Business Strategy and Outlook:
Poshmark is among the largest apparel resale platforms on the market, boasting an interactive marketplace that benefits from a triumvirate of secular tailwinds: social commerce, an ongoing mix-shift toward online retail sales, and the stratospheric growth of the apparel resale market. The firm’s strategy coalesces around four key priorities: product innovation, category expansion, international growth, and buyer acquisition. We take a neutral view of management’s roadmap, with our research leaving us unconvinced that Poshmark’s international thrusts are poised to generate excess returns for investors, and surmise that purportedly adjacent categories like consumer electronics, art, or pets may not be concordant with the firm’s apparel core competency.
As a slew of firms have entered the resale space, competition has arisen around exclusive access to customers, inventory assortment, and distribution channels, with long-term equilibrium remaining uncertain. Consolidation looks inevitable, particularly as the scope of those companies’ offerings see increasing overlap, commensurate with category, price point, and geographic expansion. Poshmark’s right to win hinges on its ability to convincingly answer the “why Poshmark?” query, attracting platform participants with some combination of competitive seller services, frictionless listing, quick inventory turnover, attractive fees, broad assortment, and authentication services.
Financial Strength:
Poshmark’s financial strength is viewed as sound. The firm carries no long-term debt, has $236 million in cash and cash equivalents on its balance sheet as of the third quarter of 2021, and figures to be free cash flow positive over two of the next three years. The management has adequate wiggle room to pursue moat-bolstering investments, while narrowing operating losses should provide a route to enduring profitability by our midcycle (2025) forecasts. Following its IPO, the firm’s capital structure has simplified meaningfully, retiring $50 million in convertible notes issued during the third quarter of 2020 that carried a panoply of derivative clauses. Shareholder dilution hereafter should be limited to those shares issued in the normal course of business, with approximately 8.6 million options and RSUs outstanding (just north of 11% of free float) as of the third quarter balance sheet date. Poshmark’s waterfall of investment priorities is viewed as consistent with other high growth firms: pursuing internal investments and strategic mergers and acquisitions.
Bulls Say:
- Five straight quarters of operating profitability (ending in the third quarter of 2021) suggest a strong underlying business model once acquisition costs normalize.
- Early traction in Australia and Canada could augur well for long-term success in those markets.
- Adding APIs and analytics tools for wholesalers and liquidators could add another platform use case, while generating higher units per transaction, average order values, and fulfillment cost leverage.
Company Profile:
Poshmark is one of the largest players in a quickly growing e-commerce resale space, connecting more than 30 million users on a platform that sells men’s and women’s apparel, accessories, shoes, and more recently consumer electronics and pet products. The marketplace operates in four countries–the U.S., Canada, Australia, and India–with a capital-light, peer-to-peer model that dovetails nicely with prevailing trends toward social commerce, apparel resale, and an ongoing pivot toward the e-commerce channel. With $1.4 billion in 2020 gross merchandise volume, or GMV, we estimate that the firm captured just shy of 10% of the global resale market, as rolling lockdowns and tangled supply chains provided a meaningful impetus for channel trial during 2020 and 2021.
(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:
Although the pandemic and government regulation continue to materially affect near-term demand in Macao (68% of estimated 2024 EBITDA), Las Vegas Sands and the gaming enclave are still thought of as well positioned for long-term growth. Not only does Sands hold a dominant mass and nongaming position on the attractive Cotai Strip, but the company will reinvest proceeds from the planned $6.25 billion sale of its Vegas assets (scheduled to close in 2022) in its Asian assets, strengthening the brand locally. Meanwhile, Sands’ position in the profitable Singapore gaming market (32% of estimated 2024 EBITDA), where a duopoly remains in place through 2030, is buoyed by the company expanding its presence with the renovation of its existing towers in 2022-23 and development of a fourth tower scheduled to open in 2025, solidifying our view of the firm’s long-term growth.
Although the pandemic and government regulation present material potential demand headwinds, analysts continue to forecast annual mid-single-digit steady-state visitation growth in Macao during 2025-30, supported by China outbound travel that they expect average high-single-digit annual growth during that time. Also, upcoming developments are expected that add attractions and improve Macao’s accessibility, which will improve the destination’s brand, supporting our constructive long-term view on Macao.
