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Global stocks Shares

Unpredictability strikes Flight Centre Shares keeping Intrinsic Value secure

Business Strategy and Outlook

A wave of COVID-19-induced damages has been inflicted on Flight Centre since late March 2020. Government restrictions on travel and border control (international, domestic), grounding of airline capacity and strict lockdown measures on consumers have created a 

unique squeeze on the group. It is considered that the measures to execute a severe reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the malaise.

Flight Centre is one of the world’s largest travel agents, but it still generates significant earnings in Australia and New Zealand. Unparalleled scale and brand strength in the domestic travel market has provided buying power and pricing flexibility that resulted in high returns on capital. Flight Centre has a strong network of services that has driven solid end-user traffic and bookings over the past 20 years, but it is rarely assumed that this is sufficient to protect the company against online competitors over the next 10 years.

Because of the discretionary nature of travel and high levels of operating leverage, earnings can be very volatile. During the financial crisis, net profit after tax fell to AUD 38 million in fiscal 2009 from AUD 143 million in fiscal 2008. The company is heavily loss-making during the current 2020 pandemic also. This inherent volatility means fair value uncertainty is high.

Flight Centre’s considerable scale and extensive store network have made the firm a key distribution channel for travel suppliers and generated cost advantages that enable it to offer competitive prices. However, with the warning from online competitors increasing, we believe physical stores are likely to increasingly lose relevance longer term.

From about 2005, facing a maturing domestic market, the company increased its focus on offshore markets, particularly the United Kingdom and United States. The group made several offshore acquisitions during this period. The company is also increasingly focused on corporate travel, which is more structurally resilient than leisure.

Financial Strength

As at the end of September 2021, there was AUD 969 million of available liquidity, thanks to the AUD 700 million injected by shareholders in April/May 2020 and two convertible bond issues totalling AUD 800 million. It is believed, this is sufficient liquidity for Flight Centre to see through until mid-2023, even if total transaction volume remains at around 30% of pre-COVID-19 TTV levels.

Bulls Say’s

  • A strong balance sheet allows Flight Centre to take benefit of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to address specific market segments more effectively. 
  • Brand strength provides a powerful foundation for the blended online/physical store offering. 
  • Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favourable deals with travel providers.

Company Profile 

Flight Centre Travel is one of the largest travel agencies in the world. It operates an extensive network of shops globally, most of them located in Australia, the United States, and Europe. The group participates across the whole spectrum of the travel services market, including leisure travel retailing, in-destination experiences, corporate travel arrangement, and youth travel retailing. The services are facilitated via some 40 brands, with Flight Centre being the flagship brand in the leisure segment and FCM Travel the key brand in the corporate.

(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.

Categories
Dividend Stocks

Travelers Commercial have profitable outlook on the commercial side with favourable pricing environment

Business Strategy and outlook

The coronavirus affected the company’s results last year. However, losses were very manageable and have stayed well within the range of historical events that the industry has successfully absorbed in the past. On the positive side, Travelers had some natural hedges against COVID-19, and the pandemic was a material positive for its personal auto business, due to a falloff in miles driven.

There outlook for profitability on the commercials side of the business looks relatively bright, in as per Morningstar analyst view. While investment yields are under pressure, the pricing environment has not been particularly favorable in recent years. However, in 2019, pricing momentum picked up in primary lines, and this positive trend accelerated in 2020 as the coronavirus appears to have acted as an additional spur to pricing.

Travels could also see some headwinds in personal lines going forward, which could partially offset favorable conditions in commercial lines. Pandemic tailwinds in personal auto have dissipated, and pricing has recently declined. Finally, insurers are absorbing a rise in claims costs due to factors beyond the impact of drivers returning to the road. All in all, it is  expected that  mean reversion will take place over time, auto insurers look set to endure a relatively difficult period in the near term. Travelers does enter this period with some compnay-specific question marks, as it appears to have not anticipated the recent rise in social inflation as well as peers and reported adverse reserve development in 2019. 

