Category: Global stocks

Business Strategy and Outlook:

Penske Automotive Group receives 93% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm’s operating margin tends to be on the lower end of the publicly traded dealers. The main reasons for this are that Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business–a 100% gross margin business–as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske’s SG&A ratio is competitive.

Penske has moved into heavy-truck distribution in Australia and New Zealand, truck dealers in the U.S. and Canada, and 23 CarShop used-vehicle stores in the U.S. and U.K. with 40 targeted by 2023. Total company pretax income is targeted at $1 billion by then, up 41% from 2020.

Financial Strength:

EBIT covered interest expense 5.5 times in 2020, up from about 3 times during the Great Recession. At year-end 2020, Penske had notable debt maturities in 2023 ($128.4 million) and 2025 ($689.6 million). In 2020, it issued $550 million of 3.5% 2025 notes and on Oct. 1, 2020, fully redeemed the $550 million 5.75% 2022 notes, reducing annual interest by $17 million. The company issued $500 million of 3.75% 2029 senior subordinated notes in second-quarter 2021 to fully redeem the $500 million 5.50% 2026 notes. Total credit line availability at Sept. 30 was about $1.1 billion. Debt/EBITDA at year-end 2020 was 2.2 from 4.7 at year-end 2008 and was just 0.9 times at Sept. 30 due to debt reductions and turbocharged earnings. Management reduced debt by $670 million in 2020 and by over $900 million since the end of 2019.

Bulls Say:

• Auto dealerships are stable, profitable businesses with a diversified stream of earnings coming from parts, service, and used cars. 
• Parts and service revenue should continue to be lucrative over time because most manufacturers require warranty work to be done at the dealership, and large dealers can more easily afford the technology and training needed to service increasingly more complex vehicles. 
• Penske is well suited to acquire dealerships because many small dealers do not want to keep paying expensive facility upgrades mandated by the automakers.

Company Profile:

Penske Automotive Group operates in 22 U.S. states and overseas. It has 144 U.S. light-vehicle stores including in Puerto Rico as well as 161 franchised dealerships overseas, primarily in the United Kingdom. The company is the second-largest U.S.-based dealership in terms of light-vehicle revenue and sells more than 35 brands, with 93% of retail automotive revenue coming from luxury and import names. Other services, in addition to new and used vehicles, are parts and repair and finance and insurance. The firm’s Premier Truck Group owns 37 truck dealerships selling mostly Freightliner and Western Star brands, and Penske owns 23 CarShop used-vehicle stores in the U.S. and U.K. The company is based in Michigan and was called United Auto Group before changing its name in 2007.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Despite intensifying competition that we believe is diminishing its competitive edge, Dollar General’s advantageously located store network, low-priced items, and leverageable supply and distribution capabilities should allow it to deliver economic returns. With a footprint focused on thinly populated areas that cannot support numerous retailers and make shipments to homes costly for a small basket (over 80% of items are priced at or below $5), we expect Dollar General to use its burgeoning scale and proximity to customers to economically deliver the convenience and affordability that its generally modest-income (roughly $40,000 annually, as a household) customers demand. 

Still, switching costs are negligible, forcing Dollar General to face intense competition from convenience stores, mass merchandisers, hard discounters, grocery stores, pharmacy chains, and online retailers (Amazon). The crowded landscape puts a premium on execution, a challenge management has met thus far but requires agility as customers’ demands change.

Financial Strength

With stores that have remained open through the pandemic, ample liquidity, and negligible near-term maturities, the firm is well positioned to endure a volatile fiscal 2021-22 as the economy normalizes. The firm has a history of limited leverage, with net debt roughly equal to adjusted EBITDA over the past five years, on average. It is expected that such prudence to continue. Despite aggressive growth (from under 9,000 stores at the start of fiscal 2010 to more than 17,000 at the end of fiscal 2020), free cash flow generation has been strong. 

Furthermore, in the event of financial strain, Dollar General should be able to hold additional funds as needed by simply curbing its unit growth targets, reducing capital expenditure needs, which we forecast to average 2%-3% of sales over the next decade, or more than $1 billion annually.Dollar General introduced a dividend in fiscal 2015, with a payout ratio averaging nearly 20% over fiscal 2015-20. 

Bulls Say’s 

• Low price points and average ticket sizes protect the dollar store segment from digital incursion as shipping costs are difficult to absorb, all while allowing firms to sell smaller package sizes at higher margins. 
• Dollar General capitalizes on a broad network of stores, which include rural locations that are often the only convenient sizable retailer. 
• With its stores considered essential, a consumablesheavy lineup, and potential to capture trade-down sales, Dollar General should largely sidestep the COVID-19 pandemic’s adverse economic consequences.

