smiths numerator “Costs of goods sold” has collapsed, but still, they should manage to reduce their inventory levels along with declining sales.

The negative of Smiths inventory turnover will lead to increasing days in holding inventory. This would incur extra storage costs and other holding costs.

Prolonging creditors’ days

Below is the cash cycle chart:

Click the image to open in full size.

Apart from the increasing inventory days, WH Smiths creditors are having to wait longer for payment. However, this pattern is rather volatile and doesn’t appear to put investors off investing in Smiths.

Question: Is there any particular reasons why creditors’ days are longer?

The other dirty secret is WH Smiths assets.

A look at the depreciation of WH Smiths

WH Smiths rate of depreciation has slowed from 8.9% to 7%. A lower rate of depreciation indicates smaller depreciation charge. It helps to lower expenses and boost profits!

Another angle could be Smiths revaluing assets higher, as their original costs of assets rose from £460m to £539m, despite falling sales. In that case, you can ignore the depreciation charge.

Click the image to open in full size.

The average age of WH Smiths assets has gotten older by 3.2 years.

Lesson: - The older the asset gets over time, the greater the chance a company will spend big to refresh and maintain the condition of its assets.

For WH Smiths, this may not necessarily apply because they are focused on increasing its operating profits. However, the “bricks and mortar” coverage between their high-street branches and travel branches suggest otherwise (more on that later).

If you think WH Smiths is deliberately “lowering” depreciation charges, then there is an argument against that. One is to use the Worn-Out ratio, a measure of how much value has been written off.

Click the image to open in full size.

That ratio shows WH Smiths assets represent less than two-thirds of original value from half their original value, a decade ago.
However, it is evident the assets are getting older!

The Ugly Truth about WH Smiths

If you visit a WH Smiths store you may see this:

Click the image to open in full size.

Or, that

Click the image to open in full size.

I'm kidding!!!!!!! Now, the real ugly truth, which I’m ONLY hinting at, but shouldn’t be taken as gospel is the retail coverage.
We saw the big drop in sales of their high-street division from £1.1bn to £600m. When you compare that with “SQ. FT.” coverage, it tells a different story.

Click the image to open in full size.

The high-street division cover 2,827 (Sq. ft.’000s) today, not far from the 3,000 (Sq. ft.’000s) ten years ago, so how is it possible that sales declined so dramatically in that division?

Hmm… That’s a legit question.

We assumed from the start that Smiths been closing down its stores. In fact, the opposite has happened. There are now more stores on the high-street, as it jumped from 543 to 612. Or, it could mean that bigger branches are closing down, while it opens more little ones.

Based on the above assessment. Do you think there is foul play or a misunderstanding between crashing high-street sales and increasing stores?

WH Smiths Valuation

Smiths’ valuations are looking fairly high. Normally, it trades on single-digit of 6s and 7s for EV/EBIT. Now, it trades at 13 times operating earnings, which is doubled the average.

A similar comparison can be made for EV/OCF ratio, but the one difference is it normally trades at 5s and 6s multiples.

Click the image to open in full size.

So, is this valuation too high?

Well, analysts are forecasting £1.05 per share in earnings for 2017 and £1.09 per share for 2018. We can’t determine the absolute profits because of the company’s share buyback policies.

But, if “per share” increases are that small, despite further buybacks, then profits could be stagnating.

WH Smiths Briefing

Let’s remind us of the objectives in this post, that’s about identifying factors which support a retail stock price.

These are:
A. The growth in Smiths trading profits is a key factor, but it must translate to giving your shareholders a decent return.
B. Don’t sell a retail stock because of a declining revenue trend. Earnings should be your focus. Also, a mature business can attribute falling sales from over expansion, so it is natural for the company to implement economies of scale.
However, a growth retailer with falling sales would be bad.
C. Generating high levels of free cash flow is a positive sign and means the retailer didn’t have to borrow money to pay dividends. It is why WH Smiths debt levels are low.
D. And earning positive amounts of free cash flow gives management the options to increase dividends.