Financial Strength:
Las Vegas Sands entered 2020 with the industry’s strongest balance sheet, as its 1.5 times net debt/adjusted EBITDA was well below the 4 times covenant level. But given the material impact from COVID-19 on 2020-22 gaming demand, the company has suspended its dividend and share repurchases. That said, Las Vegas Sands ended 2021 with $1.9 billion in cash and $4 billion available in credit. This liquidity provides the company enough liquidity to operate at near zero revenue into 2023, assuming a monthly cash burn of around $350 million. Its liquidity profile stands to be enhanced further with the planned sale of its Las Vegas assets for $6.25 billion in 2022.
The proceeds from the sale are expected to be reinvested in its existing Macao (if the government allows) and Singapore properties and used to pay down debt in the back half of our 10-year forecast. As a result, the company’s financial health remains solid.
Bulls Say:
- Sands is well positioned to exploit growth opportunities in the attractive Asia casino market with a dominant position in Singapore (around mid-60s EBITDA share) and China (around mid-30s EBITDA share).
- The company has a narrow economic moat, thanks to its possession of one of only two licenses to operate casinos in Singapore and one of only six licenses to operate casinos in China.
- Sands’ continued investment in Macao and Singapore support its competitive position.
Company Profile:
Las Vegas Sands is the world’s largest operator of fully integrated resorts, featuring casino, hotel, entertainment, food and beverage, retail, and convention center operations. The company owns the Venetian Macao, Sands Macao, Londoner, Four Seasons Hotel Macao, and Parisian in Macao, the Marina Bay Sands resort in Singapore, and the Venetian and Palazzo Las Vegas in the U.S. (which it plans to sell to Apollo and VICI for $6.25 billion in 2022). Sands are expected to open a fourth tower in Singapore in 2025. After the sale of its Vegas assets, the company will generate all its EBITDA from Asia, with its casino operations generating the majority 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.
Business Strategy and Outlook
Suncorp is a well-capitalised financial services business with a dominant market position in the Australian and New Zealand general insurance industry and a regional banking franchise headquartered in Queensland. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, bingle, Apia, Shannons and Terri Scheer. In New Zealand key brands include Vero, AA Insurance and Asteron Life. Some brands are specific to certain states, but at a group level, the insurer carries concentrated weather and earthquake risk in Australia and New Zealand, and in particular Queensland which makes up around 25% of gross written premiums in Australia.
The group’s exposure to the Queensland market, where large natural peril events have tended to be larger and more frequent, heightens the risks. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. Suncorp’s regional banking franchise is more concentrated than the major banks, with home loans making up around 80% of the loan book and Queensland accounting for more than half of total lending. Suncorp Bank’s smaller operating presence, higher funding and operational costs, and relatively limited product offerings have all led to lower margins relative to the majors.
Financial Strength
Suncorp Group is in good financial health. As at Dec. 31, 2021, Suncorp Insurance had a prescribed capital amount, or PCA, multiple of 1.71 times the regulatory minimum. Following the payment of the final dividend, a special dividend, and AUD 250 million buyback, at a group level that leaves Suncorp with AUD 492 million of capital in excess of its common equity Tier 1 target. This excess capital provides a buffer for unforeseen insurance and bad debt events. The common equity Tier 1 ratio for the insurance business was 1.28 times post the final dividend payment, within the target range of 1.08-1.28 times the PCA, and well above the regulatory minimum of 0.6 times. The bank’s common equity Tier 1 ratio as at Dec. 31, 2021 was 9.9%, above Suncorp’s 9% to 9.5% target range. Suncorp targets a dividend payout of 60-80% cash earnings (excluding special dividends).
Bulls Say’s
- Suncorp owns a portfolio of well-known insurance brands and a regional bank that lacks switching or cost advantages. A focus on processes and systems, largely digitising customer interactions, should support underlying earnings growth.
- General insurance is inherently risky, with factors such as weather, natural disasters, and investment markets affecting earnings and capital adequacy.
- Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but customers are price sensitive.
Company Profile
Suncorp is a Queensland-based financial services conglomerate offering retail and business banking, general insurance, superannuation, and investment products in Australia and New Zealand. It also operates a life insurance business in New Zealand. The core businesses include personal insurance, commercial insurance, Vero New Zealand, and Suncorp Bank. Suncorp and competitors IAG Insurance and QBE Insurance dominate the Australian and New Zealand insurance markets.
(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.
Investment Thesis
- Global leader in a significantly under-penetrated sleep apnea market.
- High barriers to entry in establishing global distribution channels.
- Strong R&D program ensuring RMD remains ahead of competitors.
- Momentum in new masks releases.
- Bolt-on acquisitions to supplement organic growth.
- Leveraged to a falling Australian dollar.