Financial Strength

 Travelers’ balance sheet structure is roughly in line with its peers’, with equity/assets at 25% at the end of 2020. The company has held this ratio between 22% and 25% in recent years. As per Morningstar analyst this level is adequate, given the nature of the company’s business and its exposure to occasionally large losses caused by catastrophes. From Morningstar analyst prespective, the company invests relatively conservatively. Of its fixed-income securities, 90% are rated A or higher, and the company avoided any major investment issues during the financial crisis, and during the recent turbulence in capital markets. As Travelers is not acquisitive and the inherent volatility of the insurance industry precludes a high dividend payout ratio, stock repurchases have been the predominant use of free cash flow for the company historically, with Travelers buying back about $1 billion-$3 billion annually in recent years. The company did take pause on this front in 2020 due to the uncertainty around the impact of the coronavirus, but we expect this to continue longer term.

Bulls Say 

  • We think Travelers is relatively conservative in its investing choices. 
  • diversification of Travelers’ business insulates it from issues in any specific lines. 
  • Pricing is improving in commercial lines.

Company Profile

Travelers  offers a broad product range and participates in both commercial and personal insurance lines. Its commercial operations offer a variety of coverage types for companies of any size but concentrate on serving midsize businesses. Its personal lines are roughly evenly split between auto and homeowners insurance. Policies are distributed via a network of more than 11,000 brokers and independent agents.

 (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.

Categories
Global stocks

Penske Has a Long Growth Runway in a Variety of Businesses

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.

Categories
LICs LICs

Carlton Investments Limited: A diversified portfolio

Carlton Investments Limited (CIN) is an investment company listed on the Australian Securities Exchange (ASX). It is required to release its net tangible asset (NTA) backing per ordinary share to the ASX after each month end. At the end of each quarter the Company also releases, as part of its NTA announcement, a listing of its top twenty equity investments. Group companies also invest funds in term deposits. The Group has no debt. The investment strategy is to invest in established, well managed Australian listed entities that are anticipated to provide attractive levels of sustainable income and also long-term capital growth. The Group also invests in companies that enable a high portion of income to be received as fully franked dividends.  Investments are held for the long term and are generally only disposed of through takeover, mergers or other exceptional circumstances that may arise from time to time. Group entities do not act as share traders nor do they invest in speculative stocks.

Investment Team:

The Group has an experienced Board of Directors, consisting of Mr Alan G Rydge, Mr Murray E Bleach and Mr Anthony J Clark AM. It is an objective of the Board to maximise shareholder return through both the payment of fully franked dividends and longer-term capital growth in the value of the company’s shares whilst maintaining an investment portfolio with an acceptable level of investment risk.

Performance:

Global Equity Fund1 month1 yr2 yrs3 yrsSince Inception
Total Return-0.16%13.94%19.00%–15.80%

About LIC:

Incorporated in 1928, Carlton Investments is the holding company for three subsidiaries whose principal activities are the acquisition and long term holding of shares and units in entities listed on the ASX. Investments have been made to create a diversified portfolio. At 30 June 2021 the Group held an investment portfolio with a total market value of $1,000,907 thousand, consisting of shares and units in over 85 entities. The Group has a significant holding in Event Hospitality & Entertainment (EVT) (formerly known as Amalgamated Holdings Limited), a group engaged in cinema exhibition (Event, Greater Union, BCC and Cinestar) in Australia, New Zealand and Germany, hotel operations and ownership (Rydges, Atura and QT), operation of the Thredbo Alpine Resort and investment property ownership.

(Source: www.carltoninvestments.com.au)

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.

Categories
Technology Stocks

NetEase capitalizes on the industry shift toward mobile gaming and now focuses on innovation in it

Business Strategy and Outlook:

NetEase started as a Chinese Internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known massively multiplayer franchise in China—Fantasy Westward Journey. Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach.