These are a few things you need to watch out for but is not everything. One big factor is the valuation. In the case of WH Smiths, it was a great buy when the company was trading on 6 times EV/EBIT. Now, at 13 times, the market got ahead of fundamentals.

A second factor is future earnings growth and for Smiths this it at a low single-digit (See WH Smiths Valuation). Add that to the high valuation and further share buyback, then fundamentals suggest it is running out of steam.

A third factor is the company’s business cycle. WH Smiths has been delivering for a long time, especially earnings growth. Now, it might be the time when consumers are cautious or picky in their spending.

As for forecasting WH Smith’s share price, I will leave that to the securities firms. If I was going a pick where the shares are going then there is a 60% chance it will trade £15 or under, but an 80% chance it will stay above £12.

Thanks for reading if you made it to the end!

Let’s me pick your brain some more and ask a few questions:
1. Do these factors support a mature retailer’s share price?
2. Do you think WH Smiths valuation looks too high? Therefore, may emulate NEXT PLC.


The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.
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Old Jun 8, 2017, 11:41am   #15
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Walbrock Research started this thread Didn’t expect Molins to pull off this disposal, but what did we expect when the shares have been undervalued for so long!

The last time I posted, I said the company needed to invest in their ageing assets. Now, they won’t need to invest as much. Instead, they have a lot more cash at hand.

Before the disposal, Molin's enterprise value was £18m, now it is 25% higher!
Let’s say they invest £8m, that would leave them with £28m-£30m in the bank.

Regarding, their pension schemes, shouldn’t the deficit come down if interest rate or UK Gilts and US Bonds start to rise? Well, that depends on what’s in the composition of Molin's pension assets.

Oh, BTW, with this disposal, I expect the shares to trade around £1.20 per share or higher, giving a market value of £25m. Think about it, if their Tobacco division has similar fundamentals to their packaging division, shouldn’t that be worth at least £20m in a liquidation!
But, I need to do further research, before coming to a full conclusion.
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Old Jun 14, 2017, 6:11pm   #16
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5 Reasons why Investors are shunning Norcros PLC Shares

Walbrock Research started this thread The post is originally from and I have full authority to re-post as I am the author. All images links are charts I've created and helps to interpret the text.

Norcros, the owner of Triton, Croydex and Johnson Tiles has been struggling lately, regarding growth in their share price movement. In fact, Norcros share price has gone nowhere for four years, despite showing clear operational improvement and higher profitability. Here are the anomalies:

Click the image to open in full size.

If you compare the market value against net income and operating cash flow, it’s like night and day.
So, why are investors shunning this stock?
A tough question that requires a thorough investigation. Here are five reasons investors could concern themselves about Norcros:

South Africa Issue

South Africa has been in the news for its political crisis, which doesn’t help with its social and economic stabilities. The most important effects from its South African would be poor sales generation and a hit on its profits when the Rand get converted back to the British Pound.
The weakness of the South African Rand is noticeable against the U.S. Dollar when it fell from 6 Rand to 12.8 Rand to 1 U.S. Dollar in six years.
Despite the UK seeing a similar weakness, the British Pound is actually stronger than the South African Rand by appreciating from 10 Rand to 16 Rand in the same period.
Now, we compare Norcros South African operations. Sales did stagnate (2011: £72.4m; 2016: £72.9m), but operating profits have grown from £0.2m in 2011 to £4.1m. Today, results saw its South African operation generate £88.9m in sales and £6.4m in operating profits.
So, the weakness in its share price doesn’t come from South Africa.

Foreign Exchange gains/losses

Given the weakness in the British Pound, how prevalent is this to investors? The graph shows big FX losses.

Click the image to open in full size.

In the last seven years, Norcros saw FX losses totalled £16.5m. Compare that to the net profit of £60.1m during the same period, the company saw slightly more than a quarter its profits have been eaten away by adverse FX.

Growing pension deficit
On an annual basis, Norcros saw its pensions obligation turned from surpluses into deficits in 12 years (See below).

