Pavan Sharma

We initiate coverage of Mastercard Inc (NYSE: MA) with a BUY rating. The company offers a payment network which is accepted globally by +40 million merchants. Together with Visa (NYSE: V) the two form a payment network duopoly. We see the primary drivers for Mastercard’s success as rising global incomes and a continued shift to a cashless society.

The New Zealand market (NZX 50 Index, +0.4%) rose marginally on Tuesday. Pushpay (-1.7%) fell after the company omitted to provide details concerning the takeover bids it was fielding. On Monday, Pushpay climbed +3.5% before being placed in a trading halt. Sky Network Television (+5.2%) surged, correcting for the -5.0% selloff the stock experienced yesterday after announcing it had sold its RugbyPass streaming platform and secured the rights to the World Rugby through to 2029. 

We initiate coverage of Domino’s with a HOLD rating. Domino’s Pizza is the world’s largest pizza chain. In the world of quick service restaurants, it is distinguished by i) it’s delivery/eat-out-first model and ii) the cheapness of its offering. For a long time, the leading pizza chain in the world was Pizza Hut. Pizza Hut was an eat-in concept. Delivery was secondary. Dominos made delivery primary and benefitted from cheaper store fit-outs (no dine-in floorspace, practically) and a pre-Uber Eats shift in consumer preferences to delivered food. Like its competitors Dominos largely franchises out, collecting a franchise fee and acting as the largest supplier to its stores (dough, cheese, toppings, etc). The delivery-forward model has faced some challenges as of late, as fuel prices and staff shortages eat into franchisee’s razor-thin margins.

The New Zealand market (NZX 50 Index, -1.7%) finally had a chance to react to the strong US jobs data released on Friday. Healthcare (-2.2%), Utilities (-2.1%), and Real Estate (2.1%) were the largest drags on the market on Monday. Materials (+1.0%) was the only sector in the green.

We initiate coverage of McDonald’s with a NEUTRAL rating. As we wrote in our report on Starbucks, we like the quick service business because the set-up costs are relatively low, and the return is relatively high. Well-known brands are easier to sell; everyone knows what McDonald’s is. There’s a high degree of predictability baked into the model. We especially like McDonald’s because it is really a real estate company. The company owns roughly 70% of the buildings and 45% of the land of McDonald’s locations worldwide (excl. Russia). Franchisees pay a percentage of gross revenue (~10.7%) as rent and another percentage (~4%) as a franchise fee. The fact that McDonald’s sells burgers is incidental – it is a highly effective driver for franchisees to pay rent to the parent company.

We initiate coverage of Starbucks with a hold rating. The Seattle-born Starbucks is a globally known coffee chain with +33,000 stores worldwide. Starbucks has come under pressure from i) unionisation efforts ii) China’s extended COVID shut-down iii) shifting consumer tastes. Same-store sales in China declined ~43% in Q3 ‘22, whilst intl. same-store sales decreased 18%.

Shares of Nike Inc fell sharply in aftermarket trading after missing on gross margin expectations. GM narrowed to 44.3% and mgmt reiterated that GM may decline another ~50bps this fiscal year. Revenue grew – up 10% on a currency neutral basis; Nike Direct sales were up 16% cur. neutral and Nike Online grew 23% cur. neutral. Inventory grew 40%. Diluted EPS were down 20% YoY (0.93), slightly beating analyst’s estimates.

We initiate coverage of Meta Platforms Inc (NASDAQ: META) with a SELL rating. Meta Platforms is the owner of Facebook, Instagram, and WhatsApp. We trust our readers are familiar enough with all three platforms – they are amongst the most widely used in the world – 2.87 billion people use one of Meta’s core products daily.

We think private equity is correct: music catalogues are an extremely valuable asset class. However, we prefer Warner Music Group and Universal Music Group as ways to “play” this, simply because they already own a lot of catalogues and are in the business of producing more at an up-front cost with the artists they’ve signed. Private equity and Hipgnosis is in the business of paying more aftermarket, which can hike up the price significantly — we prefer to own it at the source.