Like its global gaming peers, NetEase maintains a high level of profitability (above 30% operating margin) for its gaming business, thanks to stable revenue from core titles and the steady development of new franchises. The firm is positioned to not only continue capitalizing on the success of Westward Journey titles, but to also keep diversifying its revenue into new franchises. While games will remain NetEase’s core cash flow driver, the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential.

Financial Strength:

The fair value estimate of the stock is USD 139.00, which implies forward 2022 P/E of 32, below the above 40 times earnings multiples demanded by global peers like Take-Two and Electronic Arts.

NetEase has a rock-solid balance sheet. At the end of December 2020, the company had CNY 93 billion in cash, cash equivalents, short-term investments, and time deposits under current assets. There was also a restricted cash balance of CNY 3.1 billion under current assets. This compares with only CNY 19.5 billion of short-term debt. Thanks to its strong net cash position and strong operating cash flow that amounted to 137% of net income in 2020, the firm should have no problem funding its gaming business and innovative businesses. However, NetEase has returned capital to shareholders via dividends and has set quarterly dividends at 20%-30% of its anticipated net income after tax in each quarter starting in the second quarter of 2019.

Bulls Say:

  • NetEase’s expertise in asymmetric multiplayer (Identity V and Dead by Daylight) would allow it to capitalize on future opportunities in this genre. 
  • The firm has done an admirable job at organically expanding into Japan, and it is likely that it will be able to replicate same success in Europe and the U.S. 
  • NetEase Music could see stronger user growth now that Tencent Music was told to end its exclusive licensing agreements with music labels on anti-trust grounds.

Company Profile:

NetEase, which started on an Internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company develops and operates some of the China’s most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

(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.

Categories
Shares Small Cap

Platinum Shares at discount as investors overlook its good traits

Business Strategy and Outlook

Platinum is an active manager founded in 1994, specialising in global equities. It concentrates on identifying unfashionable stocks with latent business and growth prospects. Platinum is not focused on asset allocation and pays little attention to its benchmarks. As a result, its portfolios often look little like–and returns often don’t resemble–their indexes. The firm manages about AUD 22 billion in FUM, and is one of the best known fund managers in Australia. 

Platinum eschews empire-building–such as special discounting to attract FUM, acquisitions or product proliferation–and prefers to spend most of its time managing money. Management is largely focused on minor product enhancements: clients can invest via unlisted funds, active ETFs, listed investment companies, mFunds, or investment bonds. Clients can also invest into performance fee class of funds. Moreover, the firm is making an effort to grow its client engagement and business development initiatives.

Financial Strength

Our fair value estimated to AUD 3.90 per share from AUD 4.25 after increasing the expected magnitude, and prolonging the duration, of net outflows to fiscal 2024. Platinum is in strong financial health, supported by a conservative balance sheet with no debt and a healthy cash balance. Platinum has maintained a very high dividend payout ratio since listing in 2007. An absence of debt, consistent earnings, strong cash flow conversion, and a durable balance sheet support the high dividend payout ratio target of close to 100%. High dividend payouts are a feature of the capital-light asset-management sector, delivering attractive shareholder returns while maintaining comfortable balance sheet settings.

Bulls Say’s 

  • Platinum is well known in Australian funds management. The firm may be able to take advantage of retail investors increasing allocation to global equities, if it improves medium-term performance. 
  • The long-term outlook is positive due to likely mandated increases in compulsory superannuation. However, fund underperformance, increasing competition and a trend to lower-cost passive investments are risks. 
  • Capital demands low, and free cash flow generation is strong. This supports a high dividend payout ratio and offers investors the opportunity of both growth and income returns.

Company Profile 

Platinum Asset Management is an Australian-based niche fund manager with a specialty in international equities founded in 1994. It offers region and industry-specific funds in addition to global portfolios. There is flexibility in the investment strategies at Platinum, with funds having the option to engage in short-selling, taking positions in foreign exchange markets, and derivative-based activities to manage risk and aid performance.

(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.