Click the image to open in full size.

That growing deficit means Norcros will one day have to reduce that deficit from operational cash flow, therefore future profits are expected to come in below expectation because of the out of control pension deficit!!
However, in their latest interim results that deficit grew to £97.8m, which is a £55m increase from a year ago. It looks like the time is coming soon for Norcros. But, today's results saw the pension deficit got reduced to £62.7m, thanks to rising equity prices and gilts yield.
Another interesting fact is the pensioner payroll, which has 7,922 members that saw the company paid out £20m per annum or equivalent of 8.5% in total sales to their retired employees, as contribution.

P.S. The pension scheme has been closed to new entrants since 2013.

The Real Net Debt

This may sound controversial because the traditional way of calculating net debt is total debt minus total cash and cash equivalent.
However, this can mislead investors into a false sense of security.
A company doesn’t need to take on debt, it can delay payments to suppliers. Or, it can let the pension deficit grow larger (see section above).

So, the real net debt should include the following:
On the Debit side: -
Cash, trade receivables and pension surplus.
On the credit side: -
Total debt, finance lease, trade payables and pension deficit.

With that knowledge, you can draw a bar chart comparing the traditional net debt and the real net debt.

Click the image to open in full size.

As the pension deficit grew, so did the real net debt as it pulled away from the traditional measure of net debt. The real net debt is the second highest since 2005.

Norcros’s Valuation: Cheap or not so cheap

By including pension deficits and changes to receivables and payables, this has affected Norcros PLC enterprise value.
First, an illustration:

Click the image to open in full size.

The label “New EV” includes the pension deficit.
That graph tells me that a rising pension deficit is responsible for suppressing market valuation of Norcros, and in turn, is the reason why the shares saw no rise. Another interesting fact is that net debt, including the pension deficit, is now greater than Norcros’s Market Capitalisation!!

Other Financial Facts on Norcros

1. Revenue at Norcros grew from £147m in 2005 to £236m by 2016. Today, it reported revenue of £271m.
2. Shareholders’ equity stands at £47.6m on an annual basis, which has been trending lower for six years. But in their latest interim result, equity has fallen to £22.5m, down from £52.2m, a year ago. Now, shareholders’ equity has bounced back to £56.6m.
3. In twelve years, Norcros has paid out a total of £19.1m in dividends.
4. One thing you didn’t know is net investing activities totalled £37.5m since 2005, which worked out as £2.88m per year in net capital expenditure. At the time, depreciation costs have totalled £78.7m or £6.05m per year. Does this mean Norcros hasn’t been maintaining their assets?

Share Price Forecast

This is a simple forecast to make.

Best-Case Scenario: - The share price will rise to £2.20 per share in the next 12 months. (Probability outcome: 30%)
That can happen if the pension deficit gets smaller, with this translating to a rising share price. But Norcros operating profits must remain intact!!

Base-Case Scenario: - The share price will hover between £1.40 to £1.80 in the next 12 months. (Probability outcome: 45%) Hopefully, the pension deficit doesn’t grow larger but start to stabilise. Also, Norcros needs to continue to deliver results for the market.

Worst-Case Scenario: - The shares could drop below £1.40 to £1 in the next 12 to 24 months. (Probability outcome: 25%) This is because Norcros face a “catch-22” situation where they allow themselves to report higher profits without dealing with their pension deficit.

Leaving it to grow organically means Norcros needs to borrow from external sources to plug the pension gap in the near future. This would catch investors by surprise!!!
Secondly, there is a case to be made about Norcros not maintaining their assets. However, this hasn’t affected their operations.

Overall, this company is a hold for now because it is trying to deal with the pension deficits. Investors should be concerned if the equity markets start to fall or gilts yield start falling because that would exacerbate the pension deficit.

P.S. An earlier version was written, but I didn't they were reporting results today, so I included the latest results into my analysis.

Thanks for reading.

Do you agree or disagree with my analysis, please let me know down the comments below!


The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.
Finally, the writer does not own the company’s stock, unless stated otherwise.
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