Business Strategy and Outlook
MSC has become one of the largest industrial distributors in U.S., and it is especially well known in the metalworking industry, wherein the firm enjoys approximately 10% market share.While MSC’s sales declined in 2020 (negative 5%) and sales growth was anemic in 2021 (2%) amid the global pandemic, over the longer term, but as per Morningstar analyst perspective it is expected that mid-single-digit growth prospects for the company driven by a return to healthier end-market demand and market share gains from smaller local and regional distributors.
Because MSC has national scale and a robust portfolio of products and value-added inventory management services, it is well positioned to capitalize on the growing trend of manufacturers consolidating spending with large distributors. Although national accounts can generate lower gross profit margins, they can also generate higher volume, which MSC can leverage to improve operating margins. MSC’s focus on providing inventory management solutions has helped the firm expand customer wallet share over the years, and we expect that trend to continue.
MSC has proved to be a consistent free cash flow generator throughout the business cycle, and in our view, it has allocated its free cash flow in a balanced, shareholder-friendly manner. We expect MSC to continue to use its excess cash to increase its regular dividend and repurchase shares. The company also occasionally pays special dividends, most recently in fiscal 2021 ($3.50 per share) and 2020 ($5.00 per share).
Strong Growth Returns for MSC Industrial but Operating Environment Remains Challenging
MSC Industrial Direct enjoyed strong year-over-year revenue growth during its fiscal first quarter ended Nov. 27. Sales increased nearly 10% as the company executed on its growth initiatives and end market demand improved (industrial production has expanded at a steady pace for much of 2021). In terms of the growth initiatives, MSC saw notable growth during the quarter from its industrial vending and in-plant initiatives as well as from its e-commerce platform (MSCDirect.com).
While MSC’s first-quarter revenue growth was encouraging (and caused us to increase our full-year fiscal 2022 revenue growth projection to 8% from 6.5% previously), supply chain challenges and inflationary headwinds persist. CEO Erik Gershwind said the company is seeing little evidence of easing supply chain bottlenecks, labor shortages are severe, and inflation is the most extreme he can recall. Yet, despite these challenges, MSC managed to expand adjusted operating margin 30 basis points year over year 11.3%. Management was disappointed with its gross margin, which contracted 30 basis points year over year (to 41.6%) as the firm’s price/cost dynamic had not been as favorable as management would have liked (price/cost was slightly positive during the quarter). However, MSC realized nice leverage on its operating expenses (7.5% growth compared with 10% top-line growth). MSC intends to increase prices by more than 2% in fiscal 2022 to improve gross margin, and management is still targeting about a 42% gross margin (unchanged year over year), which we think is achievable.
Morningstar analyst have increased fair value estimate about 2% to $87 per share due to our stronger revenue growth outlook and the time value of money.
Financial Strength
MSC has historically operated with a very conservative balance sheet, and it has only significantly flexed its balance sheet for large acquisitions (2006 and 2013) and large share buybacks (MSC spent $384 million to repurchase 5.3 million shares in 2016) a handful of times. At the end of its fiscal first-quarter 2022, MSC had an outstanding debt balance of $763 million. MSC’s earnings provide the firm with substantial headroom to service its debt obligations. During fiscal 2021, MSC incurred about $15 million of interest expense and generated $441 million of adjusted EBITDA, which equates to a comfortable interest coverage ratio of about 30 times. MSC has a proven ability to generate free cash flow throughout the cycle. It has generated positive free cash flow every year since 2001, and the firm’s free cash flow generation tends to spike during downturns due to reduced working capital requirements. This dynamic played out in 2020 with free cash flow increasing 26% despite sales declining 5%. Given the firm’s relatively conservative balance sheet and consistent free cash flow generation, it is believed that MSC’s financial health is satisfactory.
Bulls Say
- As end-market demand improves, MSC could return to mid- to high-single-digit sales growth and highteens return on invested capital.
- MSC’s national scale and focus on value-added inventory management services should help the firm take market share from smaller regional and local distributors.
- MSC generates consistent free cash flow and runs a shareholder-friendly capital-allocation strategy. The company should continue to utilize its free cash flow to increase its regular dividend, repurchase shares, and occasionally pay special dividends.
Company Profile
MSC Industrial Direct is a value-added industrial distributor with a focus on metalworking and maintenance, repair, and operations products and services. The company offers 1.9 million products through its distribution network which has 11 fulfillment centers. Although MSC has a presence in Canada, Mexico, and the United Kingdom, it primarily operates in the United States. In fiscal 2021, 94% of the firm’s $3.2 billion of sales was generated in the U.S.
(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.
The Fund provides exposure to investment grade securities from around the globe while incorporating PIMCO’s ESG screening framework. The strategy can be used as a core bond holding in client portfolios who have an ESG bias. The PIMCO Global Bond Fund is in attraction due to the well-resourced / experienced investment team and PIMCO’s well established investment process. PIMCO’s ESG framework involves three stages: (1) Exclude (restrictions on certain sectors). (2) Evaluate (best in class ESG issuers + prime engagement candidates). (3) Engage (engage issuers to improve ESG related business practices).
Downside Risk
- Interest rate risk (bond prices and yields are inversely related).
- Credit risk (the risk of downgrades or even default) & inflation risk.
- Personnel risk – significant turnover among the 3 lead PMs.
Fund Performance (As at Aug, 2021)
Investment Process
PIMCO applies a wide range of strategies including Duration analysis, Credit analysis, Relative Value analysis, Sector Allocation and Rotation and individual security selection. The Manger looks to make active decisions with a long-term focus and avoid extreme swings in duration or maturity with a view to creating a steady stream of returns. The Manager has designed and structured a global investment process that includes both top-down and bottom-up decision-making. The first and most important step in the firm’s process is to get the long-term view correct. The figure below provides a summary of the key elements in the investment process.
Secular analysis: The Manager considers its secular analysis as critical to the investment process, with the firm devoting three days every year to a “Secular Forum”. At this forum, the firm formulates PIMCO’s outlook for global bond markets over the next three to five years. Selected members of the investment staff are assigned secular topics to monitor, including monetary and fiscal policy, inflation, demographics, technology, productivity trends, and global trade. Secular researchers tackle their subjects on a global basis and approach them over a multi-year horizon. At the forum the researchers present their findings to all of the firm’s investment professionals.
Decision making: Post Secular and Economic Forums, the Investment Committee (senior portfolio managers) develop major strategies that serve as a model for all portfolios using a consensus-based approach. The IC utilises top-down analysis provided by the forums as well as bottom-up input from specialists who focus on various fixed income sectors and the regional portfolio committees. The Investment Committee sets targets for portfolio characteristics such as duration, yield curve exposure, convexity, sector concentration and credit quality and ensures themes are consistently applied across all portfolios. The portfolio management group including the PIMCO Global Strategy team, through the incorporation of the Investment Committee’s model portfolio characteristics, will then construct the Fund.
About the fund
The ESG Global Bond Fund is an actively managed portfolio of global fixed interest investment which incorporates PIMCO’s ESG screening. The portfolio predominantly invests in governments, corporate, mortgage and other global fixed interest securities.
(Source: Banyantree)
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.
