Silver soared last summer on skyrocketing demand from stock traders stampeding into silver-ETF shares. These huge positions that sure looked speculative initially have largely stayed deployed since, even riding out a silver correction. That implies these holdings are now being viewed as long-term investments. The silver investors’ resoluteness is very bullish for this metal, keeping silver high which fuels growing interest.
Silver has certainly had a wild ride this year, more than living up to its super-speculative reputation. It got sucked into the overwhelming maelstrom of fear from mid-March’s stock panic on governments’ COVID-19 lockdowns, plummeting 35.8% in under a month! The resulting $11.96 nadir was brutal, well below the world’s silver miners’ all-in sustaining costs of production. Silver had been left for dead at that 10.9-year low.
But like a phoenix rising from the ashes, silver’s rebound out of those extreme lows was incredibly violent. Over the next 4.8 months into early August, silver skyrocketed 142.8% higher to $29.04! That proved its best level in 7.4 years. If such high silver prices can be sustained, that would be a game changer for the long-struggling major silver miners. And so far these way-better silver prices have largely held since.
In the 4.4 months since its latest upleg peaked, silver has averaged an impressive $25.00 on close. That is 54.5% higher than 2019’s average price! These far-higher prevailing silver levels are resulting from silver investors’ resolve. They haven’t unwound most of their massive new positions added during this past summer. That suggests they believe silver’s secular bull will keep powering even higher on balance.
Unfortunately world silver supply-and-demand fundamentals are really opaque. Despite its enthusiast following, silver is a tiny global market with a dearth of reliable data. Silver’s definitive fundamental read is only published once a year by the venerable Silver Institute in its World Silver Survey. The last one was released in late April, covering 2019. Thankfully silver investment has a far-higher-resolution proxy.
That is the physical-silver-bullion holdings of the leading and dominant Shares Silver Trust (SLV). They are published daily, vastly superior to the annual peek provided by the WSS. Launched way back in April 2006, SLV has grown into a silver juggernaut. Last year SLV’s holdings grew 45.4m ounces to hit 362.6m. According to that latest WSS, that growth represented 55.6% of the global silver-ETF-demand total.
And the 81.7m ounces of silver that exchange-traded funds bought in 2019 weighed in at nearly a third of overall investment demand. Last spring when they were preparing their latest WSS, its analysts forecast major growth in silver demand through ETFs this year. They projected this silver demand soaring 46.9% YoY to 120.0m ounces in 2020. But even that optimistic view fell way short of what recently transpired.
With this crazy year winding to a close, SLV’s holdings alone have skyrocketed 194.8m ounces year-to-date! Among all kinds of excellent data in the WSS reports is the silver-bullion totals held in physically-backed ETFs around the world. At the end of last year, SLV’s holdings commanded 49.8% of the world total! So this American silver ETF dominates its space, and silver ETFs are increasingly silver’s main driver.
Silver ETFs’ mission is to track and mirror the underlying silver price. But the supply and demand for silver-ETF shares is independent from silver’s own. So the only way ETFs can maintain price parity with silver is to shunt excess silver-ETF-share supply and demand directly into silver itself. That requires making these ETFs actual conduits for stock-market capital to flow into and out of real physical silver bullion.
When SLV-share demand exceeds silver’s, those share prices will decouple from silver’s to the upside. SLV’s managers prevent this by issuing enough new shares to offset this differential demand in real-time. Then they immediately plow the proceeds from those new-share sales into buying more physical silver bullion for their vaults. So when SLV’s holdings are rising, stock-market capital is flowing into silver.
And when SLV-share supply runs higher than silver’s, those share prices threaten to disconnect from silver’s to the downside. SLV’s managers avert this by buying back enough shares to absorb the differential supply in real-time. They raise the money to finance those purchases by selling some of their silver-bullion hoards. So when SLV’s holdings are falling, stock-market capital is shifting back out of silver.
In a year full of remarkable and unprecedented market action, what happened in SLV’s holdings is near the top of the most-amazing list. This silver-bull chart superimposes SLV’s physical-silver-bullion holdings held in trust for its shareholders over silver’s price and technicals. I marveled at this chart last summer as silver soared, and marvel at the incredible resolve silver investors have shown since. They are hanging tight!
Silver’s current secular bull was born in mid-December 2015 with gold’s, and all its uplegs and corrections since are carved out on this chart. Note that strategically silver price trends usually follow those in SLV’s holdings. Silver uplegs mostly coincided with SLV builds, while SLV draws helped drive silver corrections. Before 2020, this bull’s biggest SLV build fueling a silver upleg was 19.3% or 62.7m ounces in mid-2019.
And silver investment had generally been out of favor for a decade or so, since silver shot parabolic and then collapsed back in early 2011. Near silver’s late-April peak of $48.43 after skyrocketing up 169.5% in just 8.3 months, SLV’s holdings hit an all-time-record high of 366.2m ounces. Over the next 8.9 years into March 2020, those holdings never went higher than 388.2m. Silver couldn’t win significant popularity.
That previous-record 388.2m peak came in August 2019, as silver’s upleg that year crested surging to $19.59. Prior to that month the highest SLV holdings ever reported was 366.4m ounces in October 2016, which was actually dead-flat over 5.5 years since April 2011. So there was virtually no excitement in silver for many long years, and investors generally wanted little to do with it. All that suddenly changed in 2020.
For the decades I’ve been studying silver and trading its miners’ stocks, gold has been its primary driver. Silver generally mirrors and amplifies gold’s trends, acting like a leveraged play on gold somewhat like a mining stock. So after March 2020’s stock panic, some of the earlier trades we added after those super-anomalous lows were major silver stocks. These were recommended in our newsletters in early April.
After writing about the epic opportunities in gold and gold stocks in that panic’s immediate wake, I finally found time for silver in mid-April. In my essay “Big Silver Bull Running!” published when silver was still in the low $15s, I concluded “Silver will almost certainly double or triple, and potentially quadruple or quintuple again, from last month’s deep 10.9-year secular low!” Its “outperformance after stock panics is legendary.”
I discussed the incredible differential SLV-share demand following that panic, with its holdings soaring 12.0% or 44.6m ounces higher in less than a month! That was finally a major upside breakout to new record SLV holdings after those long years of no meaningful capital inflows. The reason silver’s price was able to blast 2.4x higher by early August was astoundingly-strong SLV demand from American stock traders.
It was like these guys finally rediscovered silver after nearly a decade of it flying way under their radars. The faster and higher silver rallied, the more SLV shares they bought. The more of those positions they amassed, the more physical silver bullion SLV’s managers had to buy accelerating silver’s rally. It was a glorious virtuous circle of buying, catapulting silver that enormous 142.8% higher in that quick 4.8 months.
During that fast silver upleg’s exact span, SLV’s holdings skyrocketed a phenomenal 53.6% or 198.7m ounces higher. They literally exploded vertically as this chart reveals, which was easily the biggest inflow of stock-market capital into silver ever witnessed! Even back in late 2010 and early 2011 as silver blasted parabolic generating vastly-greater excitement and greed, SLV’s holdings only climbed 20.8% or 61.2m ounces.
It was really fun riding that blistering post-panic silver upleg this year, and some of our biggest realized gains came in silver-stock trades running as high as +199.1%! But stock traders are notorious for being momentum players. They love piling in when something is soaring, but once it peaks and starts selling off they are quick to exit and move on to the next exciting thing. So I feared heavy SLV selling was looming.
All bull-market uplegs are followed by healthy corrections to rebalance sentiment and technicals. And the magnitude of those selloffs tends to be similar to their preceding uplegs. The first three uplegs of this silver bull were fairly modest, averaging just 35.9% gains. Yet the subsequent corrections following them still averaged major 28.9% losses! Excluding that anomalous stock-panic one, the other two averaged 23.9%.
If silver’s corrections snowballed that big after smaller uplegs, what was likely after it rocketed up 142.8% in its latest one? And if silver plunged 25% to 30% in its inevitable correction, would the legions of new silver investors via SLV shares aggressively flee as their capital shrunk? Some fraction of these new SLV shareholders were inexperienced millennials trading their stimulus money with that free Robinhood app.
I discussed these Robinhooders in more depth in a mid-July essay on the exploding silver demand. I sure thought once silver’s upleg exhausted itself and rolled over into a correction, SLV shares would have to suffer a serious mass exodus. That differential SLV-share selling would exacerbate silver’s downside, fueling a vicious circle of losses. And with SLV’s holdings just soaring, there was lots of potential selling to do.
Silver did indeed soon start correcting with gold right on cue like usual. At worst so far, the white metal has lost 22.2% over 3.7 months since its early-August peak. But even though this latest correction was nearing this bull’s previous average excluding March’s stock-panic anomaly, SLV’s holdings merely shed 25.2m ounces or 4.4%! Such resilience was astonishing with so much new capital stuffed into SLV shares.
The highly-speculative momentum-chasing SLV positions that mushroomed last summer have morphed into apparent long-term investments! That doesn’t necessarily mean the same stock traders kept their capital deployed in silver. The hot-money millennials could’ve fled, while institutional investors started to amass silver portfolio allocations after its huge upleg finally put silver back on their radars for the first time in years.
It doesn’t matter who owns SLV, its silver-bullion holdings have been able to hold near highs after they rocketed parabolic last summer! Vertical ascents plateauing instead of symmetrically collapsing are very rare in the markets. After many years of neglect, silver has won over a large contingent of new capital from the stock markets. And these investors must believe silver’s bull market still has lots of room to run higher.
They only unwound about 1/8th of their massive capital inflows into SLV during this latest upleg. Back in early August I would have bet on at least a half one, a silver-correction draw on the order of 100m ounces instead of just 25m. But these new silver investors via SLV shares are certainly right that the outlook for silver remains very bullish. Silver is a small speculative asset in a world awash in new central-bank money.
Almost all financial assets have enjoyed soaring prices since the stock panic as central banks spun up their printing presses to radically-unprecedented speeds. Leading the way to monetize everything was the Fed, which ballooned its balance sheet by an absurd $2,857b or 66.3% in just the first 3.0 months after mid-March’s panic! Other major central banks added the equivalent of trillions of new dollars of their own.
If even a tiny fraction of that liquidity deluge parks in silver, it is in for a speculative mania exceeding what is going on in bitcoin today. Compared to that leading cryptocurrency and gold, the silver market is just vanishingly-small. So any given capital inflows move silver higher faster. One way to visualize silver’s tiny market is looking at its annual demand multiplied by average prices compared to those seen in gold.
That latest World Silver Survey covering 2019 pegged total global silver demand at 991.8m ounces last year. That happened at $16.18 average silver prices, implying the silver market was worth a trivial $16.0b in 2019. Using this same metric for gold derived from the latest fundamental data from the World Gold Council, its market was worth $196.6b last year. Thus silver’s market is running about 1/12th the size of gold’s!
So any capital migrating into silver has about 12x the potential to drive silver-price upside than the same amount flowing into gold. And using SLV’s holdings as a proxy for overall silver investment, silver has won massive capital inflows this year. At the end of 2019, SLV’s holdings were worth about $6.5b. This week with both much-higher silver prices and SLV holdings, they are worth $14.0b which has soared 116.9%!
As long as gold’s own secular bull market continues powering higher on balance, so will silver’s. Central banks’ vast flood of quantitative-easing money printing certainly supports the precious metals. Since their total aboveground supplies only grow slightly each year on new mining, there is relatively far more money available to compete for roughly the same amounts of gold and silver. That should bid their prices way higher.
Silver prices rebounding after correcting parallel to gold’s own rebalancing selloff, and the persistent high SLV holdings, argue that a new silver upleg is likely getting underway. The same is true for gold, which has led us to aggressively redeploy in fundamentally-superior gold and silver stocks in our newsletters since late November. So far we’ve added 10 and 4 new stock trades in our weekly and monthly since then.
They include one of the world’s purest major primary silver miners, and the world’s newest primary silver producer just spinning up its first mine. The fundamentally-superior silver stocks amplify silver’s upside in bull-market uplegs. And with SLV’s persistently-high holdings implying silver investors’ resolve to stay deployed is strong, that ups the odds silver’s correction is over. So its next upleg could already be marching.
The bottom line is silver investors have proven remarkably resolute since this metal’s parabolic peak in early August. The dominant SLV silver ETF’s bullion holdings, which are the best daily proxy for global silver investment demand, have held near highs in recent months. That was despite a silver correction following an unprecedented vertical soaring in SLV’s holdings, driven by record capital inflows from stock traders.
The fact silver investors haven’t unwound the great majority of their huge summer buying implies they still expect this silver bull to keep running higher. That makes sense with silver being a tiny global market in a vast deluge of new central-bank liquidity. With lots more capital competing for roughly the same amounts of aboveground silver, great upside potential remains. The better silver miners’ stocks will amplify silver’s gains.