Company Profile 

A leading American discount retailer, Dollar General operates over 17,000 stores in 46 states, selling branded and private-label products across a wide variety of categories. In fiscal 2020, more than 76% of net sales came from consumables (including paper and cleaning products, packaged and perishable food, tobacco, and health and beauty items), 12% from seasonal merchandise (such as toys, greeting cards, decorations, and gardening supplies), 7% from home products (for example, kitchen supplies, small appliances, and cookware), and 5% from basic apparel. Stores average roughly 7,400 square feet, and about 75% of Dollar General locations are in towns of 20,000 or fewer people. The firm emphasizes value, with more than 80% of its items sold at everyday low prices of $5 or less.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, it is expected that Costco’s durable competitive advantages lead to consistent, strong performance despite retail’s upheaval. The competitive environment is intense and becoming more challenging as Amazon scales and physical rivals deliver an omnichannel experience, but it is believed that the values that Costco offers (driven by cost leverage, procurement strength, and top-class store efficiency) should allow it to keep traffic high. With ample opportunity to expand globally, Costco Is expected to post consistently strong returns even as it grows. 

Through a financial crisis, the maturation of digital general merchandise retail, the expansion of Amazon’s Prime offering, a credit card provider switch, a robust pre-pandemic economy, two meaningful fee increases, and the COVID-19 outbreak, Costco’s membership renewal rates in the United States and Canada have remained at roughly 90%. The traffic-driving values that Costco offers in its stores are fueled by cost leverage and procurement strength that, in turn, feeds additional store visits. 

As per Morningstar analyst perspective, it is believed that the firm’s food and fuel offerings drive traffic and suspect that Costco is poised to thrive even as digital sellers expand. Although it is expected to keep pace with rivals by further developing its omni channel offering (a mid- to high-single-digit share of fiscal 2021 sales, excluding same-day grocery and various other services, came from e-commerce), it is  believed that Costco’s value proposition should support continued member growth and in-store sales expansion.

Financial Strength

With strong cash flow generation and a dedicated subscriber base, Costco is in good financial health. Costco had $11 billion in balance sheet cash as of the end of fiscal 2021 against just $7.5 billion in debt. The geographic mix of new store openings will shift as Costco grows to more than 1,000 warehouses; it is expected that openings and digital investments will leave capital expenditures at roughly 2% of sales, in line with the firm’s five-year average. Despite the spending, analysts expect the firm will be able to balance growth with returning capital to shareholders without meaningfully altering its leverage metrics. Morningstar analyst expects that firm’s conservative balance sheet approach to endure despite continued share repurchases. With free cash flow to the firm expected to average around 2%-3% of sales (consistent with recent results), it can be observed that Costco has significant financial flexibility. It is suspected such returns will include special dividends, which Costco paid in fiscal 2013, 2015, 2017, and 2021. 

Bull Says

• Costco’s membership format exhibits strong customer loyalty, with renewal rates holding steady around 90% in a variety of economic environments and despite Amazon’s growth (particularly Prime) and the broader digitization of retail. 
• Costco’s focused assortment reduces complexity while concentrating its buying power, which we believe grants it exceptional procurement leverage. 
• Costco should be a safe harbor in retail seas roiled by the COVID-19 pandemic, with its competitive advantages holding returns steady.

Company Profile

The leading warehouse club, Costco has 815 stores worldwide (at the end of fiscal 2021), with most sales derived in the United States (72%) and Canada (14%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 40% of fiscal 2021 sales, with non-food merchandise 29%, warehouse ancillary and other businesses (such as fuel and pharmacy) nearly 17%, and fresh food 14%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 7% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook:

Centene aims to be the top provider of government- sponsored health plans. Although it has grown at a solid clip organically, Centene also has made significant acquisitions- most notably the 2020 WellCare merger–to meet that goal. Technology investments to boost efficiency have helped Centene prosper in this relatively low-margin managed care sector, as well.

Centene leads the Medicaid managed-care business; those plans accounted for about two thirds of its medical membership. The Medicaid program is jointly funded by federal and state governments and primarily serves low-income individuals of any age and people with disabilities. The Affordable Care Act expanded the Medicaid population starting in 2014, and we think this program may be used in the future to expand insured rates further.

