Category: Shares

Business Strategy and Outlook 

United Airlines is the most internationally focused U.S.-based carrier by operating revenue, with almost 40% of 2019 revenue coming from international activities. Before the coronavirus pandemic, much of the company’s story focused on realizing cost efficiencies to expand margins. In the leisure market, United is to continue receiving yield pressure from low-cost carriers. While its basic economy offering effectively serves the leisure market, don’t expect the firm to thrive in this segment. United’s international routes will not be as pressured, but that international flights will be difficult to fill until border restrictions are lifted.

United Airlines will participate in the recovery of business and international leisure travel in 2022 and 2023. A recovery in business travel will be critical for United to maintain the attractive economics of the frequent-flier program. Business travellers will often use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks are willing to pay top dollar for these frequent-flier miles, which provides a high-margin income stream to United. The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and much of the projections are based on assumptions around how illness and vaccinations affect society. A full recovery is expected in capacity and an 80%-90% recovery in business travel that subsequently grows at GDP levels over the medium term. United has considerably greater regulatory uncertainty than peer carriers due to its increased exposure to international travel, and summer of 2022 will be a critical test of international travel recovery for United.

Financial Strength

United has a roughly average debt burden relative to peer U.S. carriers, but an average airline balance sheet is not strong in absolute terms. United carries a large amount of debt, comparatively thin margins, and substantial revenue uncertainty. As the pandemic has wreaked havoc on air travel demand and airlines’ business models, liquidity has become more important than in recent years. The primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums. United’s priority after the pandemic will be deleveraging the balance sheet, but this will take several years because of the firm’s thin margins. United came into the pandemic with a reasonable amount of debt, with the gross debt/EBITDA ratio sitting at roughly 4.5 times in 2019. United, like all airlines, has materially increased its leverage since February 2020 and has issued debt and received support from the government to survive a previously unfathomable decline in air traffic. As of the fourth quarter of 2021, United has $33.4 billion of debt and $18.3 billion of cash on the balance sheet. Roughly break-even levels of profitability are in 2022 and profitability in 2023 and beyond, there is no leverage to increase considerably from here on out.

Bulls Say’s

• United has renewed its frequent-flier partnership with Chase, potentially creating room for long-term margin expansion.
• An increasing focus on capacity restraint across the industry, combined with structurally lower fuel prices, should boost airlines’ financial performance over the medium term. 

• Leisure travellers have become more comfortable with flying during the COVID-19 pandemic.

Company Profile 

United Airlines is a major U.S. network carrier. United’s hubs include San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. United operates a hub-and-spoke system that is more focused on international travel than legacy peers.

 (Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy and Outlook 

Biogen’s specialty-market-focused drug portfolio and novel, neurology-focused pipeline create a wide economic moat. Biogen’s strategy has its roots in the 2003 merger of Biogen (multiple sclerosis drug Avonex) and Idec (cancer drug Rituxan). While Rituxan is succumbing to biosimilar competition, Biogen is expanding its neurology portfolio beyond MS, including blockbuster neuromuscular disease drug Spinraza and several promising drugs behind Aduhelm in Alzheimer’s disease. n MS, Avonex and longer-acting Plegridy still generate nearly $2 billion in annual sales and remain the leading MS interferon drugs. Biogen’s MS antibody Tysabri also sees $2 billion in annual sales due to its high efficacy. Oral MS drug Tecfidera peaked above $4 billion in sales in 2019, but U.S. generics drastically cut into sales in 2021 after entry in 2020. The new oral therapy Vumerity offers improved GI tolerability but will only partly offset this headwind. While pricing power and demand for Biogen’s injectable MS portfolio are eroding in the face of new competition, Biogen receives substantial royalties on the biggest new competitor, Roche’s Ocrevus, which helps offset pressure on older MS drugs.

Outside of MS, Biogen has strong human genetic validation for its neurology pipeline. Spinal muscular atrophy drug Spinraza (partnered with Ionis) is a $2 billion drug, although competition from Novartis (gene therapy Zolgensma) and Roche (oral drug Evrysdi) are beginning to erode sales. While Aduhelm was approved in the U.S. in June 2021, skepticism surrounding the launch and lack of Medicare coverage have made the drug a commercial failure. That said, Biogen and Eisai’s lecanemab (data fall 2022) could have more definitive data. While there is significant uncertainty surrounding Biogen’s Alzheimer’s pipeline, the market also underestimates Biogen’s remaining pipeline, which includes a continuing partnership with Ionis (including tau-targeting Alzheimer’s drug BIIB080) and drug candidates to treat conditions including stroke, depression, Parkinson’s, pain, and ALS.