Key Risks
- Disruptive technology leading to better patient compliance.
- Product recall leading to reputational damage.
- Competitive threats leading to market share loss.
- Disappointing growth (company and industry specific).
- Adverse currency movements (AUD, EUR, USD).
- RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.
Key Highlights 2Q22 Results
- Revenue increased 12% (13% in constant currency) to US$894.9m driven by higher demand for sleep and respiratory care devices and a major product recall by one of the Company’s largest competitors. Across geographies, revenue in the Americas climbed +14%, in Europe, Asia, and other markets it increased +12%, and RMD’s software-as-a-service business saw +8% revenue growth. By product segment, globally in constant currency terms device sales increased by 16%, while masks and other sales increased by 10%.
- Non-GAAP operating income of $267.7m, up +5%. This equated to US$1.47 per share, up 4%.
- Net income was up +12% to US$201.8m.
- Gross margin declined 230 basis points to 57.6%.
- Diluted earnings per share was up +11% to US$1.37.
- The Board declared quarterly dividend of US42cps.
- RMD’s balance remains strong with cash balance of $194m, $680m in gross debt and $496m in net debt, whilst debt levels remain modest, and the Company retains ~$1.6bn for drawdown under its existing revolver facility.
Company Profile
ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio).
(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
Coupa Software is a cloud-based business spend management, or BMS, platform that allows firms to monitor, control, and analyze expenditures to lower costs and improve operational efficiency. Morningstar analyts believe Coupa has a long growth runway ahead as it continues to make strategic investments to expand its platform and spend management use-cases. In a go-to-market model that focuses on co-selling deals with system integrators, Coupa has been able to expand its market reach significantly. As back-office digital transformations are accelerating and Coupa remains the market-leading cloud BSM vendor, morningstrar analysts expect Coupa’s partners to increasingly advance Coupa’s adoption throughout businesses as they guide their clients through digital transformation initiatives. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic spend management tool. As the firm introduces new modules, Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, analysts also believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.
Coupa’s Opening Strategy in Business Spend Management Paying Off as it Plays the Long Game
Coupa Software is a cloud-based business spend management, or BSM, platform that allows companies to monitor, control, and analyze expenditures to lower costs and improve operational efficiency. Coupa has built a broad-reaching self-reinforcing ecosystem of AI-informed spend management and Morningstar analysts believe the firm will benefits from a strong network effect and high switching costs. Morningstar anlaysts fair value estimate for Coupa is $152 per share, down from $232, as they model more muted long-term growth. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic BSM tool. As the firm introduces new modules, Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, Morningstar analyst also believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.
Financial Strength
Coupa is in a decent financial position. As of January 2021, Coupa had $606.3 million in cash and marketable securities versus $1.5 billion in convertible debt.Coupa has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. Coupa does not pay a dividend, nor repurchase stock, and for a young company pioneering a novel offspring under the ERP umbrella, it can be considered as appropriate that the company focuses capital allocation on reinvestments for growth. Even so, the firm has historically demonstrated strong cash flows, with free cash flow margins averaging 13% over the last three fiscal years. While cash flows were pressured in fiscal 2021 as a result of the COVID-19 pandemic, Morningstar analysts expect healthy free cash flows in later years. Coupa reached non-GAAP profitability in 2019, posting both a positive non-GAAP operating margin and positive non-GAAP earnings from then on. The company has averaged a non-GAAP operating margin of 9.1% since 2019, and as the company scales, we expect non-GAAP operating margins to reach into the low-30% range at the end of our 10-year forecast period. These positive results should translate to profitability on a GAAP basis in the future as well.
Bulls Say
- Coupa has strong user retention metrics, with gross retention above 95% and net dollar retention north of 110%.
- As Coupa expands its platform both organically and inorganically, we expect increasing suite synergies to accelerate cross-selling activity, further entrenching customers within Coupa and creating greater monetization opportunities.
- Continual annual subscription price point increases reflect the stickiness of Coupa’s modules and suggest significant competitive differentiation in winning new deals over less expensive alternatives.
About the Company
Coupa Software is a cloud-based provider of business spend management, or BSM, solutions. Coupa’s BSM platform provides visibility into all spend, allowing companies to gain control over their spending, optimize their supplier network and supply chains, and manage liquidity. The platform’s transactional core consists of procurement, invoicing, expense management, and payment solutions, while supporting modules ranging from strategic sourcing solutions to supply chain design and planning solutions round out the comprehensive spend management ecosystem.
(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.