Through the acquisition of WellCare in early 2020, Centene added to its Medicare-related capabilities, particularly in the fast-growing Medicare Advantage program. With positive demographic trends and increasing popularity relative to traditional Medicare plans, we see the Medicare Advantage program as one of the most attractive growth opportunities in health insurance in the long run. This opportunity largely explains the appeal of the WellCare deal, although WellCare also added to Centene’s Medicaid footprint, too.

Financial Strength:

The fair value estimate of the stock is USD 91.00, which reflects 17 times price/earnings multiple on 2022 expected earnings.

Centene’s balance sheet remains in fine financial shape even after the WellCare merger in early 2020. With total debt around $19 billion at the end of September 2021 (including $2 billion issued for the pending Magellan Health acquisition) and the potential to deleverage in the near term primarily through profit growth, we project that the company’s gross leverage could decline to roughly 3 times in the next couple of years. Debt/capital appears likely to return to its target of the mid- to high-30s in the near future, too. The company’s maturity schedule appears easily manageable, as well, with the company facing limited maturities during the next five years, which includes its $2 billion term loan facility, borrowings on its revolver ($150 million), a construction loan ($188 million), and finance leases ($495 million).

Bulls Say:

• Centene represents a countercyclical investment opportunity in managed care, as it can benefit from economic downturns through increasing enrollment in its Medicaid and individual exchange products. 
• With a focus on government-sponsored programs, Centene could benefit from potential U.S. policy changes to reach universal, affordable coverage in the long run. 
• Centene’s midteens annualized earnings growth goal through 2024 puts its near the top of its MCO peers in that metric.

Company Profile:

Centene is a managed-care organization focused on government-sponsored healthcare plans, including Medicaid, Medicare, and the individual exchanges. Centene served 22 million medical members as of September 2021, mostly in Medicaid (68% of membership), the individual exchanges (10%), Medicare Advantage (6%), and the balance in Tricare (West region), correctional facility, and international plans. The company also serves 4 million users through the Medicare Part D pharmaceutical program.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook:

Cintas is the dominant provider in the $16 billion U.S. uniform rental/sales and related ancillary-services industry. It enjoys a roughly 43% market share, and no singular end market comprises a significant portion of total revenue. Despite its already impressive position, Cintas is expected to grow over the next 10 years. The firm constantly considers new product lines while emphasizing cross-selling to its existing customers. About 60% of its annual sales growth derives from new client wins, and at $4 billion-$5 billion, the remaining unvended market remains sizable, and the G&K acquisition added 170,000 uniform rental clients to Cintas’ book of business.

Cintas is a highly cyclical business; its uniform rental segment moves closely with U.S. employment trends, and given the current market environment, revenues will increase in fiscal 2022 after marginal growth in fiscal 2021. The firm recovered quickly after the 2009 recession, with revenue exceeding pre-recession levels by fiscal 2012, and Cintas still generated economic profits despite sustaining revenue losses for five straight quarters. Management has navigated this tough economic environment well over the last year, and cost management has been impressive.

Financial Strength:

The fair value estimate of the stock has been increased due to raised revenue guidance and time value of money.

Cintas’ balance sheet is considered to be healthy. At the end of the fiscal 2021 (ended May 31, 2021), the firm posted $494 million in cash and equivalents and about $1.6 billion of total long-term debt. Long-term debt was down significantly from the $2.5 billion posted at the end of fiscal 2020. Solid free cash generation will enable the firm to continue reducing leverage as desired in the years ahead. Cintas’ debt/EBITDA was near 1.4 times at the end of fiscal-year 2021, versus 1.6 times at the end of fiscal-year 2020–$1 billion dollars of debt will mature in fiscal 2022, followed by about $350 million of debt maturing in 2023 and about $50 million in 2025. Beyond that, no more debt will mature until 2027 and beyond.

Bulls Say:

• Cintas’ industry-leading operating efficiency stems from its significant scale-based cost advantages, achieved through superior route density. 
• The firm’s impressive sales execution is supporting robust new business wins and greater penetration among existing customers. It’s also helping Cintas to realize material cross-selling opportunities with the former G&K operations. 
• There is still ample opportunity for expansion, as companies in the sizable unvended market look to outsource their uniform programs and facilities services.

Company Profile:

In its core uniform and facility services unit (80% of sales), Cintas provides uniform rental programs to businesses across the size spectrum, mostly in North America. The firm is by far the largest provider in the industry. Facilities products generally include the rental and sale of entrance mat, mops, shop towels, hand sanitizers, and restroom supplies. Cintas also runs a first aid and safety services business (11% of sales), a fire protection services business (6% of sales), and a uniform direct sales business (3% of sales).

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.