Financial Strength

Biogen’s year-end 2021 cash and marketable securities balance ($4.7 billion) and free cash flow will help fund future repurchases and allow the firm flexibility on future acquisitions. Most maturities for Biogen’s $7.3 billion in long-term debt are well into the future, with only $1 billion in debt due before 2025. Historically, Biogen has focused on returning excess cash to shareholders via buybacks, but its limited acquisition and collaboration record is strong and more tuck-in acquisitions going forward. Of the $15 billion in free cash flow generated in 2006-15, Biogen spent the vast majority of this cash on repurchases, with an average repurchase price over 2006-15 of $87 per share.

Bulls Say’s

• Biogen leads the $20 billion global MS market with Avonex, Plegridy, Tysabri, and Tecfidera, and the launch of Vumerity partly protects Tecfidera sales from generic headwinds in the U.S. 
• Biogen receives royalties and profit share from Roche on MS drug Ocrevus and cancer therapies Rituxan and Gazyva, boosting Biogen’s profitability. 
• Biogen’s neurology portfolio outside of MS, including Spinraza in SMA, should help diversify revenue and boost sales growth.

Company Profile 

Biogen and Idec merged in 2003, combining forces to market Biogen’s multiple sclerosis drug Avonex and Idec’s cancer drug Rituxan. Today, Rituxan and next-generation antibody Gazyva are marketed via a collaboration with Roche. Biogen also markets novel MS drugs Plegridy, Tysabri, Tecfidera, and Vumerity. In Japan, Biogen’s MS portfolio is co-promoted by Eisai. Hemophilia therapies Eloctate and Alprolix (partnered with SOBI) were spun off as part of Bioverativ in 2017. Biogen has several drug candidates in phase 3 trials in neurology and neurodegenerative diseases and has launched Spinraza with partner Ionis. Aduhelm was approved as the firm’s first Alzheimer’s disease therapy in June 2021.

 (Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

American Express has enjoyed a strong start to 2022 as the company’s payment volume benefited from a recovery in travel and entertainment spending (roughly 30% of pre-pandemic billings) as pandemic fears faded. American Express generates more than 80% of its revenue through noninterest income, with its largest source of revenue being the discount rate charged to merchants when they accept payment from one of its cardholders. This means that a recovery in travel and entertainment spending has a direct impact on the company’s revenue. Consumer travel has rebounded strongly, but the impact on business travel could be longer lasting as companies reassess their travel needs. 

While a long-term impairment of business travel would affect American Express, the overall impact would be manageable as the company is not as dependent on this segment as it once was. Another point of concern going forward in 2022 is the impact that rising fuel prices and high inflation will have on travel demand. So far travel spending has remained resilient, despite higher prices, but this will be a point to monitor given that American Express does have more reliance on spending patterns in this industry than its other card issuing peers. 

That said, note that non-travel spending on American Express’ cards is well above 2019 levels, as the firm benefits from a larger cardholder base and strong consumer engagement with its cards. Also, the company should see higher fee income as the $695 annual fee for its premium Platinum cards becomes effective for existing cardholders, providing additional tailwinds to the company in 2022. The company’s greatest strength remains its existing cardholder base of high-spending individuals and small businesses. The high average spending rate on American Express’ cards makes its cardholders attractive to merchants, and the company has been able to form valuable partnerships in exchange for access to these cardholders. This will continue as American Express’ position in the premium credit card market remains strong.

Financial Strengths

American Express has a strong financial position with a well-positioned balance sheet and a credit card portfolio that historically has had lower credit risk than its peers. At the end of March 2022, the company had a common equity Tier 1 capital ratio of 10.4%, in line with its long-term target. While American Express’ common equity Tier 1 ratio is well below its 2021 peak–a consequence of returning $9 billion in capital to shareholders during 2021– this is a sufficient level, particularly as the company has historically had credit losses well below those of peers. While the project net charge-offs to rise in 2022 and 2023, American Express’ balance sheet should be well equipped to handle higher credit costs.

Bulls Say

• American Express operates as a closed-loop network for the cards that it issues. This allows it to capture more of the economic profit of a single credit card payment than other credit card issuers. 
• American Express’ strong position with small businesses should help it win additional B2B payment volume as the company seeks to expand its offerings in the space. 
• Non-T&E spending on American Express’ cards has already recovered to pre-pandemic levels, showing that cardholders remain engaged with its products even with limited opportunities to travel.

Company Description

American Express is a global financial institution, operating in about 130 countries, that provides consumers and businesses charge and credit card payment products. The company also operates a highly profitable merchant payment network. Since 2018, it has operated in three segments: global consumer services, global commercial services, and global merchant and network services. In addition to payment products, the company’s commercial business offers expense management tools, consulting services, and business loans.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook:   

Company views Nike as the leader of the athletic apparel market and believes it will overcome the challenge of COVID-19 despite near-term supply issues. The wide moat rating on the company is based on its intangible brand asset, it will maintain premium pricing and generate economic profits for at least 20 years. Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. While it does face significant competition, the company believes it has proven over a long period that it can maintain share and pricing. Company thinks Nike’s strategies allow it to maintain its leadership position. Over the last few years, Nike has invested in its direct-to-consumer network while cutting wholesale accounts like Belk and Dillard’s. In North America and elsewhere, the firm has reduced its exposure to undifferentiated retailers while increasing its connections with a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. It is considered that these strategies will allow Nike to hold shares and pricing.