Copyright 2000-2020 Zeal LLC (www.ZealLLC.com)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own many long positions in gold stocks and silver stocks which have been recommended to our newsletter subscribers.
Paychex, Inc. (NASDAQ:PAYX) Q2 2021 Earnings Conference Call December 23, 2020 9:30 AM ET
Martin Mucci – President and Chief Executive Officer
Efrain Rivera – Chief Financial Officer
Conference Call Participants
Ramsey El-Assal – Barclays
Kevin McVeigh – Credit Suisse
Jason Kupferberg – Bank of America
Josh Schimmer – Evercore ISI
Steven Wald – Morgan Stanley
Andrew Nicholas – William Blair
Bryan Keane – Deutsche Bank
Kartik Mehta – Northcoast Research
Jeff Silber – BMO Capital Markets
Samad Samana – Jefferies
Mark Marcon – Baird
Tim Willi – Wells Fargo
Lisa Ellis – MoffettNathanson
Pete Christiansen – Citi
Bryan Bergin – Cowen
Tien-tsin Huang – JPMorgan
Matthew O’Neill – Goldman Sachs
Scott Wurtzel – Wolfe Research
Ladies and gentlemen, thank you for standing by and welcome to the Paychex Q2 FY ‘21 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Martin Mucci. Please go ahead, sir.
Thank you and thank you for joining us for our discussion of the Paychex second quarter of fiscal 2021 earnings release. Joining me today is Efrain Rivera, our Chief Financial Officer. This morning, before the market opened, we released our financial results for the second quarter ended November 30, 2020. You can access our earnings release on our Investor Relations website and our Form 10-Q will be filed with the SEC within the next few days. This teleconference is being broadcast over the Internet and will be archived and available on our website for approximately 90 days.
I will start today’s call with an update on our business highlights for the second quarter. Efrain will review our second quarter financial results and provide an update on our outlook for fiscal 2021 and then we will open it up for your questions.
While the first half of fiscal 2021 was affected by the economic impacts of COVID-19, we have been pleased with the results of our business and the sequential improvement over the first quarter, in both revenues and earnings. Improvements in revenue occurred across the board, all lines of business, most of our key business metrics have continued to show steady improvement, though at a more moderate pace as we ended the quarter. We have not yet experienced any deterioration related to recent surges in COVID-19 cases across the country, but we continue to monitor trends closely, especially as new restrictions are being implemented in many states.
Throughout the COVID-19 crisis, our business model has proven resilient, our client base has grown despite economic headwinds and we continue to see good sales momentum with growth year-over-year in new units sold. Our digital sales remain an area of strength and we continue to invest in digital marketing, lead generation and sales technologies to drive growth. We also see strong demand for HR solutions and HR outsourcing, which we deliver through both our ASO and PEO models.
Since the onset of the pandemic, we have seen a greater interest in the ASO model as businesses are looking for more immediate HR support. We are on track for another year of record retention as losses have declined significantly compared to the prior year. Client satisfaction scores continue to improve as we focus on providing excellent service to our customers, supporting them in this most challenging time in helping them simplify complex regulations. We have not let up on our efforts to help our clients navigate this environment, and we continue to educate clients and prospects on state and local specific regulations which are frequently changing, including the new stimulus initiatives passed by Congress.
Our retention team is proactive in reaching out to clients who may be showing signs of difficulty to consult with them regarding available options. And our clients are facing the most complex calendar year-end many have ever seen and we are here to help them through it. We have expanded our thought leadership, not only in the area of COVID related regulations, but more recently offering information on the 2020 election results and the potential impacts to our clients’ businesses. We continue to see demand for virtual events and webinars to help educate clients and prospects in this changing environment.
Our financial strength allows us to continue to make investments in technology. Our fall product for launch builds on our track record of innovation and delivers on our promise to make complex business issues simple. We introduced several new offerings and enhancements that help businesses increase productivity, reduce risk, maintain compliance and adapt to mobile and AI driven trends. More business leaders are turning to tech solutions to increase productivity in this environment and respond to the interest of their employees. Our Apple Watch and Google Assistant device integration now allows employees to access their HR and payroll information easily without even logging on to their phone or PC. We also added new features in our performance management system to allow for greater feedback and engagement with remote employees critical to employee retention in development in this work-from-home environment.
We continue to enhance our analytics suite in dashboards, we deliver a user experience that enables clients to define the data that is most relevant and actionable to them, which saves time, improves productivity and supports better business decisions. We also see positive trends with double-digit increases in mobile and self-service usage as our strategy of device independence continues to gain traction with customers. We recently announced the integration of Paychex Flex with the market-leading Clover point of sale platform from Pfizer. Available on the Clover app market, this gives business owners the ability to streamline payroll and time and attendance management. This is another example of our commitment to connect Paychex Flex users with some of the world’s leading business tools. We are proud of these innovations and more were recognized by industry experts this quarter, most recently the Paychex Flex platform was recognized by human resource executive magazine with an HR Tech Award for the top HR product of the year. The combination of a single device-independent application with HR services and benchmarking capabilities sets us apart from others in this category.
We continue to design solutions that add value to our clients. Our new PEO, Protection Plus Package helps business owners reduce risk by offering coverage related to cyber attacks and employee lawsuits. Exposure to these risks has been rapidly increasing in the COVID-19 environment and we are the only provider offering both cyber liability and EPLI coverage as part of our PEO solution. And by leveraging the group plan model of our PEO, the coverage is significantly more affordable to businesses. The COVID-19 environment has also impacted the financial security of millions of Americans, further exacerbating the issue of lack of retirement savings in the U.S. This month, we announced that we are among the first in the retirement industry to sponsor and maintain a pooled employer plan to help businesses nationwide provide a cost-effective retirement plan option for their eligible employees. This offering is an outcome of the SECURE Act, and along with a reduced cost compared to a single employer plan, it will reduce fiduciary liability for employers and simplify plan management.
As we move through this period of uncertainty, we are confident that our resilient business model, strong liquidity position and dedicated employees who are focused on service and innovation for our clients and their employees will have Paychex emerge from this pandemic in an even stronger position in the market with our clients having experience the full value and support that we deliver.
I will now turn the call over to Efrain Rivera to review our financial results for the second quarter. Efrain?
Thank you, Marty. Before I begin, let me just wish everyone on the phone call a safe and a joyous holiday season. I hope you get some time off to enjoy this Covidian season. We are making of it what all of us can make of it to make it a good time.
So let’s start. I want to remind you that today’s conference call will contain forward-looking statements, refer to the customary disclosures. In addition, I’ll periodically refer to some non-GAAP measures. Please refer to the press release and investor presentation for more information on these measures. Let me start by providing some of the key points for the quarter, follow-up with some – excuse me, greater detail in certain areas, and then wrap with the review of the fiscal 2021 outlook. As Marty mentioned, while second quarter results continue to reflect the impact of economic conditions resulting from the COVID-19 crisis. They improved sequentially from first quarter. For the second quarter, total service revenue of $969 million was even with the prior year. And this was moderated by a lower volume of client employees paid across our HCM solutions.
Results improved from a decline of 6% in the first quarter, as you recall. Within service revenue, Management Solutions revenue started to increase, it was up 1% to $733 million and PEO and Insurance Solutions revenue decreased 3% to $236 million. During our October earnings call, I’ve noted that second quarter revenue was anticipated to be down mid to high-single digits for Management Solutions and high single-digits to low double-digits for PEO and Insurance Solutions. Our results exceeded those expectations, obviously.
Total revenue declined 1% to $984 million that basically is the impact of further declines in interest on funds held for clients. Interest on funds held for clients were down 25% for the quarter to $15 million due to lower average interest rates, average investment balances and realized gains. Average balances for interest on funds held for clients declined 4% during the quarter, primarily due to lower client fund collections and changes in the client base mix. That was offset by timing of collections and remittances and some wage inflation.
Expenses decreased 3% to $629 million. The decline in expenses was driven by lower headcount, discretionary spending and facilities costs as a result of our cost savings initiatives. Operating income, up 4% to $354 million and reflected an operating margin of 36%. I’m sorry, a 150 basis point improvement from the prior year quarter. As a reminder, other expense now for the second quarter includes interest on our long-term borrowings, partially offset by corporate investment income, which was impacted by lower interest rates. Our effective income tax was 22.1% for the second quarter, compared to 23.2% for the same period last year, both periods reflect net discrete tax benefits related to stock-based comp payments that occur with the exercise of stock option awards as you know, we call those out, simply because it’s difficult to predict when they will occur.
Net income increased 5% to $272 million and adjusted net income increased 4% to $265 million for the quarter. Adjusted net income excludes one-time costs in the tax benefit from stock-based comp payments. Diluted earnings per share and adjusted diluted earnings per share both increased 4% during the quarter to $0.75 and $0.73 per share, respectively. Year-to-date, I’ll touch on these very quickly they are in the press release. Service revenue declined 3% to $1.9 billion with Management Solutions revenue declining 2%, PEO and Insurance Solutions declining mid single-digits, interest on funds held for clients declined 27% as we bore the brunt of lower interest rates, total revenue was down 3% to $1.9 billion, operating income decreased 8% to $638 million and adjusted operating income decreased 3% to $670 million, reflecting a margin of 35%.
Adjusted operating margin, as you know, excludes one-time costs of $32 million related to acceleration of cost savings initiatives including the long-term strategy to reduce our geographic footprint and headcount optimization, majority of which was recognized in the first quarter. The amount recognized in second quarter was minimal, about $1 million or so from that amount that we had talked about when we initially released guidance. Diluted earnings per share decreased 8% to $1.34 I should say and adjusted diluted earnings per share decreased 4% to $1.36.
Investments and income. As you know, our primary goal is to protect principal and optimize liquidity, continue to invest in high credit quality securities. Long-term portfolio has an average yield of 1.9%, average duration of 3.4 years. Our combined portfolios earned an average rate of return of 1.3% for the quarter, down from 2% last year.
Let’s talk about financial position. It remains strong with cash, restricted cash and total corporate investments of $963 million and total borrowings of $804 million as of November 30, 2020. Funds held for clients were $3.4 billion, in line with the balance as of May 31, 2020. Funds held for clients wary widely on a day-to-day basis and averaged $3.6 billion for the second quarter. Our total available for sale investments, including corporate investments and funds held for clients reflected net unrealized gains of $109 million compared with $100 million as of May 31, 2020. The increase in net gain position resulted from the declines in interest rates.
Total stockholders’ equity was $2.9 billion as of November 30, 2020, reflecting $447 million in dividends paid and $29 million of shares repurchased during the first six months. Return on equity for the past 12 months remained very strong at 38%. Cash flows from operations were $431 million for the first six months, a decrease from the same period last year. The decrease was driven by lower net income and fluctuations in working capital, including an increase in accounts receivable, which drove most of that, and that is parallel to our recovery in our revenue.
Now, I will turn to our guidance for the current fiscal year ending May 31, 2021. It reflects our current thinking regarding the speed and timing of the economic recovery, while results for the first half of the fiscal year exceeded expectations. Uncertainty about the trajectory of the recovery over the remainder of the year remains particularly with the recent surge in COVID-19 cases. Improvements in key indicators have moderated and our guidance reflects a steady but gradual improvement through the rest of the fiscal year, although not at the pace of the first six months. We have provided the following updates to our guidance after seeing the second quarter results. Management Solutions revenue year-over-year is expected to be in the range of a decline of 1% to growth of 1%. We previously guided to a decline in the range of 1% to 3% with a bias toward the high end of that range. PEO and Insurance Solutions is expected to decline in the range of 2% to 5% that is unchanged from prior guidance.
Interest on funds held for clients that is expected to be between $55 million and $65 million, that’s also unchanged from prior guidance. Total revenue expected to be in the range of a decline of 3% to flat or even with last year, we previously guided to a decline in the range of 2% to 4%. Adjusted operating income as a percentage of total revenue is now anticipated to be approximately 36%, up from previous guidance of approximately 35%. And adjusted EBITDA margin for the full year fiscal 2021 is expected to be approximately 41%, up from approximately 40%. Other expense net is anticipated to be in the range of $25 million to $30 million, previously it was a range of $30 million to $35 million. Our effective income tax rate is expected to be approximately 24%, while we previously guided to a range of between 24% and 25% and adjusted diluted earnings per share is expected to decline in the range of 1% to 4%, we previously guided to a decline in the range of 6% to 8%. Turning to the second half of the fiscal year, we currently anticipate total revenue will be in the range of flat to up low-single digits. Adjusted operating margin is expected to be in the range of 37% to 38%.