Categories
Funds Funds

MFS Institutional International Equity Fund

Approach

The managers rely on broad and thorough bottom-up research and a disciplined focus on moderately growing established companies with shares trading at decent prices. That is not unique, but the process is bred in MFS’ bones and has delivered strong results elsewhere, including Gold-rated MFS Global Equity MWEIX. The managers look for firms growing faster than global GDP. That’s a lower hurdle than more-aggressive growth funds since global GDP historic growth is in the single digits.

Portfolio

This is a diversified yet distinctive portfolio. It spreads its bets over its nearly 80 stocks. Most holdings were less than 2% of assets, and the fund had less than 30% of its money in its top 10 stocks. The strategy’s preference for competitively advantaged, moderately growing, developed-markets companies helps it stand out, though. More than two thirds of its holdings have wide or narrow economic moat ratings, much more than its foreign large-cap peers and relevant indexes, like the MSCI ACWI ex USA. It also had a large slug of assets in developed Europe, including the 2021 purchase of tire maker Cie Generale des establisment Michelin. 

Portfolio .png

People

The firm’s sprawling, yet experienced analyst team supports the managers. MFS has dozens of U.S. and nonU.S. equity analysts who divide responsibilities across eight global sectors. In addition, the firm’s large credit analyst team provides insights across the capital structure, and a quantitative research squad offers riskmanagement support. The equity analysts average more than 15 years of industry experience and nearly eight years’ firm tenure, and team turnover has been low. The managers also collaborate with the firm’s other non-U.S. portfolio managers, including Roger Morley and Ryan McAllister of Gold-rated MFS Global Equity.

Performance 

The fund has done well in a variety of environments. Its performance in the early 2020 pandemic-induced market collapse was mixed, though. Its 31% loss hurt but was less than the nearly 34% plunge of broader non-U.S. stock indexes. The typical foreign large-growth fund and growth benchmarks, however, shed about 30%. Pandemic-ravaged businesses like food service company Compass hurt, so did not owning more tech stocks.

Performance .png

(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.

Categories
Shares Technology Stocks

NextDC benefits from industry megatrends

Business Strategy and outlook

NextDC is well-placed to benefit from industry megatrends, including the growing adoption of cloud computing, the Internet of Things, and artificial intelligence, leading to exponential growth in data creation. As per Morningstar analyst forecast NextDC will materially expand its capacity over our 10-year forecast period in order to meet growing demand for data center services. 

The COVID-19 pandemic has accelerated the digital transformation of many businesses and expedited demand for co-location data centers. Large numbers of employees have made the transition to remote working arrangements, leading to a greater reliance on digital technologies such as video conferencing and cloud-based platforms, and reducing the need to store servers at a centralized location. Beyond the COVID-19 pandemic, it is expected that remote working levels will remain elevated above pre-pandemic levels, resulting in continued demand for digital technologies and potentially less need for physical office space. This shift has increased demand for data centers and hybrid and multi cloud data storage solutions, which are supported by co-location data centers like NextDC. Hybrid solutions, which combine traditional infrastructure with cloud storage, can improve business outcomes through reduced latency and costs, increased security and resilience, and the flexibility to connect to multiple clouds based on business needs. These solutions provide greater flexibility and allow businesses to scale their data storage capacity based on workflow. 

As per Morningstar analyst, interconnection services are becoming increasingly important for NextDC as more businesses make the transition to hybrid cloud storage models. As of fiscal 2021, interconnection revenue contributed 8% of NextDC’s total recurring revenue and this will trend higher over time as its network ecosystem matures.

Financial Strength

NextDC is in sound financial health. The company raised AUD 862 million in fiscal 2020 via an institutional placement and share purchase plan. Proceeds from the equity raising will be used to fund the development of a third Sydney data center and further capacity expansion at its existing and new sites. Morningstar analyst forecast, gearing, measured as net debt/EBITDA, to deteriorate to above 3.6 times in fiscal 2023 as NextDC continues to invest heavily in portfolio expansion, before recovering from fiscal 2024 as capacity utilization improves. Morningstar analyst forecasted that NextDC will invest about AUD 4.0 billion during the 10 years to fiscal 2031 to grow total power capacity at a CAGR of 16%. It is also expected that NextDC will only consider paying dividends when it has accrued sufficient franking credits, otherwise the capital would be better spent on investments or repaying debt.