 Although its recent results in China have been inconsistent due to supply issues and a political controversy, I still believe Nike has a great opportunity for growth there and in other emerging markets. The firm experienced double-digit annual sales growth in six of the past eight years in greater China and, fueled by high government investment in athletics, it will do so again after the current difficulties have passed. Moreover, with worldwide distribution and huge e-commerce that exceeded $10 billion in fiscal 2022, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strengths:  

Company believes Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021, Nike had $9.4 billion in debt but $13 billion in cash and short-term investments. Its debt/adjusted EBITDA and debt/equity were 1.3 and 0.6, respectively. Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments of more than $1 billion per year. Nike has an unused credit facility of $1 billion and a separate $3 billion commercial paper facility for short-term borrowing, so it has significant unused borrowing capacity. The firm, with its investment-grade credit ratings, could easily increase debt for stock repurchases or other uses. Nike may also make acquisitions, although these are likely to be technology-focused and fiscally immaterial. It is anticipated Nike will continue to return significant cash to shareholders. The firm produced $20.6 billion in free cash flow to equity over the past five years, and estimates it will generate more than $40 billion in free cash flow to equity over the next five. It completed a $12 billion stock-repurchase program authorized in 2015 and has begun to repurchase stock under a four-year, $15 billion stock-repurchase program authorized in 2018. Moreover, Nike issued $1.8 billion in dividends in fiscal 2022, and forecast an average annual dividend payout ratio of 28% over the next decade. Over the next five fiscal years, the company forecasts that Nike will repurchase about $24 billion in stock and issue $11 billion in dividends.

Bulls Say: 

• Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America. 
• Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations.  
• Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales.

Company Description:  

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, football (soccer), training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy.

In October 2013, Sonic announced its intention to compete with CarMax in used vehicles with EchoPark used-vehicle stores. The U.S. used-vehicle market is highly fragmented at about 40 million units a year, with late-model used vehicles as old as six years often making up at least 15 million units, so there is certainly room for both firms to pursue their strategies. Openings started in late 2014 in the Denver area and as of March 2022, the EchoPark segment has 47 stores with plans to add 25 a year between 2021 and 2025. It will take time for EchoPark to reach the scale to compete with CarMax’s over 220 stores. The stores will not have a big-box retail format and are not capital-intensive due to most eventually being delivery and buy centers that only cost $1 million-$2 million each. These centers will be served by larger hub stores in a region that each cost between $7 million and $25 million. EchoPark will not do home delivery. Sonic does not plan a captive finance arm like CarMax enjoys. In July 2020, management announced a $14 billion 2025 revenue target for EchoPark, up from $2.3 billion in 2021, with 140 nationwide points. This is not impossible in because EchoPark intentionally undercuts competitors on price, then recovers a small loss on the vehicle by arranging loans with third-party lenders and selling extended warranties, targeting over $2,000 gross profit per unit. In 2021, Sonic said it is reviewing alternatives for EchoPark. Sonic will have scale relative to a small dealer and can get better terms from vendors for supplies, computer systems, and health insurance compared with a small dealer. It also captures lucrative service work over repair shops through its warranty business. 

Financial Strengths

Sonic’s largest debt maturity at year-end 2021 through 2026 is $118.2 million in 2024, mostly from about $90 million of mortgage line borrowing coming due in November. The credit facility matures in April 2025 and is undrawn at the end of 2021 with $281.4 million available for borrowing. Total liquidity at the end of 2021 is $702.8 million including $299.4 million of cash. Management has told us that the used floorplan line is like a revolver. Net Debt/adjusted EBITDA was about 1.80 times at year-end 2021. Leverage in 2019 declined from about the 3.7 times level thanks to the early redemption of the firm’s $289.3 million 5% notes due in May 2023. Sonic also has $346.2 million of mortgage notes with 62% of the balance at fixed rates ranging between 2.05% to 7% and maturities at various dates through 2033. The company owns about half its real estate, but has not disclosed how much unencumbered real estate it has. In October 2021, Sonic issued $1.15 billion of 2029 ($650 million at 4.625%) and 2031 notes ($500 million at 4.875%) to help fund the $950 million purchase of RFJ Auto Partners in December 2021, but no one can concern about balance sheet health. The firm’s debt profile is not going to be a challenge for management to maintain.