Now, let me talk about the third quarter. Management Solutions revenue is expected to decline in the low-single digits and PEO and Insurance Solutions revenue would decline in mid to high single-digits, impacted by lower rates for workers compensation and state unemployment insurance. Adjusted operating margins excluding one-time costs are anticipated to be approximately 41% in the third quarter. Of course, all of this is subject to our current assumptions which are subject to change. We’ll update you again on the third quarter call. I will refer you back to our Investor shares on our website for more information.
And now with all of that, I will turn it back to Marty.
Great. Thanks, Efrain. Operator, we will now open the call to questions.
Certainly. [Operator Instructions] And your first question is from Ramsey El-Assal of Barclays.
Hi, guys. Thanks for taking my question this morning. Hi, good morning. I was wondering if you could let us know whether your guidance assumptions include stimulus. And I guess also as a follow-on question to that, now that you’ve lived through it once, what would a second round of stimulus – do you have any kind of a better understanding of how that would impact the P&L?
Yes. So let me handle the first half and then the second half. So the short answer Ramsey is that, no, it doesn’t include the impacts of any stimulus, it’s a little bit tough to gauge, but it would be a net positive. I’ll let Marty talk to kind of what we think the benefit might be.
Yes. I think a number of benefits, obviously, a lot of clients have been kind of holding – some clients have been holding on waiting for a second stimulus. What we have found is that, those who – when we surveyed our clients, those who took a PPP loan the first time, virtually 100% of them were still in business, so 99.8% or something. So obviously, the stimulus, the first one made a big difference for holding clients over and until things pick back up and I think the second one will do the same thing and it’s very targeted to small and – kind of on the smaller end of mid-sized businesses, which is even better and has better parameters from what we can see, at least that was signed or approved by Congress for forgiveness for loans as well. We also have done some things like made sure that we’re totally connected now with fintech providers and lenders like Biz2Credit. So we can pass our information from payroll and they can – clients can approve the fact that they can move information directly to a fintech provider like Biz2Credit to get a loan. So I think everything is going to speed up faster from a stimulus perspective. If you need a loan, you’re going to get it easier, faster. The forgiveness is going to be even better than before, particularly if you are on the low end. And not to mention that I think payroll and HR Solution services software is covered by the expenses or part of the expenses that can be covered. So I think it’s going to be positive. Certainly, it’s going to be positive to the degree how much, it’s hard to tell at this point.
Great. And then I was wondering if you could also comment on or give us a little more color on the underlying drivers in management solutions for the rest of the year. It’s great to see the outperformance this quarter. It looks like there is some moderation expected. Maybe a little more color on what you are seeing in your portfolio that’s causing you to be a little bit conservative going forward here?
Yes. So let me talk about first kind of what have been the drivers in the first 6 months and then why third quarter looks a little bit different perhaps than – sequentially than other quarters. And by the way, I would just ask for other people in the queue, if there is a question that’s really kind of related to what we are discussing, if you could just sort of keep your questions brief, because we want to try to get to everyone. So, the short answer to your question on Management Solutions is that, Management Solutions has HR outsourcing and the ASO model in that revenue stream. It’s got retirement services in that stream. Other modules of Flex including and very importantly, time and attendance in that revenue stream and then some other items. All of those, all of those products are doing very well. And I would highlight the fact that if you look at the year, this has been the year of demand for HR services. So, if you look at our worksite employees across all of our platforms that provide HR support, our worksite employees are up. So we have seen a very strong demand driving the revenue growth or the revenue recovery. Now we are battling as I mentioned in my comments, we are battling the fact that the number of employees paid is down, obviously because of current unemployment, but the underlying trends are very, very positive. So, why as we get into Q3 does that change? In Q3, there are a number of revenue streams that are built annually and depend on the number of employees on the payroll at that point in time. Because they are lower, we anticipate that they will be lower simply because of the number of worksite employees that are being paid. It has a moderating impact on the revenue in the third quarter. That’s what’s driving that result. Obviously, then as we come out of Q3, those revenue streams are no longer a factor in Q4 and we expect a rebound in Q4. So, that’s really what’s driving the – what would appear to be conservatism in Q3. We like where the underlying trends are in all of the revenue streams on Management Solutions and we see those continuing through the year into Q4.
That was super helpful and happy holidays to you both.
Thanks. You too.
Your next question is from Kevin McVeigh of Credit Suisse.
Great. Thanks so much. Happy holidays to you all. Hey, Efrain. Hey, Marty. Congratulations on the retention, just really, really fantastic outcome. I wonder, Marty or Efrain, it just – it feels like based on the transition to the cloud that part of that is clearly structural. Is there a way to think about whether how much you can narrow it from a retention perspective and then ultimately kind of translate that into revenue relative to the cloud-based providers? Because it seems like as you have transitioned the business model to the cloud, it should clearly call for even higher levels of retention. So, maybe help us understand that a little bit?
Well, I think ultimately, the retention is about – as you know about the level of service and value that you are bringing these clients and I think the work that we have done on innovation and technology investment to the cloud has made a lot of benefits. And I think they have really shown up in this pandemic environment. If one of the positives, there can be a positive in this environment for businesses was that they could see the full value of Paychex and the service that we bring. So being on the cloud and the fact that many of them have – people working from home, they could see the technology and what being in the cloud meant to them. So, they could handle – they could improve productivity, they could have better retention of their employees, they could still develop them, train them, onboard them, they can do – they can handle all kinds of time and attendance measures. They can do anything that I don’t think they even really thought a lot about beforehand and I don’t think it’s ever going to go back for them the way it was prior to that. So they understood the investments that we had made in the technology and innovation that we have. They found much more of a value from that and the cloud is certainly a big part of that, that they don’t have to rely and there is a lot more self-service that they took advantage of and their employees took advantage of that saved them time and money and saved us time and money as well and focuses on high-value parts of the products.
The other thing I would add to that, Kevin, so your question is, okay, can we expect 25% or 50 basis points, 75 basis points better retention. I don’t have a direct answer for that right now, but I will say this. It’s very easy to envision that we have one service model that applies across the breadth of our 700,000 plus clients. The reality is that that’s not correct. We have a variety of different service models that respond to the needs of the client as we understand. And I think that we have very high degree of customer intimacy with our clients and understand what kind of service model they need. And so we have a variety of different models that are designed to ensure that the client has the highest possible net promoter score we can have. Our net promoter scores in this year are at all-time record highs and it’s in part because we have understood and have the capability, which others do not of being able to provide hybrid, flexible service models based on what the customer desires. And so I think as we continue to refine that, as we continue to get better and better at understanding what each customer and each segment needs, whether it’s no service to full service, I think you are going to see our retention continue to improve.
Super helpful. I want to be respectful of time, but – so I will go back into queue. I have another question, but I don’t want to really get [indiscernible]. Thank you all.
Thank you. Your next question is from Jason Kupferberg of Bank of America.
Hey, thanks. Good morning guys. Happy holidays.
Thank you. Same to you.
Thanks. Thanks. I wanted to just get your view as you head into the key selling season here. Do you think COVID is going to have an impact on competitive dynamics in the sense that perhaps fewer SMBs look to switch providers, because they are consumed, we are just trying to keep their businesses afloat or is it actually possible that we see the opposite scenario with an above average amount of competitive switching as small businesses look to watch every dollar even more closely during the pandemic or perhaps their needs have become even more complex as a result of COVID?
Yes. Jason, what we have seen and I would assume it’s going to carry through into January this quarter selling season is there much more of a hesitancy to switch. So our retention is certainly benefiting from that. It does make sales away from competitors, a little more challenging to the degree, because they – I think your first assumption is what we have seen is more correct, which is just that people are not focused on switching. They don’t want to go through the switch right now. And they have also at least in our – from our perspective, they have really, as I mentioned earlier, seen the value of what we can bring at an all-time high. So they are going to be reluctant to switch, because they are not focused on that. And also I think they have also seen we have gotten this feedback directly from clients with the way we help them, with the PPP loans, the first group, the way we help them with the forgiveness, the feedback they got from their accountants on how easy it was to file and get forgiveness or apply for the forgiveness of loans was really a step ahead of other competitors for us. We were able to pre-populate all their reports, the forgiveness application was pre-populated and signature ready with adding just a few bits and now that’s even easier that we are going to tie them into the fintech lenders as well. So I think it’s one a reluctance to move, but I also think they are seeing a lot more value and that’s made a big difference in our retention. And then for sales, I also think that’s going to help us.
Okay. The revenue upside this quarter was more pronounced in HR management and wanted to get a better understanding of which specific products were especially outperformers in the second quarter?
Yes. I think we may have mentioned that the ASO product really was strong. Any HR product, the need for HR, particularly when you think of so many employees working from home, some being furloughed whether they – how do you handle the credits, the tax credits and so forth about employee retention. All of those things helped really push HR support and more on the ASO side than the PEO side. I think insurance was not as important to them right now from a benefits perspective as the HR support wasn’t, so more tended to say, look, I am not ready to switch or begin insurance, but I need the HR support pretty dramatically.
Okay. Well, thanks for the answers. Have a great holiday.
Alright. Thanks. You too.
Thank you. Your next question is from David Togut of Evercore ISI.
Hi, good morning, everyone. This is Josh Schimmer on behalf of David Togut. Just wanted to ask my first question on business formation, so you mentioned last quarter that new businesses start up – new business startups were up 20% year-over-year, how did you see those trends continue into 3Q and can you give any projection for what you are expecting for the rest of the year?
Well, I think yes, nationally, we have seen it continue, it’s even higher than that. I think it’s approaching high 30s or 40% increase in new business start-ups. I think what you are finding is both people shifting in the pandemic to new business opportunities and those starting new businesses. Some have been laid off from other businesses and have decided this is the time. Also money is fairly easy to get a hold of at low cost. They have home equity where they can take loans as well at low cost to start their businesses, so that has continued. We have seen the household sales that I mentioned in the first quarter, lot of nannies, tutors things like that where people had their kids at home and were buying for that. We have seen a lot of other new upstart businesses get started or change what they were doing and create a new business. So, it has continued. It’s continued to accelerate higher than in the first quarter. And I would assume that may moderate to some degree because – but we will have to see.
Great. Thank you for the color. Next on capital allocation, can you provide or update your priorities and kind of what you are thinking in terms of capital allocation as we move beyond the COVID-19 environment?
Yes. I think we haven’t really changed significantly. I mean obviously, payment of the dividend is an important part of the equation. We buyback shares to maintain share count level, but we are interested in looking at M&A and remain in the discussion for opportunities that we think could be interesting. Obviously, prices are high, but we think there is selected pockets of opportunity, where it may make sense. So, that’s where we are at.
Great. Thank you all very much and have happy holidays.
Thanks. Same to you.
Thank you. Your next question is from Steven Wald of Morgan Stanley.
Hey, good morning and happy holidays.
You have the same. Thanks.
Maybe just starting off on what you guys are talking about with sort of the incremental penetration, the bundles, you called out the ASO strength. It just seems like you are getting better economics relative to each client and maybe that’s part of additional market penetration and all the things you and other platforms have talked about in terms of incremental HCM demand. Just curious how big of a runway you see for that seeing it’s already starting to show up as well as how you think of that in terms of lowering your macro sensitivity going forward?
Well, I think there is a lot of opportunities still there. When you think about time and just take products like time and attendance, time and attendance has really been growing very strong double-digits for some time. We are seeing that with the innovation that we have put out there from the iris scan time clocks to the kiosks to punch in and punching out on your watch. All these things have driven even more demand for things like time and attendance. HR certainly has been driven a lot by the COVID environment, how different – I mean, you can understand that clients are facing for the first time challenges they have never seen before and they are going to continue, I think as the next big question will be, do you require vaccinations, for example, to bring people back to work? How do you verify that? What are the rules around that? What do you do with absences due to COVID or family or things like that? So, these are all so complicated for small to midsized businesses, who typically don’t have an HR person. I think there is a great opportunity for continued demand for the services from light HR right to full ASO and PEO as well and that includes insurance, which we think will pickup in the back half of the year?
Hey, Steven. To the second part of your question, it’s a good one. And I think frankly, if you really disaggregate our results and we look at kind of the second level of why the performance has been what it’s been I think it’s two things. The first thing is, our sales unit or our volumes on HCM have been up the first 6 months. We hope it continues into the back half of the year, but frankly, it’s been higher than we expected. That strength of digital – strength of digital sales, marketing and a lot of the efforts that we put into the platform over the last several years, that’s part one. But I think you highlight the second part, which is important, which is when you look at that – at the next level, what you realize or what you see is that, we have really had strength in terms of selling other products to the base. And I would say you are seeing in important respects the criticality of having an HR solution in the bundle of offerings that you give to clients. And by the way, I don’t mean a HR solution in the sense of an HR administration module almost everyone has that, but the real ability to be able to provide counseling and consulting to clients in a very complex environment. And so we have benefited from the fact that we not only have been able to increase unit sales, but also increase penetration of services within the base. So part of that to your point has lessened the impact of what is obviously not a great macro-environment still, we hope it – in the back half of the year, it starts to get a bit better and it has moderated, but I think our ability to sell within the base, the importance of HR services across the continuum of what we sell has proven out thus far this year.