Bulls Say

  • NextDC is well placed to benefit from industry megatrends including the growing adoption of cloud computing, the Internet of Things and artificial intelligence leading, to exponential growth in data creation. 
  • The shift to cloud-based services increases the need for enterprises to connect to numerous cloud providers and the connection is fastest, safest and most efficient in a co-located data center. 
  • The COVID-19 pandemic has accelerated the digital transformation of many businesses and is leading to increased demand for cloud-based services.

Company Profile

NextDC is an Australia data center developer and operator with a focus on co-location and interconnection among enterprise and government customers, global cloud and information and communications technology, or ICT, providers, and telecommunication networks. NextDC provides physical space, cooling, power, and security services and offers optional technical and project management support. The company’s tenants house their servers within the data center and can connect to each other via physical and virtual connections.

 (Source: Morning Star)

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.

Categories
Funds Funds

Pfizer strong pipeline development increasingly sets ups near term growth

Business Strategy and Outlook

Pfizer’s size establishes one of the largest economies of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer, heart disease, and immunology. Pfizer’s vast financial resources support a leading salesforce. 

Pfizer’s commitment to postapproval studies provides its salespeople with an armamentarium of data for their marketing campaigns. Further, Pfizer’s leading salesforces in emerging countries position the company to benefit from the dramatically increasing wealth in nations such as Brazil, Russia, India, China, and Turkey. Pfizer’s recent decision to divest its off-patent division Upjohn to create a new company (Viatris) in combination with Mylan should drive accelerating growth at the remaining innovative business at Pfizer. With limited patent losses and fewer older drugs, Pfizer is poised for steady growth.

Financial Strength

Pfizer holds a very strong financial position with a large degree of flexibility. As of the end of 2020, debt/capital stood at 39% and debt/EBITDA was 2.9, which suggests that Pfizer remains on solid financial footing. With the majority of its cash flow derived from a diverse portfolio of products, it’s not expects a high degree of volatility with future earnings. After a deep dive on several of Pfizer’s pipeline drugs combined with continued strong data for COVID-19 treatment Paxlovid, it has increased our projections for several key drugs leading to a fair value estimate increase to $48 from $45.50. The strong pipeline increasingly supports our wide moat rating for the firm. For the core business of Pfizer, it is expected to close to 6% annual sales growth between 2020 and 2025 as new drugs offset generic competition. 

Bulls Say’s 

  • Bega is shifting investment to the spreads and grocery business, which we view as less commoditised and higher margin than dairy, with strong niche positions in Vegemite and peanut butter 
  • External factors outside of Bega’s control, such as the weather, can adversely impact supply and demand dynamics. This can impact commodity prices, inputs costs and the firm’s supply chain and lead to volatile earnings 
  • Changing consumer trends toward dairy-free and vegan diets could lead to declines in per-capita dairy and cheese consumption, weighing on the majority of Bega’s earnings

Company Profile 

Pfizer is one of the world’s largest pharmaceutical firms, with annual sales close to $50 billion (excluding COVID-19 vaccine sales). While it historically sold many types of healthcare products and chemicals, now, prescription drugs and vaccines account for the majority of sales. Top sellers include pneumococcal vaccine Prevnar 13, cancer drug Ibrance, cardiovascular treatment Eliquis, and immunology drug Xeljanz. Pfizer sells these products globally, with international sales representing close to 50% of its total sales. Within international sales, emerging markets are a major contributor.

(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.

Categories
Global stocks

Dollar General Should Weather Near-Term Supply Chain Issues, Long-Term Competition Well

Young woman trading stock market by touching.

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.