Bulls Say

• Auto dealerships are well-diversified businesses that have lucrative parts and servicing operations, which help them be profitable in almost any environment. 

• EchoPark could prove to be a very lucrative business this decade if it can scale up. 

• Sonic has the potential to generate significant economies of scale as vehicle demand rebounds and if EchoPark grows.

Company Description

Sonic Automotive is one of the largest auto dealership groups in the United States. The company has 110 franchised stores in 17 states, primarily in metropolitan areas in California, Texas, and the Southeast, plus 47 EchoPark and Northwest Motorsport brand used-vehicle stores. In addition to newand used-vehicle sales, the company derives revenue from parts and collision repair, finance, insurance, and wholesale auctions. Luxury and import dealerships make up about 88% of new-vehicle revenue, while Honda, BMW, Mercedes, and Toyota constitute about 60% of new-vehicle revenue. BMW is the largest brand at over 26%. 2021’s revenue was $12.4 billion, with EchoPark’s portion totaling $2.3 billion. Sonic bought RFJ Auto in December 2021, which added $3.2 billion in sales.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

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Business Strategy and Outlook 

With a fast-turning inventory of high-value branded merchandise, Ross’ store experience and value proposition should continue to resonate as the pandemic ebbs. Ross weathered a number of challenges in 2021, with a difficult environment for experience-oriented physical retail, inflation, supply chain disruptions, and volatile case counts eased by economic stimulus, continued strength in home décor categories, and the start of Americans’ post-pandemic wardrobe rebuild. The current situation is unprecedented, but off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively. Ross’ results are enabled by its strong merchandising and inventory management, allowing a fast-changing assortment of opportunistically sourced items. It aims to be a partner of choice for vendors looking to sell excess items, accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (allowing them to avoid creating pricing pressure in the full-price channel that can ensue if their labels are viewed as a constant discount option). This flexibility is a product of the treasure-hunt shopping experience and Ross’ distribution and merchandising agility.

Ross has long enjoyed ample availability of attractively priced products, which is expected to persist. Mutable tastes, the proliferation of alternative distribution channels, and inherent demand variability due to unpredictable external factors (exacerbated by full-price store closures during the pandemic), should leave room for off-price retailers to source products attractively, capitalizing on their vendor relationships and ability to offer favourable terms. While competition is fierce and digital rivals are building a presence in Ross’ core categories, its low-frills shopping experience and significant discounts (around 20%-70%) result in competitive prices and superior economics after considering shipping and return costs. The pandemic should increase e-commerce adoption long term, but the full-price sellers will have to bear most of the shift.

Financial Strength

With nearly $5 billion in cash at the end of fiscal 2021 against less than $2.5 billion in debt, Ross’s clean balance sheet affords considerable flexibility. It is expected that annual adjusted EBITDA will cover interest expense at least 40 times in any given year over the next decade. Combined with free cash flow to the firm averaging around 8% of sales over the long term, Ross will fund its continued expansion goals internally once conditions normalize. Ross is expected to grow toward its 3,600-unit footprint target over the next 10 years (from 1,923 at the end of fiscal 2021). While expansion should remain its capital priority, it should continue to favour leasing stores. Capital expenditures should average around 3%-4% of sales long term, near fiscal 2019’s pre-pandemic 3.5%. The firm will continue to look to return excess capital to shareholders via share buybacks and dividends. Ross’ dividend rises over time as cash generation increases, at a long-term payout ratio of around 30%, slightly higher than fiscal 2021’s 23% mark. It is expected Ross to use 60% of its annual operating cash flow to repurchase shares by the end of the explicit forecast. Alternatively, the firm could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth.

Bulls Say’s

• Ross should be relatively well-insulated against digital rivals, considering its differentiated store experience and operational efficiency (which fuels its competitive prices). 

• Its treasure-hunt shopping experience, agile supply chain and distribution network, and merchandising strength maximize Ross’ flexibility while holding inventory levels in check, minimizing risk while freeing capital. 

• Other physical retailers’ downsizing should lead to an ample supply of attractively located, well-priced storefronts that should fuel Ross’ expansion

Company Profile 

Ross Stores is a leading American off-price apparel and home fashion retailer, operating over 1,920 stores (at the end of fiscal 2021) across the Ross Dress for Less and dd’s Discounts banners. Ross offers a variety of name-brand products and targets undercutting conventional retailers’ regular prices by 20%-70%. The company uses an opportunistic, flexible merchandising approach; together with a relatively low-frills shopping environment centred on a treasure-hunt experience, Ross maximizes inventory turnover and traffic, enabling its low-price approach. In fiscal 2021, 26% of sales came from home accents (including bed and bath), 25% from the ladies’ department, 14% from each of men’s and accessories, 12% from shoes and 9% from children. All sales were made in the United States.

(Source: MorningStar)

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