And one other thing, I think it bodes well for retention. Sometimes when they took the HR product, they needed to set up their handbook for the first time they needed a couple of things that they never had, employee rules and kind of benefits and so forth. But now, when you think about it, there is such a continuation of this need, it’s going to go on for some time, but I think that does bode well for retention of the HR products as well.
Okay, great. Appreciate the robust commentary from both of you there. Just maybe one follow-up to, I think something that Ramsey had asked about, the sort of baking in a stimulus and other factors. If we tape six or nine months, I think the way you described how you think of the upswing is sort of a gradual recovery. And I know you had characterized it as, the next six months are not going to be quite as robust as the last six months, but if I think about the sensitivity to the upside and downside if stimulus added in, as you see it is a slight net benefit. Is it also fair to think about the potential for a step back in employment or other macro factors has also not baked in, so this could be possible drag to offset that? How should we think about the push and pull there?
Yes. So that’s interesting complex question, but I will try to give a simple answer. I mean, it could end up having that effect. My sense is that you didn’t factor in completely what the impact of a vaccine has in all of that and that’s really kind of the joker in the deck to the extent that it becomes more widespread and now you see an uplift in employment that’s going to be a positive. If we continue in the same – with the same environment, I think what we are assuming is gradual improvement unless things get much worse, I think we are in reasonable shape. If it goes backwards, we will have to see what happens. As I mentioned and Marty mentioned too, we have seen some moderation over the last month or so in the improvement in forward-looking trends. Will it go the other way? I don’t know, too early to call on them, Steven.
Okay. I just wanted to see how you were thinking about it. So appreciate the thoughts there. Happy holidays.
Thanks. You too.
Thank you. Your next question is from Andrew Nicholas of William Blair.
Hi, good morning. First, I was hoping you could provide maybe a bit more detail on the health of the PEO business specifically. Anything you can say about kind of the growth rate in that business over the past couple of quarters? And then also just how conducive is the market right now for starting a brand new PEO relationship, just wondering if people are kind of stuck in their ways given the current environment or if there are still opportunities to initiate a new relationship there? Thanks.
Marty will take the second. I will come back to trends in the PEO.
So, I think the second one is, I think as I mentioned, there has been some – there has been a much more of a demand for the HR support and sometimes that’s with the PEO, but it’s been a little bit more heavy in the ASO side for us and of course, we offer both. I think people have been a little more reluctant to change insurance providers and so forth. However, I do think that’s going to start to change, because I think that’s been a real benefit. And we also, as I mentioned, has provided a new bundle that’s providing EPLI, so employment practices, liability protection, that’s going to be very important right now, there’s a lot of questions that are out there about how am I treating employees that are working from home, who have COVID, who are connected to someone who has, it may take time off. I think there is going to be – there is a lot of, as you know, of course, in the congressional discussion about liability protection for businesses, this is going to become a bigger issue as the overall health concern start to moderate. I think with the vaccine getting out, they’re more widespread. So I think there is going to be an increased demand for the PEO. I don’t know if it’s going to be in the next quarter. They are steady demand and I think people are more open to it, everyday people understand the PEO business a little bit better, and they’re looking for the same concept that the PEP has for retirement. It’s a shared plan where we can share some of the liability protection, the fiduciary responsibility, the – and also get better rates and kind of better benefit packages by going with the PEO. So I think it maybe quiet for another – quieter for another quarter, but then start to pickup a little bit more as things calm down.
Yes. And with respect to your first question, Andrew, I think there is three factors driving the PEO results. The first is, in the first six months, if you look at our client base, we over-index a bit in terms of our exposure to hospitality and accommodations and so that as we entered this year, we were more exposed than we might have been in previous years. We had a pretty sharp rebound in first quarter that continued into the second quarter, but we were coming off a lower base. That’s one. The second thing is, I called out in my comments, what we’re seeing is much lower workers’ comp and SUI rates. Those have an impact on revenue too. That’s a trend that we’re seeing. Certainly through the back half of the year, that’s having an impact on revenues. And then, I would say, the final point is we’ve seen lower at-risk insurance attachment in the PEO, part of that has been our decision on underwriting standards in this environment. So, we have been a bit tighter than we have. I think, in part, that’s helped a bit of the ASO business, but it’s hurt the PEO business a little bit. And also we prefer to be a little bit more conservative on underwriting as we get into the back half of the year and we see what the environment looks like. If you look at where the guidance was, we basically maintained, there is a lot of positives on the underlying performance, but there are some headwinds that we’re battling on in other parts of the revenue streams in PEO.
Great. Thank you. That’s really helpful. And then, Marty, you mentioned the PEP plan that you introduced a few weeks back. It seems to me like Paychex is obviously really well positioned to be able to offer a plan of that type. But I’m just wondering, bigger picture, to what extent new regulations on PEPs will impact Paychex? Does it increase the target market for retirement administration business? Does it open you up to additional competition? Just any additional color on that offering and what it means for Paychex would be great? Thank you.
Yes, sure. I think the fact that we’ve been in this for so long, well over 20 years, in the retirement business and that we provide more new retirement plans than anybody else in the business for at least the last 8 years, I think we’re well positioned. I think that also proves the point that we were the first out – I think, pretty much that one of the first out with the PEP plan, we think it can be very competitive to opening up new market opportunities. Those small or mid-sized businesses that didn’t want to get into a plan because they were worried about kind of administering the whole thing. We could be the record keeper, but they still have to take care of investments and would also have some other costs. This is going to lower their cost, allow it to be much more accessible to those who didn’t quite step up to it. And I do think, as you said, I think Congress is going to push more and more of this – the new Congress and the new President administration, I think, will push for 401(k)s and probably give even more credits and benefits if you start one. So, I do think it opens up a market that we’re already strong in, and it has great potential for us.
Great. Thank you and happy holidays.
Thank you. Same to you.
Your next question is from Bryan Keane of Deutsche Bank.
Good morning. Efrain, I just wanted to clarify something you said. The hit in 3Q revenues due to the number of employees on the payroll being lower, I guess why doesn’t that have that same impact in 4Q ‘21? Is it – it sounds like it’s more of just a one-time impact then in 3Q.
Yes, because there are certain revenue streams, Bryan, that are only build in the third quarter, and so – and they have – they obey or they follow the amount of employees you have on your books at that point, then it doesn’t recur until the following third quarter.
[indiscernible] annual. It’s just an annual bill. It’s somewhat unusual, but happens every year.
Got it. That makes sense. And then, when I think about how we modeled it out, at least we have a little bit lower now a third quarter, but a stronger fourth quarter. And just thinking about that fourth quarter, now it sounds to be a little bit stronger than what you kind of talked about last quarter. Just thinking about any pent-up demand in sales as we get to that easier comp in fourth quarter and how you’re thinking about it?
Well, we hope it’s going to be a good quarter because the compare certainly sets up to be a good quarter. I think it’s comprehended, obviously, in the guidance. Obviously, Bryan, a lot – as you know, a lot of it depends on the momentum we come out of the third quarter with. So if we come out of the quarter with good momentum and the macro environment arrows are pointing upwards, I think a fourth quarter will be good. If the others don’t pan out, then it will be slightly different. We’ll update when we get through through third quarter.
Okay, great. Happy holidays, guys. Enjoy it.
Thank you. You too, Bryan.
Your next question is from Kartik Mehta of Northcoast Research.
Hey. Good morning, Marty and Efrain.
Good morning, Kartik.
Marty, I wanted to ask, I know you’ve talked about the selling season and some hesitancy of people wanting to switch. Is that – what’s the pricing environment like? Are you seeing more competition because people are trying to get market share or has the pricing environment not been that aggressive this year compared to maybe seasons past or even though the last few months?
Kartik, I think it’s been very consistent, which means it does get quite aggressive, particularly right now at this point, November, December. So I think you’re seeing – we’re seeing the typical same number of months free upfront or over the first year kind of thing. I wouldn’t say anything more aggressive than we’ve typically seen and I’m not sure that that’s making as much of a difference. As I said, I think there is still a hesitancy to switch. We’re definitely seeing that. I think it’s helping, certainly, our retention and it is putting a little more pressure on sales. But right now, we’re feeling pretty good going into selling season, we definitely have seen again a quarter of more unit growth than second quarter of last year, and that’s pretty amazing to me when you think everyone is still home and they’re selling from home. And we’re strongly – we certainly have been selling inside for many years, but we also have a majority outside. And for their ability to adapt and be able to get to clients and then use the technology that we have that allows clients to search, demo and even sign up to some degree for the service has really been good. So to see [indiscernible] up units over last year in total units sold is pretty positive for us as we head into selling season in this quarter.
And then, Efrain, just maybe this is too early, but any thoughts on changing how you’re managing the full portfolio? The yield curve is getting a little bit steeper, but have you made any changes or any thoughts on maybe the next few months?
It’s funny, it’s like you were looking over my shoulder when I was scribbling notes this morning before the call. There are some things we can do in terms of altering duration. I’m – Kartik, I want to see where we end up or what – how things look in the spring. My sense is that interest rates start to float up a bit not significantly, but then on that level of yield curve steep. But yet that level of yield curve steepness, it again probably give us some additional opportunities to think about managing the portfolio slightly differently. The first half of the year, we tended to be pretty conservative in terms of the approach we took. We wanted to see what macro environment we’re in. It looks like maybe next year might be incrementally a little bit better.
Perfect. Hope you guys have a great holiday. Thank you.
Thank you. Same to you, Kartik.
Thank you. Your next question is from Jeff Silber of BMO Capital Markets.
Thanks so much and happy holidays to you both as well.
Yes, thank you.
Thanks. I think one of the surprises in the pandemic has been the growth in new business applications and new startups. I know it’s not necessarily an area that you focused on, but I think you do have some clients there. Are you seeing any impact of that on your business?
Well, definitely. We’re – I mean, part of the unit sales on the small end in particular have been a lot of new business starts. Now, we typically have been very successful at selling brand new businesses on our Paychex and SurePayroll platforms, but then it’s continued to assist us and give us some positive benefit. So yes, we’re seeing it. It has been amazing. I do think, as I said earlier, that cash is available, that’s out there, home equity, these are how new businesses start and people also have decided, believe it or not, that this is sometimes the environment where they want to go ahead and get started because of some big change, either laid off or they see a new opportunity or their existing business does not fit in the – under the pandemic and people have made switches to get into new things and capitalize on them. I mean new business starts being up, I think high-30% is the last number I’ve seen over last year is pretty amazing.
Yes. That’s true. And if I could just ask a quick outlook question, Efrain…
In looking at, I guess, it’s the PEO and insurance services, are you expecting growth this year in worksite employees or is that something we won’t see till next year? Thanks.
No, we expect growth this year in worksite employees for sure. I would say, Jeff, the other thing that I called out probably when in response to someone’s answer. We are unique in that, we have both an ASO and a PEO and we look at the worksite employees together. And if you look at the growth in worksite employees across both platforms, we’re up year-over-year. So, we’re going to be up year-over-year on the PEO and certainly in terms of where we ended the year. So, we’ll have a nice rebound there. And then, when you put in ASO, we think it should be a pretty good year in terms of worksite employees served by our HR solutions to the point that Marty was making earlier. That’s been a big source of demand this year.
Okay, great. And stay healthy and safe. Thanks again.
Thank you. You too.
Same to you.
Your next question is from Samad Samana of Jefferies.
Hi, good morning. Thanks for taking my questions. Likewise, happy holidays, like as everybody else wished. Maybe first one, I think the announcement with Fiserv Clover was interesting. So, just maybe help us understand how our relationship like that – Is that more of a technology partnership or does that – is there an economic relationship there as well?
