And just like that, we’re into December. It’s been a whirlwind year for Australian and global markets and we at Morgans have been busy expanding our depth and range of services to help you achieve your financial goals. This edition of the Month Ahead presents ideas from three areas of focus for Morgans: domestic equities, ETFs and global equities. We take a look at the opportunities presented by Light & Wonder, the Firetrail Australian Small Companies Fund and Eli Lilly.
Wishing you a very happy Christmas and a prosperous New Year.
Light & Wonder (ASX: LNW)
Light & Wonder is a Las Vegas-based global games company focused on content and digital markets. It generates revenue through the sale and leasing of land-based gaming machines, alongside free-to-play digital and online casino content. Its primary listing is on NASDAQ with a dual listing on the ASX. In March 2022, Light & Wonder rebranded from its former holding company, Scientific Games and has since pursued market share growth with revamped management and a new board. Since the rebranding, management has reduced leverage from 8x to 3x in under two years and set a 2025 earnings target that seems achievable to us given its growth trajectory. The strongest performance in the recent third quarter results came from global outright machine sales which rose 50% year-on-year, driven by strong European shipments.
In October, litigation ruling was handed down with Aristocrat Leisure over proprietary math models used in "Dragon Train." This led to the game's withdrawal and the dismissal of its designer. While significant, the game represents just one of Light & Wonder’s approximately 130 annual titles and would have contributed less than 5% to earnings. A revised version is in development and expected by mid-2025 which we see as a significant upcoming catalyst. While litigation remains an overhang, we think the share price decline is overdone. Negative sentiment around the injunction and upcoming legal catalysts will linger, but it shouldn’t detract from the company’s strong fundamentals. Light & Wonder has a solid track record of delivering and in our opinion has the potential to be a multi-year compounder. It boasts top-tier game developers, including much of the team behind Aristocrat's standout growth in the 2010s.
Light & Wonder is busy buying back stock as it believes the share price undervalues the business. We agree and regard the discount to Aristocrat on which Light & Wonder trades as unwarranted.
Firetrail Australian Small Companies Fund Active ETF (ASX: FSML)
The Firetrail Australian Small Companies Fund Active ETF provides Australian retail investors access to a high conviction portfolio of Firetrail’s best ideas in domestic small caps, boasting a long track record of 12% p.a. outperformance net of fees. Managed by a highly experienced team led by Patrick Hodgens, Matthew Fist, and Eleanor Swanson, the fund benefits from their extensive industry knowledge and proven track record. The team's significant equity ownership in the firm ensures their interests are closely aligned with those of the investors and reflects a strong commitment to achieving long-term performance.
FSML debuted on ASX last month, providing investors with one of the first active ETFs in Australian small caps. FSML provides investors with a simple, accessible, liquid and transparent means of gaining access to a higher performance, diversified small cap manager – a sector of the market we at Morgans are particularly bullish on.
The fund's investment process is designed to identify undervalued opportunities within the Australian small-cap market. By employing a bottom-up approach and utilising a proprietary quality scorecard, the team rigorously assesses potential investments based on management quality, business sustainability, and financial transparency. This structured process results in a concentrated strategy, typically holding between 20-50 stocks, ensuring that only high-quality companies are selected, enhancing the likelihood of strong returns for investors.
Performance-wise, the fund has consistently and handsomely outperformed its benchmark, the S&P/ASX Small Ordinaries Accumulation Index. This impressive track record is further supported by the fund's strong risk management practices and the team's disciplined approach to portfolio construction, making it a solid option for investors looking to diversify their portfolios beyond the mostly fully valued ASX large caps.
Eli Lilly (NYSE: LLY)
“When health is lost, the only thing you want is to get better”. That’s the slogan of US pharmaceutical giant Eli Lilly, a company thrust into the limelight over the past year as chronic weight management drug Zepbound, along with type 2 diabetes medication Mounjaro, which shares the same chemical backbone, have gained ‘blockbuster’ status (more than a billion dollars in sales) in short order, propelling shares to all-time highs back in September. Since that time, however, shares have fallen more than 15%, with the majority of loss recorded in this month alone.
So, what has happened and does this represent a good time to ‘buy the dip”? We think so and here’s why. First, while 3Q results reported on 30 October 2024 disappointed on lower sales of both Zepbound and Mounjaro, it was not due weak demand, but inadequate supply. Actually, a good problem to have (if you have a problem), but trying to balance the supply/demand equation has proven to be easier said than done. Although LLY continues to invest in manufacturing infrastructure, it will take time to adequately scale to consistently deliver its obesity and diabetes care medications. As such, it is not uncommon for inventory levels to ebb and flow and quarterly results to be a tad bit lumpy. But there appears to be no fundamental cause for concern.
Second, while LLY currently enjoys a duology in the diabetes/weight loss realm with Danish pharmaceutical company Novo Nordisk (NVO), there are numerous other companies nipping at their heels. That said, the total addressable market is massive (pun intended!), with the latest projections surpassing US$100bn by 2030 (just two years ago it was cUS$25bn). In addition, the list of other diseases/disorders potentially amenable to treatment by these drugs keeps growing and runs the gamut from cancer and cardiovascular to neurological and even infections. So this expanding market is certainly big enough to support numerous players and is not a winner-take-all opportunity.
Third, while Zepbound and Mounjaro represent c40% of total sales and showcase LLY’s expertise in cardiometabolic health, it also has key franchises in cancer, immunology, neurodegeneration and pain, along with a deep R&D pipeline of more than 70 drug candidates (70% in mid/late-stage trials). Notably, Alzheimer’s Disease drug Kisunla (Donanemab) gained FDA approval last July and eczema injection Ebglyss was greenlighted last September, each targeting markets well over US$60bn. In addition, LLY is leading the pack in developing the first weight-loss drug pill, orforglipron, with late-stage data expected Apr-25. All concrete catalysts seemingly overlooked.
Finally, the recent Biden Administration proposal to allow Medicare/Medicaid coverage for the cost of weight-loss drugs could turn out to be an early Christmas gift, as it would expand access to more than 7 million Americans who currently are only covered (if at all) for conditions like diabetes and heart disease, but not for obesity alone. And while the future of the policy will be in the hands of President-elect Donald Trump's administration, to be enacted in 2026, it is likely to be a political landmine, one that the incoming administration is doubtful to denote, despite the added costs (CBO estimates that Medicare coverage of anti-obesity drugs would increase federal spending by US$35bn over 8 years), given it would be seen as taking away important health benefits. Given the above, the share sell-off appears unwarranted and an opportunity to ‘buy the dip’ in a company that make medicines that give people a chance at health.
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