Well, it’s got a couple of different parts to it. First, it’s a referral relationship. So they, Clover – what we have always found is many new businesses and we’ve talked a lot about the growth of new business startups start with, obviously, with credit card or merchant processing services, and so – and then go to payroll and HR, etcetera., later. We established – with a leader like Fiserv, we have a referral arrangement where they can refer payroll or HR needs that their clients as they sell in merchant services over to us and we have a process – a pretty streamlined process to get those referrals to our sales team to be able to sell. And then there is a technology piece as well. We have a connection into the Clover system, which I think is an industry-leading system, certainly, where, between our Flex platform and the Clover system, the demographic information, the employee information, for example, you add a new employee on the Clover system and you’re using Flex payroll or HR, that will automatically sync with the Flex system. And in addition, we saw an opportunity with Clover with time and attendance. Clover users for Fiserv use a lot of time and attendance. We have industry-leading time and attendance solutions, a number of them. You can clock in and clock out on the Clover system, but you can then look in Flex and see who is on – who is punched in, who is there, who is out, you can shift swap, you can also look and see if they’re approaching overtime requirements, you can do a number of things. And we’re going to continue to advance this to the point where if you’re a Clover client and have signed up with Clover and you start, you can actually – you’ll be able to in the future – near future, be able to sign up with Paychex in a self-service mode, just be able to sign right up for payroll yourself right over the Clover system. So it’s a referral arrangement now, a technical arrangement with connection. It has great opportunity for us on the payroll side and time and attendance and other products as well.
Thank you very much for that, guys. And maybe just a follow-up, Efrain, if I think about the strong bookings commentary for the last several quarters I know you’ve mentioned that digital sales have been a big contributor. How should we think about – are there any interesting dynamics that you’ve seen on the cohorts that have been coming through digital versus direct sales? And any interesting retention trends or the size of the average customer just as we think about this being something that may be structurally sticky going forward as well?
Yes. Early on the retention side, so you need a years worth of experience to really kind of get a sense of that. So, we don’t anticipate that it will be different. I do think that, and I’ve said this to a number of you, it does skew smaller. That’s part of it, but that may also be a function of the environment we’re in. So, it may be that with this amount of new start-ups that Marty mentioned, we’re – you’re getting a lot of the mix has shifted a little bit smaller than we would otherwise see, but it does tend to be smaller. We’re hopeful, obviously, over time that in the relationship with Paychex, we can nurture them. Marty mentioned I think in his comments, I mean we really take a lot of care with customers and our analytics are such that we can help a small business navigate some of the storm. Obviously, a lot of them go out of business, so you can’t do that. But I would say in terms of the ability to interact with a provider – a solution provider that can maximize your chances of doing your best, there is really kind of no finer solution on the market.
Great. Very helpful. Good to see the quotes for calendar 2020 and what would happen in 2021. Have a happy holiday season.
Thank you. Your next question is from Mark Marcon of Baird.
Hey, good morning, and happy holidays, Marty and Efrain.
Hey. So, just following up on the bookings question, when we think about more units in terms of the smaller units that are coming to us through, combined with some of the pressures on some of the bigger units and less switching activity, how do you think that balances out? When we think about – I fully appreciate, in fiscal Q3, we’re going to have some of the dynamics that you mentioned in terms of the employees within the existing accounts, but when we just think about new employees coming on from new units on the whole, how do you think that compares in fiscal Q1 relative to a year ago – I mean fiscal Q3 relative to a year ago as we get through the selling season?
Well, it’s a very interesting question, Mark. I think definitely as we’ve said, and I think Efrain has mentioned it and I have, both, the sales have skewed smaller. One, because there’s a lot of brand new businesses as we’ve talked about a couple of times on the call and that the mid-market is a little more hesitant. So – but the good news that as you look at selling season right now, as I would say is the pipeline looks very healthy. So while we’ve had presentations and there has been some hesitancy to kind of close the deal from the client perspective, I think they’re a little concerned probably waiting to see what Congress does, what kind of stimulus there is, what’s happening with demand. I think between the news of the stimulus, the vaccine and where that standing, multiple vaccines, I do think some of these decisions will start to get closed in this quarter and it’ll still produce a pretty good selling season. We definitely saw improvement in the mid-market from Q1 to Q2 in our sales. And so, while there has been smaller – the small end has been strong, I do think that the mid-market is picking up speed. It certainly did in the second quarter and we expect it will, given the pipeline in the third quarter.
Excellent. And then can you just talk a little bit about – we’re still early days in terms of the reduction in terms of the geographic footprint and the office space and working from home, and it sounds like the Net Promoter Scores just continue to go up. Can you just talk about the efficiency gains that you’ve seen and the productivity gains that you’ve seen from that? And then, hate to ask this, but just any sort of commentary with regards to solar wins and what your checks have shown thus far?
Yes. No problem at all on that. There is no – we have – none of that is in our systems at all. We’ve done a thorough check of that and we feel very good that, that has not impacted us whatsoever.
And on the…
Yes, that is great.
So then on – I think the first part of the question, sorry, I jumped into this.
Yes. The first part, Marty, was just about the efficiency that we…
Yes, I’m sorry. So yes, we’ve been very – I mean, very impressed with the employee team. On the service side, in particular, we have found that who have had less experience working from home, we certainly added over 1,000 service on the service team working from home pre-pandemic, but they have done just an outstanding job. And Efrain said the Net Promoter Scores continued to increase well year-to-date over last year and the productivity has been very good. So those offices that we closed will remain closed, those that were permanently closed obviously and we will continue to have those service people work from home. It seems to be going extremely well. We’ve gotten positive feedback from the employees on the support and I think there will be continued productivity gains to get there. So, we’ve increased the number of clients that they’ve been able to handle, improve the Net Promoter Score and have the record breaking retention this part – so far this year. So I’d say it’s working really well and we’ll continue to capitalize on it.
It sounds like a win-win-win. Happy holidays.
Thank you. Same to you.
Thank you. Your next question is from Tim Willi of Wells Fargo.
Thank you, and good morning.
Hi, Tim. Welcome back.
Yes. Thank you. Good to be back. Happy holidays to both of you.
Thank you. You too.
Just a question sort of tied into the Clover partners. I guess when you think about all the discussion around business formations, working with a platform like Clover, small business start-ups, and again if you talked about this in prior calls, I apologize, but just sort of thinking about the platform concept and the ease of which people can start a business and who they sort of go-to for maybe some of those initial critical functions, should we think about more Clover-like partnerships? And then just any sort of thoughts about how a sales or service organization has to adapt to that kind of distribution channel I guess, if you see that as an opportunity to acquire and build out the sales channels?
Well, I think – look, I think there will still be a number of direct sales opportunities for us obviously, whether that’s, by the way, feet on the street or telephonic or digital sales. Digital, as Efrain mentioned to the question a little bit earlier, digital has worked very well from us where it’s going to get completely to the point of sale setup is available, you can search, demo the product and sign yourself up, that’s already available with our SurePayroll platform and Flex is moving that way as well. So finding new sales channels is always important to us and also making sure that we’re responding and even looking ahead to the way the market wants to do it. The market has changed pretty dramatically and that they wanted – they’re used to doing things on their own, both the client and the employees of the client, and we were glad to have the innovation that we’ve already done the investments to allow a lot of self-service and that includes right from starting up. Connecting with Clover moved us back in the decision making a little bit earlier, which we’ve always been looking at, which says that, hey, I might not be ready for payroll yet when one of our sales reps directly goes to someone, but what it does is say that, hey, I did get my merchant processing and wow, now I see Paychex show up on the Clover platform that I’m used to. I can transfer my information right now back and forth and very shortly I’ll be able to set up my payroll right from that. So, I do think it’s always about finding new sales channels the way clients want to buy and it is becoming much more of a client-directed, probably always was, but it’s definitely much more now a client-directed decision. Self-service, do it myself, when I want to do it and we’re set up very well with that either directly with Paychex or through partnerships like that. And I think, Yes, you will see more as we find one – ways to do that. Another example in the back into that is just thinking about the new stimulus loans and the connection I mentioned earlier to Biz2Credit. We’re allowing a client to go in and when they are in their Flex platform doing their payroll, okay, do you want another PPP loan, do you want to apply for one? Yes. Do you want to just move your payroll data and everything right to Biz2Credit so that they can approve your loan probably the same day? Yes. Okay, done. Never talk to anybody, everything was all done digitally and that’s the way of the future.
Thank you very much for the insights. Appreciate it. Happy holidays to you.
Thank you. Same to you, Tim.
Thank you. Your next question is from Lisa Ellis of MoffettNathanson.
Hi. Good morning, guys and happy holidays. A question on this shift you’re seeing with all the new business formation and then the roll off of employees within larger businesses, just a broader question. As this vault through your business assuming it’s going to persist for a period of time, are the unit economics of these smaller businesses typically more attractive, similar to the base? Is there sort of broader kind of business structural dynamics that we should be keeping in mind?
Well, I think there is two ways to look at it. One, we certainly having been in the business a long time and serving small clients for the longest period of time, we know how to obviously make a great profit from that as you know from our margins. And so the small businesses, we can do very profitably, and in fact, probably even more so today with the digital stuff that we’ve been – the digital investments we’ve talked about right through to self-service. We’re making it so much more productive to sign up a new small client. Then, when you think of the mid-market, the opportunity there is obviously for much more revenue penetration of the additional services that we offer these days. So, while the cost to set up and serve maybe slightly what will be maybe more, the revenue opportunity is more. So that’s very profitable. So we don’t see any major changing of the dynamics there. In fact, it’s probably given us – the investments we’ve made have given us an opportunity to continue to earn well. Even if prices come down a little bit on the small end due to competition, we’ve taken more costs out of the setup in the ongoing service that have still – that have really appealed to those clients because that’s the way they want to be served. And then on the mid-market, the enhancement of the products that we offer gives us a much bigger share of revenue per client in the mid-market.
Okay. And then my follow-up is another question on the Clover partnership. Just thinking about their – the size of that installed customer base is probably similar in scale to your installed base. Is there an initial part of that partnership aimed at kind of cross-selling, identifying Clover clients that aren’t Paychex’s clients and vice versa to – that might create like an initial pretty heavy lift from that relationship? Or is it more focused on sort of – should we be thinking about it is more like incremental over time new sales-oriented?
No, at least we’re hoping so. We’re – obviously, there is the cross-selling right off the bat, so yes, Clover is reaching out to their client base immediately and letting them know when they’ve already started issuing emails to their client base to say, hey, we’re connected to Paychex, this is an easy set up to go to Paychex, we will transfer data back and forth, you have Flex and Clover in sync. So I – we’re hoping that there’ll be some initial jump in success right off the bat with that, and then we’re certainly excited about, on an ongoing basis, being on that Clover platform as they’re – I think they’ve been very successful at adding new clients to it.
Terrific. Thank you, and happy holidays, guys. Thanks a lot.
Thank you. Same to you.
Thank you. Your next question is from Pete Christiansen of Citi.
Good morning. Thanks for taking my question and happy holidays.
Yes. Thank you.
Two quick ones here. So Marty, I was just – how are you thinking about the absolute level of go-to-market spending relative to other periods? How aggressive is Paychex being right now? And what are you seeing on the ROI front? And then my follow-up question is, on the PEP, is there a difference in the economics, the unit economics, and how should we think about that? Thank you, gentlemen.
Sure. On the first one, I think the go-to-market spend, we’ve increased our marketing spend pretty consistently. You may have seen we’ve also gotten into TV advertising even for the brand and getting the brand out there. It was helpful to us during the beginning of the pandemic and it is continued to be. So when I think we’ll continue that, it’s not a massive amount of TV advertising, I’m not sure it always is worth a bit. If some ROI, there is some breakeven there, that’s hard to predict. But we are getting more leads that seem to be following the advertising that we’re doing, and I think there is opportunity there. The investments that we’ve already made in go-to-market from the webinars, from the information, we have really enhanced that this year under COVID, and I think it has brought a lot of clients to us. If you think about a webinar on the original stimulus package or I’m sure of one coming up that will have on this stimulus package, those webinars used to bring different information, webinars used to bring a couple of hundred clients, prospects and CPAs, maybe 400, 500, now they’re bringing 6,000, 7,000, 10,000, which gives you a lot of leads, certainly gets your brand out there and your product set, but also a lot more leads because you have that information once they signed up for the webinars. So they’ve been extremely successful at a pretty low cost, frankly. So I think a good ROI return of our investment there.
On the PEP, just quickly, I think the economics are very good there. It’s a little bit lower cost, you’re a little bit more, and there’s probably a little bit more retention to that plan because you’re more involved, you’re not just a record keeper but you’re the fiduciary. And I think it’s going to be a lot stickier from a sale that we have on 401(k) and we’re very successful at selling 401(k) plans. And this, instead of telling the client, hey, we’re going to be a record keeper but here is – you’re going to go to a financial advisor to do this or that, we can now say, look, we’ll set up basically the whole thing for you with some partnerships and we can take care of all of it at a lower cost. So the economics we feel are still going to be very good. There is always a risk of some cannibalization of single-employer plans, but I think there is going to be a world for both of them that are out there and we may capture a lot more customers, prospects that have not had a 401(k) but now will jump in.
Thank you very much. That’s great.
You are welcome.
Your next question is from Bryan Bergin of Cowen.
Hi, good morning. Thank you. First, I wanted to clarify on client retention, are you assuming that it’s going to remain at record levels in your second half outlook? And Marty, to your comments on being pleased with the sequential improvement, but at a more moderate pace near the end of the quarter, can you dig into that a little bit more on what KPIs specifically are you seeing moderate?
Yes. So I think on the client retention, right now, we expect that it will – that we’ll stay at record-breaking. The issue really is the non-processing clients. We talked about them in the first quarter. They have come down dramatically from the first quarter, meaning that there was clients that didn’t leave us but they suspended payroll processing, but stayed with us as a client and we worked very hard to keep them as a client even if they were suspended. They’re now paying for that service to be – to kind of hang in there. It’s dropped dramatically, in fact, it’s continue to drop, but we’re trying to see if this last number of non-processing clients and it’s a pretty small number compared to our base. What will happen at year-end? Are they hanging in for year-end or not? That’s the only thing, Bryan, that we’re kind of watching is to whether if they all left then we probably wouldn’t hit retention. We’d still have a very strong retention number, but it wouldn’t be record-breaking. I think they’re – the fact that they’re still on the service, they’re just kind of holding in there. You’ve heard of restaurants that are saying, hey, I’m going to just close still spring, particularly in the Northeast and kind of hang in there. So that’s – I think it’s going to be record breaking through the year, but it could be closed depending on what happens with the stimulus. At the end of what I was saying with the moderation is that, like there was a lot of new business formation. And when you think about the quarter, September, October, November, September saw a lot of influx of new sales, particularly on the small end, because of households. So you had the start of a school year – most school years started in September. You had nanny – you had nannies, you had tutors, you had a lot of things. So we saw a big explosion of small sales like – that are small household sales in September. It’s just starting to moderate as people are kind of fitting into a new reality of the pandemic. So it moderated some. Still growth – still seeing growth, it just wasn’t quite as explosive, I guess I’d say at the first month or two of the quarter.
Okay, that’s helpful. And then can you comment on your sales head count. Just how that has progressed here in 2020?
Yes, pretty flat. We went up a little bit in head count, low single digits for overall sales and we’ve continued to mix – while pre-pandemic, we continued to mix and plan for in-house sales, telephonic sales and online sales versus feet on the street. Obviously, they were pretty much all telephonic or digital now. But head count is up a few percentage points and doing very well, particularly when you think about, we’ve sold more units than second quarter last year as we mentioned in everybody’s home, it’s been pretty amazing.
Thanks guys. Happy holidays.
Alright. Thanks Bryan, you too.
Thank you. Your next question is from Tien-tsin Huang of JPMorgan.
Thanks so much. Just wanted to clarify on the change in the outlook, obviously, the second quarter was better than expected. Did the composition of your second half outlook changed at all, just curious if I missed anything there?
No, I think it just – it I would say Tien-tsin it’s just got a little bit better than where we were at the last call. And I suspect we will have more to say when we get to third quarter [indiscernible] season. So I would say it incrementally changed.
Got it. And then just with the ASO strength you noted and to the year of demand for HR services, I think you had mentioned Efrain – do you expect to sort of maybe put a little bit more energy into selling that versus 90 days ago?
I think there’s just a lot of demand as Marty has alluded. In some ways we have – we’ve placed a lot of emphasis on sales in that area and the market is generating demand in that area. So you got a good confluence of both factors.
Yes, I think one thing I’d add Tien-tsin is that, really starting last year sometime, Mark Bottini and the sales team, they’ve really put an effort out to say it’s a power of 3,000, so all sales were leading with that HR value that we could bring. So instead of we’ve really moved from the traditional model of selling payroll, but then coming back with everything else. And I think that helped us a lot pre-pandemic and it really helped us with the momentum of the demand going up for HR. Because anybody, if I mean they’re talking to you about retirement, I’m also telling you about ASO and PEO that’s available to you and the value it brings. If I’m selling you payroll, I’m also talking about ASO and PEO. So it really has helped and so there has been a very high energy in the sales force, an opportunity for them all to sell HR and it was perfect timing.
Yes, great. Glad to see their hard work coming through. Have a blessed holiday guys. Thank you.
Thanks. You too.
Thank you. Your next question is from Matthew O’Neill of Goldman Sachs.
Yes. Hi, gentlemen. Thanks for squeezing me and I know the call is getting long and happy holidays as well. Don’t mean to belabor the questions on FI serving Clover. But was curious on two fronts similar Lisa’s question. One, when you guys were working on initiating this relationship, was there an immediate identification of a good overlap of existing Paychex and Clover clients and providing the technological connectivity was something being asked for? Or was it really more sort of all offensive as far as this could be a great referral channel going forward? And then just to round out. Is there any sort of two way street element here? I understand that people are making probably a credit card processing decision potentially before a payroll decision. But are you guys able to help sell the Clover product on the other side of your existing clients? Thanks.
Yes, in fact, we’ve been selling merchant processing with a number of partners and Pfizer of being a major one for some time. It stayed a small part of our business, because of what you just said. Typically they have merchant processing already, but we’ve been able to sometimes offer them better rates. Those rates can be very confusing and if we have payroll clients, we talked to them, we have been for a number of years, talking to them about merchant processing and we resell basically their products. So yes, there will be back and forth referral going both ways between us and it was – I think it was mostly offensive. We’ve always known that with this connection, because we sold merchant as well as payroll. And so we look for a partner, we thought that Pfizer particularly lately the Clover system is very strong and is very well penetrated. And I also mentioned earlier that, we found that probably over 30% of their clients have time and attendance solutions that are tied in with their point of sale Clover equipment and that we have very strong time and attendance solutions that can tie directly to the Clover equipment along with the payroll Flex platform. So we felt that from an offensive perspective to pick up referrals for payroll and it was positive for the connection that we could make, we could also enhance what Clover offers by giving them not only a payroll platform that’s tied in with the system, but time and attendance in a number of other products as well and the demand for HR obviously is typically there for those who are using those point of sale systems. So a lot of wins all the way around, we feel it will bring us.
Makes sense. Thanks so much.
Okay. Thank you.
Thank you. Today’s final question is coming from Scott Wurtzel of Wolfe Research.
Hi, good morning, guys. This is Scott on for Darrin Peller. Just had one question on sort of the structural positioning for the long-term. You mentioned that expenses were down this quarter related to lower discretionary spending and reduced facility costs or kind of a mix of short and longer term cost savings. And we are just wondering, if you’re still – if you are planning on doing more kind of cost savings on the longer-term side?
Well, I think and Efrain can comment on this. So obviously, we’re always looking at that, Scott, we’re always looking at. We’ve got a history of having the best margins in the business, we’re really pleased that during this kind of pandemic environment that we could maintain and improve our margins. And I think that we have been successful at making changes that respond to the market, but also make us more efficient. So yes, we’ll continue to look for ways to reduce costs and make us more productive and make the service and products even better. I think there’s a lot of opportunity for self-service that clients are looking for and their employees were well invested in that already with a five star mobile app and all of our products being mobile first designed and I think we’re going to see continued savings there as well.
Got it. And then on the revenue side, are you seeing more sustainable opportunities may be for more sticky revenue to lift the based on the other side of the pandemic?
Well, I think the HR. Yes, I think – I mentioned at the beginning of the call. I think one of the things that the pandemic has done for us and our clients is, they’ve been able to see the full value of being with Paychex. They’ve been able to use products and services and count on us for more HR support than they wouldn’t normally need in a non-kind of pandemic situation. And so I think it’s going to provide us better retention of all of the products, because we’ve had an opportunity for them to see that we can be there in a tough situation and really support them. And frankly get a lot of feedback from clients that we help them through the pandemic into – and to help their business survive. So we do feel that the products will have even better retention coming out of this, because we’ve been able to demonstrate the full value.
Great. Thanks for taking my question guys and happy holidays.
Thank you. You too.
Thank you. I will now turn the call back over to Mr. Mucci for any additional or closing remarks.
Alright, thank you. At this point, we will close the call. If you’re interested in playing the webcast of this conference call, it will be archived for approximately 90 days. Thank you for taking the time to participate in the second quarter press release conference call and for your interest in Paychex. We do wish you a very safe and happy holiday. Thank you.
Thank you. This does conclude today’s conference call. You may now disconnect.
If there is to be an inflationary force on the horizon, it could very well come from shortages in materials and commodities. Strong price gains are particular in softwood lumber. The 3-year chart below is the price of 1000 board ft of random length softwood lumber.
If anyone went to a Lowe’s (LOW) or Home Depot’s (HD) lumber department over the summer, you would have noticed both the lack of lumber supply and the price increases. Standard 8ft 2 x 4’s were going for over $6 when they were under $3 not that long ago.
Covid scare coupled with shelter in place orders caused a lot of lumber mills to shut down over the course of 2020 hitting lumber supply.
In today’s economy, there has been a great change in demand for commodities. On one hand, gasoline demand has been hit hard. On the other hand, demand for lumber is red hot.
To best give justice to the demand for lumber, below is a chart of new home sales. Demand for single family housing outside of cities is what is driving sales.
First, the company noted this:
In the first 6 weeks of our quarter through December 6th, our non-binding reservation deposits, which are a precursor to contracts, are up approximately 48% compared to 1 year ago.
Demand has continued to be very strong in the first quarter. In fact, this Saturday, we will raise prices nationwide for the 5th time this calendar year.
As for demand, the company had this to say about how it sees future sales:
So as we look to fiscal year 2021, we believe we are well positioned for growth. With our highest year end backlog in 15 years and continued strong demand, we expect to deliver the most homes in our history in fiscal year ’21.
Sounds like a lot of wood is going to be needed. To my surprise, I did not read any analyst asking about material supply concerns in the call transcript.
Lumber Shortages Heating Up
According to the U.S. Chamber of Commerce, 71% of commercial construction contractors face at least one material shortage. A recent article from a construction trade website, www.forconstrutionpros.com, provides good insight into the state of supply concerns for construction contractors.
Worth noting, it writes:
This quarter, 41% of contractors say less availability of building products and materials is a severe consequence of the pandemic, up from just 15% saying the same in Q3.
The most reported material shortage is wood/lumber, which has seen higher demand from a boom in residential construction during the pandemic. Now, 31% of commercial construction contractors report a shortage of lumber, up 20 points from 11% last quarter.
It’s one thing for there to be higher prices for a material, but quite another when you can’t even acquire it.
If you can’t acquire your material, you can’t practice your trade. In the case of homebuilders, they can’t build the house.
Per another industry article from earlier this month, it was noted:
The Timber Trade Federation (TTF) is advising all timber users and buyers to talk to their suppliers to shore up their purchasing strategies
TTF says that tight timber supply conditions will continue “certainly into Q2 2021, if not longer”.
The National Association of Home Builders is warning that the price increases and shortages could impact the economic recovery and have reached out to Government officials asking for help. Anything from reducing tariffs on Canadian wood to simply having the White House call on domestic lumber producers to ramp up production.
Lumber is simply a direct input cost to anything that requires wood. It’s particularly softwood like pine, which is what studs and plywood for housing are made up of, that is seeing the surge in price.
That higher input cost will likely be passed on to the overall cost of the finished product to ensure a profit can still be made.
Toll Brothers has noted having raised prices 5 times already this year.
For living standards and overall economic growth, this is a hindrance. More so, it makes a new home less affordable to home buyers.
The shortages and the price increases are a double whammy of a hindrance to economic growth.
It’s good to see the housing industry as strong as it is as well as the Do-It-Yourself projects being done. This has certainly given reason to be bullish on home improvement centers as well as homebuilders.
However, see that this bright spot in the economy now has a factor, shortage of wood, that will contribute to hitting profit margins or has the potential to miss out on lost revenue.
I can assure you that many decks that were wanted to be built last spring and summer did not get built due to a lack of decking material.
The economy won’t be able to bounce back as fast as it would otherwise be able to, due to supply constraints caused by the lockdown and other measures to prevent people from getting sick that have impacted supply.
The recent run-up in softwood lumber prices is quite telling of the state of the market, suggesting both strong demand and lack of available supply.
Consider this factor in your investments in home improvement centers or home builders.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
If you’ve ended up looking at Sachem Capital Corp. (NYSEMKT: SACH), then it must be the double digit dividend yield that brought you here. Sachem’s high dividend yield is an open secret – its four year average dividend yield is 9.8% most likely reflecting investors demanding a premium return from this micro-cap company.
Source: Seeking Alpha
Entrepreneurial micro-cap company focusing on a niche market
Founded in December 2010 and publicly-listed in February 2017, Sachem is an entrepreneurial company which provides short-term (12-36 months) secured, bridge loans (referred to as ‘hard money’ loans) to fix-and-flip real estate investors to fund their acquisition, renovation, rehabilitation, development or improvement of residential or commercial properties.
It has a simple spread-based business involving mortgage loans issued for an initial term of one to three years, bearing interest at a fixed rate of 5.0%to 13.0% per year, funded with a mix of equity capital and unsecured, un-subordinated five‑year notes issued at 6.88% to 7.75% coupon rates. It also charges its borrowers an origination fees ranging from 2% to 5% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan, such as inspection fees.
It offers mortgages with a maximum loan-to-value ratio of 70% which was temporarily reduced to 50% loan-to-value during 2Q-2020 at the height of COVID-19 but reinstated to 70% as of July 2020. Moreover, it has set a maximum loan amount limit for a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of its loan portfolio.
Below is some information regarding the size and type of mortgages:
Source: Investor Presentation, December 2020
Until recently, Sachem was active around its home base in Connecticut and the surrounding areas in Massachusetts, Rhode Island and New York. In 3Q-2020 it initiated lending activities in Florida and originated approx. $10 million worth of mortgages during the quarter.
So far, Sachem has posted decent profitability with return on equity ranging from 9 to 10% during the last two years as it has grown its mortgage book by 16% in 2019 and 37% y-o-y in 3Q-2020. It has also established a track-record of issuing unsecured five year notes as it primary source of funding.
Sachem has identified a market niche which a few years back was shunned by banks. In its recently filed unsecured notes prospectus, the management observes that it is facing competition from yield-chasing specialty finance entities funded by investment banks, asset managers, private equity funds and hedge funds.
Like any financial institution, the key to shareholder value creation at Sachem is efficient utilization of its shareholders’ equity. Sachem is moving in that direction by gradually increasing its leverage ratio which results in expansion of return on equity (see ROE analysis section at the bottom of table below).
Based on my back-of-the-envelope projections, Sachem could expand its Total Assets-to-Equity multiplier (or leverage ratio) to 3x over the next three years if it continues with its present pace of mortgage originations. This can allow it to increase its ROE to 16% by 2023 and grow earnings by 60% from 2020 levels.
I believe 3x leverage is the upper bound of its leverage capacity given that the unsecured notes require an Asset Coverage Ratio of 150% i.e. for every $100 of debt, Sachem should have assets or $150 and by implication, it should have equity capital of $50. I get the maximum leverage of 3x by dividend assets of $150 with equity capital of $50.
Sachem has got a decent amount of dry powder to fund its mortgage growth for 2021 after tapping the market three times in the past five months for unsecured 5-year notes at a yield of 7.75% raising approx. $50 million in total. It can issue more notes in 2022 and 2023 until it reaches the maximum leverage of 3x, and then it will need to raise more equity capital in 2023 to keep growing its mortgage book.
Given that Sachem is organized as a REIT, it will be targeting to payout most of its income as dividends. By 2023, Sachem could be valued at $6.0/share assuming a 2023 annual dividend per share of $0.60 and target dividend yield of 10%. For investors with a three year investment horizon, this means a total return of 116% over a three year period.
What’s the catch?
Sachem is a small company with total assets of $169 million as of September 2020 and stock market capitalization of approx. $89 million. In the past ten years, Sachem has successfully transitioned from a privately owned enterprise to a small public company with diversified sources of funding.
It is led by Mr. John L. Villano CPA who wears the hats of Chairman, CEO, CFO and Treasurer i.e. pretty much running the whole show. This is perfectly understandable for a start-up where all the strategy, operations and sales decisions are made by the founder.
For investor taking a longer term view on Sachem, reduction of key person risk, increase in management depth and ease of evolution from entrepreneurial stage to a more formalized organizational structure are important considerations.
Also, Sachem is in the lending business where maintaining underwriting standards while expanding the business volumes is a tough balancing act. Couple of years down the road, the number of mortgage applications being underwritten by Sachem could grow manifold from the present level of approx. 400-500 mortgages which are probably all vetted by Mr. Villano.
How to play Sachem?
For investors interested in taking exposure to Sachem, there are multiple ways to play as explained quite nicely by SA Contributor Rida Morwa here. Options range from the relatively lower risk path of generating a decent income yield but no capital appreciation by investing in the unsecured notes yielding around 7% or to the more higher risk proposition of buying the shares to get the juicier dividend yield and potential capital appreciation.
On a related note, for investors who are willing to invest in non-US companies, there is the option of Canadian mortgage investment corporations who have a more seasoned and well diversified business model of investing in residential mortgages under a pass-though structure. Atrium Mortgage Investment Corporation (OTC:AMIVF) and Timbercreek Financial Corp. (OTCPK:TBCRF) offer dividend yields in the range of 7-8% with capital appreciation potential, although US-based investors may not like the currency risk and paper work hassles.
I will conclude by saying that Sachem offers a decent dividend yield and capital prospects to investors with the risk appetite for taking exposure to micro-caps. However, the opportunity is quite small to attract any interest from portfolio managers/institutional investors and is likely to find buyers among retail investors looking to make some side bets.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This report is a personal opinion only and should not be considered as an “investment advice” or as a “recommendation” regarding a course of action. Only registered investment advisers can provide personalized investment advice. Investors should get personal advice from their investment adviser and should make independent investigations before acting on any information published here.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
Buy the Biggest and the Best Dry Bulk Ship Owner for the Improving Dry Bulk Market in 2021
Although we saw major disruptions to global dry bulk trade this year, the dry bulk market has been surprisingly resilient. With Chinese economic stimulus causing double-digit growth in steel output in recent months, and further stimulus elsewhere in the world expected in the form of infrastructure investment, demand for dry bulk’s #1 commodity iron ore is expected to rise meaningfully in 2021. This, combined with higher demand for dry bulk’s #2 commodity coal due to growing energy demand in Asia along with surging grain and minor bulks trade, will ensure that overall dry bulk trade sees meaningful growth in 2021 that could exceed expectations. Increasing demand with constrained supply from a multi-decade low shipbuilding orderbook is sure to tighten the supply demand balance further and could even lead to a rate surge similar to the one we are currently seeing in container shipping.
Star Bulk Carriers (SBLK) has been on a torrid expansion run in recent years that has earned it the title of the largest publicly traded dry bulk shipping company with one of the youngest fleets. In an industry full of suspect management, SBLK management has shown it can and will continue to fund accretive growth at the bottom of the cycle and generate superior returns. Great management, best of class corporate governance, and its scale make this one of the safest and best ways to play the improving dry bulk market.
Iron Ore to Lead the Charge of Dry Bulk Trade Expansion in 2021
Iron ore prices are making new decade highs due to surging Chinese steel production and demand for the mineral that has exhausted worldwide supply:
With Chinese steel production ramping up to an amazing 12.7% year-over-year increase in October due to stimulus measures, and Vale (NYSE:VALE) slow to bring back production capacity, seaborne iron ore supply simply can’t keep up with worldwide demand, and inventories of both iron ore and steel in China are decreasing rapidly from already low levels:
Days of inventory on hand at Chinese ports are at 5+ year lows and declining rapidly with inventories dropping by 1.5% in the latest week and expected to continue declining into Chinese New Year.
The Solution to High Prices is High Prices
The market has bid up the iron ore price to find a solution to insufficient supply. This makes shipments from swing producers at far distances like the US and Canada suddenly economical. It also incentivizes producers to pull out all the stops to bring on new supply more quickly. Just 1 week after lowering its 2021 forecast, Vale announced a restart at their Samarco mine within the month of December. In addition to the known sources of swing supply, I believe that iron ore trade and shipment forecasts for 2021 are understated at these prices with millions of dollars of extra profit incentive at work right now to uncover and bring forward every ounce of potential supply and ship it to China. I see trade volumes surprising in the near term and analysts revising estimates upwards accordingly which will be supportive of dry bulk rates and dry bulk equities.
Coal Also Seeing a Price Surge Due to Increasing Demand
Coal prices recently hit fresh 52-week highs:
(Source: Trading Economics)
China, which causes distortions in the coal market due to a quota system that incentivizes coal traders to bring in coal early in the year and prevents imports after quotas are filled late in the year, has been forced to increase quotas due to extremely high domestic coal prices and low coal stocks. With a dire need to restock and demand exceeding expectations based on quotas set before pandemic, coal demand and trade will be well supported throughout the first half of next year as coal traders get a fresh set of quotas to work with. High coal prices will incentivize suppliers to bring back capacity to meet demand which could cause coal trade to exceed current estimates. As coal is the #2 dry bulk commodity traded by volume, this will be very supportive of dry bulk shipping demand and rates.
Grains and Minor Bulk Trades Also Surging
Grain trade has surged to fresh record high volumes this year despite the pandemic to meet China’s insatiable appetite and meet the needs of its recovering pig herd with a structural shift toward industrial producers consuming more imported grain. In addition to grains, minor bulks are growing steadily and expected to continue the trend in 2021. For further reading on dry bulk trade outlook, Klaveness Research has put together a great series of articles covering iron ore, coal, grains, bauxite, and other minor bulks.
Overall Dry Bulk Trade Well Supported and Likely to Exceed Expectations in 2021 On Surging Commodity Demand and Prices
Commodity prices are signaling late in the year that Chinese led global demand is extremely strong and likely stronger than forecast. Demand and prices have caught industry participants by surprise with suppliers working quickly to increase supply. For that reason, I believe models have not yet been updated to reflect the improved outlook. As these models get updated, dry bulk freight futures and equities will increase to reflect their improved outlook. I believe this process is just beginning with the Breakwave Dry Bulk Shipping ETF (NYSEARCA:BDRY), which tracks the dry bulk freight futures, up 18% in the last 10 trading days.
Dry Bulk Ship Supply Shrinking with Multi-decade Low Orderbook and Restrained Ordering
Historic low ordering in 2020 has led to the lowest dry bulk orderbook in 16 years:
(Source: SBLK Q3 earnings presentation)
Ship ordering is likely to pick back up with an improved market, but finding capable shipbuilding capacity and willing ship finance going forward is going to be much harder than it was in the past. This is best summed up in a recent research report by Danish Ship Finance:
“There are several factors constraining production capacity. Just 65 out of 287 yards have the capacity to build vessels larger than 100,000 dwt and only 60% of global capacity has experience implementing a non-fuel oil engine. While product assortment will be important, yards must build up track records, as vessel owners cannot afford to make wrong decisions.”
(Source: Danish Ship Finance)
Not only will it be hard to find shipyards technologically capable of building the next generation of ships required by new IMO regulations, but shipbuilding capacity is also likely to be constrained in the large sizes that all sectors are favoring right now.
With uncertainty over what type of ships will be required in the future to meet environmental regulations, along with limited finance and shipbuilding capacity, new ship ordering is likely to be much more restrained than it has been in the past, even if rates go crazy. Strong demand into limited supply means high rates, high profits, and high returns for shareholders.
Star Bulk Has the Biggest and one of the Best Fleets
Star Bulk has doubled its fleet size, adding 47 ships over the past 3 years, making it the largest Dry Bulk operator on a deadweight tonne basis (DWT) with one of the youngest fleets:
(Source: information compiled by author from company filings)
Golden Ocean (GOGL), another great company to be discussed in a future article, is the only other company that comes close to SBLK in size and is the only listed company with a younger fleet (excluding Scorpio Bulkers (SALT) that is rapidly exiting the dry bulk business). SBLK’s scale and modern fleet has made it one of the most bankable companies in the business and given it access to capital markets while its smaller peers struggle to obtain financing at competitive rates.
SBLK’s scale also allows it to spread its overhead across more ships and to have some of the lowest operating costs in the industry on a per ship basis:
(source: SBLK Q3 earnings presentation)
Lower OPEX per ship means lower breakeven rates and higher profitability under the same market conditions relative to its peers. As SBLK expands its fleet, it has shown that it will continue to lower opex per ship and increase the profitability of its fleet.
Scrubber Investment Still Paying Attractive Returns
Although there was much debate about investing in scrubbers to meet the IMO 2020 mandate, the obvious choice for any company that could fund the capex was to install scrubbers with fuel futures pointing to payback periods of less than 3 years and as short as a single year for large vessels. SBLK, having a sophisticated management and strong balance sheet, made the smart decision to install scrubbers on all of its vessels which it completed in Q2 this year. Due to COVID destroying worldwide refining demand, thus lowering the cost differential of refined VLSFO vs. lower cost unrefined HSFO burned by ships with scrubbers, the scrubber thesis has not played out as planned. Instead of the single and two-year payback periods expected, SBLK is still enjoying a lower but still good ~5-year payback period on its scrubber investments. SBLK’s entire fleet will continue to earn a meaningful scrubber premium in the market and higher profit levels than its peers that elected not to install scrubbers.
SBLK Management Making All The Right Moves
Star Bulk management continues to impress. Rapid expansion at the bottom of the cycle over the past 3 years while asset prices were low has set SBLK up for success with great operating leverage on its assets. Its latest deal to buy 3 capesize vessels tells me that management has its foot back on the growth gas pedal after a long pause to assess the uncertainty in the market brought by COVID. This aligns with my view of the market that now is the time with the outlook becoming very bullish.
Intensifying of global trade tensions could negatively affect global trade volumes.
Unseen future demand shocks like that caused by COVID could negatively affect trade volumes.
Trade is especially sensitive to changes in global GDP. Any global recession would likely cause a loss of trade volumes and reduction in dry bulk rates.
The dry bulk market is improving and is likely to surprise to the upside in the near term as recent commodity prices are signaling more robust trade demand than built into current models. Restrained ship ordering will help keep supply and demand more balanced into the future and support rates. There are many ways to capitalize on the improving dry bulk market including my favorite value play Navios Maritime Partners (NMM) that you can read about in my Seeking Alpha article here. But shipping, and dry bulk especially, is not for the faint of heart with volatile rates and cycles of boom and bust. If you are new to dry bulk or looking for the highest quality and lowest risk company in the sector, look no further than SBLK with the largest fleet, access to finance, top tier corporate governance and a management team that has proven it can navigate the ups and downs of the cycles to unlock shareholder value.
Disclosure: I am/we are long NMM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
Amid this raging bull market, you’re enjoying the golden ride toward more profits. That’s because the coronavirus pandemic has nearly broken all normal market behaviors. In other words, the stock market quickly transitioned from a corona bear in March to an uber bull market within the same year. Though most stocks will rally in a bull market, certain growth stocks will give you outsized gains.
Over many years of doing market research, I’ve followed many stocks. And, I noticed that niche leaders usually give you the most outsized gains in the long haul. For instance, you saw CRISPR Therapeutics (CRSP) appreciated over 7-folds since I first featured it in 2017. That’s the leading company for gene-editing. Now the crowned champion in my book for gene therapy is Regenxbio (RGNX). Intriguingly, Regenxbio hasn’t gained that much like CRISPR. Nevertheless, I believe that Regenxbio is a powerful stock whose time has come. In this research, I’ll feature a fundamental update on Regenxbio and provide my expectation for this Philip Fisher growth equity.
Figure 1: Regenxbio chart (Source: StockCharts)
About The Company
As usual, I’ll deliver a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Headquartered in Rockville, Maryland, Regenxbio is focusing on the innovation and commercialization of gene therapy. Leveraging the power of the genes, Regenxbio is poised to fill the unmet needs in retinal, metabolic, and neurodegenerative diseases.
Powering Regenxbio is the gene delivery platform dubbed NAV. Of note, NAV uses highly advanced adeno-associated viral (AAV) vectors which confers improved therapeutic success. Specifically, NAV overcame all the setbacks like low efficacy and toxicity that hindered earlier generation AAVs.
In fact, NAV works so well that Regenxbio is able to license the technology to over 20 different companies. Among the licensees, AveXis got acquired by Novartis (NVS) for $8.7B. Better yet, its drug Zolgensma is already approved and being commercialized for spinal muscular atrophy.
Figure 2: Therapeutic pipeline (Source: Regenxbio)
Zolgensma’s $1B Milestone Hit
As you can see, the first step to success for a biotech company is in getting its lead drug through the clinical trial. The second step is to gain FDA approval, which is a more challenging step. The third and most difficult step is to generate blockbuster sales. On this note, Regenxbio succeeded on nearly all fronts. Subsequent to approval and a year into launch, Zolgensma achieved over $1B in cumulative sales for Novartis.
The aforesaid milestone is imperative to Regenxbio because it validates the NAV technology. More importantly, it signifies success to come for other pipeline assets. In other words, the success of one molecule significantly lowers the hurdles for other developing drugs.
Now, I know there are arguments that Zolgensma can be pricy. Be that as it may, the strong sales traction for Zolgensma signals that there is a strong demand for gene therapy. And with that, gene therapy is here to stay. Resonating optimism about the future, the President and CEO (Kenneth Mills) enthused:
“The overall progress of gene therapy treatments continues to be encouraging, as we see additional patients around the world treated with Zolgensma, the first approved gene therapy based on Regenxbio’s NAV Technology Platform. We maintain our focus on our important relationships with partners and licensees in the gene therapy space, with a strong focus on patient needs and innovative approaches to treat disease.”
Shifting gears, you should check the developmental progress of the crown-jewel, RGX-314 (i.e., 314). As a gene therapy targeting VEGF, 314 is being developed as a one-time treatment for wet age-related macular degeneration (i.e., wet-AMD), diabetic retinopathy, and other chronic retinal conditions.
Regarding wet-AMD, Regenxbio already dosed the first patient in the Phase 2 (AAVIATE) trial for suprachoroidal delivery of 314. Enrollment for the first group should be completed by now. And, you can expect preliminary data released in early next year.
If positive, that would add tremendous value to this stock. And, you can anticipate a huge rally. Based on my forecast, there is a 65% (i.e., more than favorable) chance of positive data release. Given that I’m highly conservative in my forecast, my 65% chances equates to others 85% odds. Asides from the suprachoroidal delivery, the company will start the pivotal program for subretinal injection of 314 in 1Q 2021.
As to 314’s treatment for diabetic retinopathy (i.e., DR), Regenxbio recently dosed the first patient in the Phase 2 (ALTITUDE) trial. Therefore, you can expect interim data sometime in 2021. Again, I also ascribed the 65% chances of success for this franchise.
Furthermore, it’s interesting that Regenxbio is tinkering with 314 for treating neurodegenerative diseases. On that note, the company is collaborating with Neurimmune AG in targeting 314 to both tau protein and alpha-synuclein. Additionally, the firm is advancing this drug as a potential treatment for hereditary angioedema (“HAE”).
Of these later franchises, you can expect additional information from Regenxbio next year. I would need more information to size up their chances of success. At this point, I’m neutral on these developments. But if they hit, you can see the tremendous value-added to this blockbuster in the making, 314. As he gives more colors to the recent development, CEO Mills remarked:
“We have made several important advancements in our clinical pipeline during 3Q2020, with continued focus on execution during the COVID-19 pandemic. I’m pleased that two Phase 2 trials are underway for the treatment of wet AMD and DR using the suprachoroidal approach for the delivery of 314. In addition, we have expanded our RGX-121 program for patients with MPS II to gain additional insight into the potential treatment effects of this one-time gene therapy candidate in more patients, and we have dosed additional patients in the second cohort of the ongoing Phase 1/2 trial. I look forward to providing additional updates on all of our clinical programs in 2021, as we continue to focus on the significant unmet medical needs in both large indications and rare diseases.”
Just as you would get an annual physical for your well-being, it’s important to check the financial health of your stock. For instance, your health is affected by “blood flow” as your stock’s viability is dependent on the “cash flow.” With that in mind, I’ll analyze the 3Q 2020 earnings report for the period that concluded on September 30.
As follows, Regenxbio procured $98.9M compared to $14.7M for the same period a year prior. As such, the top-line grew by 572.7%. And, this is due to the royalty relating to the increasing Zolgensma sales. Precisely speaking, Regenxbio received the $80.0M for $1.0B cumulative sales milestone.
That aside, the research and development (R&D) for the said periods registered at $43.9M and $35.6M, respectively. I view the 23.3% R&D increase positively because the money invested today can turn into blockbuster profits in the future. After all, you have to plant a tree to enjoy its fruits.
Furthermore, Regenxbio posted $8.3M ($0.23 per share) net loss versus $34.6M ($0.94 per share) decline for the same comparison. On a per-share basis, the bottom line improved by 75.5%. For a young commercial-stage company, it’s a great sign to see the loss narrows. That signifies either their drug and/or technology is gaining traction.
Figure 3: Key financial metrics (Source: Regenxbio)
About the balance sheet, there were $289.8M in cash and equivalents. On top of the $80M milestone payment, the cash position is strengthened to $369.8M. Based on the $84.9M quarterly OpEx, there should be adequate capital to fund operations into 3Q 2021. You can see that’s my calculations. And yet, the company believes that its cash runway can last as long as mid-2022.
While on the balance sheet, you should check to see if Regenxbio is a “serial diluter.” After all, a serially diluted company will render your investment essentially worthless. Given that the shares outstanding increased from 36.8M to 38.8M, my math reveals a 5.4% annual dilution. At this rate, Regenxbio easily cleared my 30% dilution cutoff for a profitable investment.
Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are “growth-cycle dependent.” At this point in its life cycle, the biggest concern is whether RGX-314 will post positive data for the wet AMD franchise and DR. As I’m confident in its chances of success, I ascribed the 35% chances of clinical failure. In such an event, you can expect your stock to tumble over 50% and vice versa.
Moreover, other molecules (i.e., RGX-111, -121, -181, -381) might not generate good clinical results. Nevertheless, they won’t cause Regenxbio to tumble as much as if 314 fails. As a young company, Regenxbio can grow too aggressively and thereby runs into the potential cash flows constraint.
In all, I maintain my strong buy recommendation on Regenxbio with the 4.75 out of five stars rating. As a leading gene therapy innovator, Regenxbio packs a mean punch. Specifically, the company has ownership of a powerful gene therapy platform technology, NAV. It’s a stellar technology that enticed over 20 different companies to license it for their own therapeutic development. The most advanced licensee got bought out by Novartis. This year, Zolgensma just hit its $1B cumulative sales milestone. Despite being a new and exotic technology, NAV medicine is seeing strong sales ramp up.
In the coming years, you can expect several gene therapies to generate blockbuster sales. That makes sense because the medical community will be more knowledgeable and receptive to gene therapy. After all, it takes time to get used to a novel treatment.
Riding Regenxbio’s organic and out-licensed pipelines, you can expect multiple blockbusters to be available on the market in the coming years. For instance, the most promising molecules (RGX-314) would become one such blockbuster. Even for wet-AMD alone, the market is projected to hit $16.3B by 2028. Eylea garnered $8B in peak sales. Hence, 314 should have a very good shot at procuring at least $2B. That’s because 314 is an excellent drug with a similar mechanism of action as Eylea: it’s just a novel form of delivery via gene therapy for suppressing VEGF. As such, your Regenxbio investment is most likely to increase multiple folds like other niche leaders (i.e., CRISPR).
Asides from 314, Regenxbio is advancing various assets (RGX-111, -121, -181, -381) for rare diseases. Orphan disease investment is a lucrative niche due to the premium reimbursement to warrant innovation. If any one of these molecules become a blockbuster, you’re looking at at least one-fold increase in Regenxbio’s value.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: As a medical doctor/market expert, I’m not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I am also NOT responsible for the actions of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investment in stocks and options can result in a loss of capital. The information presented should NOT be construed as a recommendation to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your actions. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized.
In this BullionStar Perspectives video, I talk to gold and commodities futures trader William Purpura about the COMEX futures exchange, the LBMA, and the gold markets in Dubai and China. William is Chairman of the COMEX Governors Committee and is a font of knowledge about the gold markets. This is a must see interview for those with an interest in the COMEX and gold.
Filmed in December 2020, the interview is 47 minutes long, and each topic in the interview is clickable as follows:
00:41 William’s career as a futures trader
02:48 The role of the COMEX Board of Governors
04:14 The function and benefits of futures markets
05:58 Physically settled vs cash-settled contracts
07:26 The triggers for COMEX metal inflows during 2020
09:51 Gold deliveries within the COMEX vaults, but lack of withdrawals
12:52 Eligible gold – A suitable metric to gauge tradeable inventory?
15:05 COMEX mass approval of LBMA Good Delivery Brands in July
17:11 Potential settlement of COMEX contracts in London vaults
19:52 Purpose of the COMEX ‘Enhanced Delivery’ 400 oz gold contract
22:40 COMEX and LBMA cooperation, EFP anomaly and arbitrage
25:35 Mechanics of warrant delivery between short and long on COMEX
29:07 Why vaults in New York apply to get COMEX approved
30:51 The LBMA and its recent attempts to influence major gold centers
35:27 Should the LBMA be the global authority for precious metals?
38:41 Dubai as a major gold hub, Opportunities, Growth and Competition
41:09 China’s gold market: Derivatives, Physical, and Cross-Border flows
45:09 COMEX as a physical precious metal delivery center in 2021
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.