Business Strategy & Outlook
Group 1’s restructurings during the financial crisis, such as new dealer and customer systems, have paid off. A common operating metric in the dealer sector is selling, general, and administrative expenses as a percentage of gross profit; Group 1’s ratio improved to 60.3% including rent expense in 2021 compared with 77.9% in 2007, and management expects it to remain below 70%. The company in 2018 began transforming itself with its Val-U-Line used-vehicle strategy and scheduling accommodations for service technicians, which are improving employee retention and increasing technician headcount. Val-U-Line comes from Group 1 wisely, wanting to retail more used vehicles rather than send them off to auction, because the former is more profitable. Val-U-Line only sells high-mileage used vehicles, and the brand is not a stand-alone used-vehicle store like three other public dealers are doing. The AcceleRide omni channel platform should keep the firm competitive with new entrants to the online used-vehicle market such as Carvana but is also for new vehicles, service, and buying vehicles from consumers. Digital will enable much better SG&A leverage than the company has had in the past and increase used-vehicle sales.
Most growth will come via acquisition because Group 1’s model is similar to that of the other large dealerships, which have been consolidating stores. The industry is consolidating because smaller players cannot compete with the scale and cost savings achieved through roll-up acquisitions pursued by the largest franchise dealerships. The industry is still highly fragmented, so Group 1 will not have a problem finding desirable stores to buy. Most deals to be in the U.S. Parts and servicing was about 12% of 2021 revenue but made up 36% of gross profit. This significant contribution to profitability is less volatile than vehicle sales and mitigates some of the cyclical risk of the auto industry. Vehicles are becoming more complex to repair, which favors the dealer that can more easily invest in service operations. Financing also helps profits with 100% gross margin from commission.
Financial Strengths
In the third quarter of 2014, Group 1 retired all of its convertible bonds outstanding. The firm funded the convertible retirement with $550 million of new 5.00% senior unsecured notes due in June 2022. These 2022 notes were retired in September 2020 and replaced with $550 million of 4% notes due in 2028. The firm issued another $200 million of the 2028 notes in 2021 to help fund the Prime acquisition. Group 1 redeemed all $300 million of its 5.25% 2023 notes in April 2020 via cash on hand and credit line borrowing. Group 1 has about $790 million in liquidity from cash and capacity on its credit lines and no bond debt due until 2028. Availability on credit lines excluding floor plan at the end of September was about $550 million. Group 1 reinstated its dividend in 2010 and had been repurchasing shares, but COVID-19 led to the suspension of the dividend and the end of buybacks. In October 2020, the company announced the resumption of the dividend, and it recently bought back over 20% of its stock. In March 2022, Group 1 amended its credit facility to expire in March 2027. The facility has $1.65 billion for U.S. inventory floorplan financing and another $349 million for working capital, acquisitions, or general corporate purposes. The $349 million can be expanded to $500 million and up to $150 million can be in euros or pounds. The credit facilities are secured by essentially all of the company’s domestic personal property. The facilities also contain financial covenants including a fixed-charge coverage test and total leverage test. The total adjusted leverage covenant is less than 5.5 times and was 1.8 times at Sept. 30. The fixed-charge coverage covenant is greater than 1.20 times and was 6.1 times at the end of 2021. Group 1 had $800 million of mortgage debt at Sept. 30 and owned 66% of its real estate, up from 36% in 2011. Group 1 can continue to maintain a reasonably healthy balance sheet and fund more deals as needed.
Bulls Say
- Auto dealerships are stable, profitable businesses with a diversified stream of earnings beyond selling new vehicles.
- 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 complex vehicles. Parts and service provide a large portion of gross profit, despite being a small part of overall revenue.
- If successful, AcceleRide and Val-U-Line could prove good future sources of profit.
Company Description
Excluding its Brazil operations about to be sold, Group 1 owns and operates 46 collision centers and 201 automotive dealerships in the U.S. and the U.K., offering 34 brands of automobiles altogether–nearly 150 of the stores are in the U.S. with American locations mostly in metropolitan areas in 17 states in the Northeast, Southeast, Midwest, and in California. Texas alone contributed 40% of new vehicle unit volume in 2021 excluding Brazil and the U.K. about 19%. Texas, Oklahoma, and Massachusetts combined were about 55%. Revenue in 2021 totaled $13.5 billion. The company was founded in 1995 and is based in Houston.
(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
Credit Suisse’s true underlying profitability has been masked for the better part of a decade by multiple restructuring charges and the cost of running down a legacy book of unprofitable assets. The new management team at the helm of Credit Suisse hoped that it addressed all issues during 2020, but new problematic exposures continue to crop up. This suggests a deeper risk management malaise at Credit Suisse. Credit Suisse has some very good, profitable, and generally asset-light business with good long-term secular growth prospects—especially in wealth management/private banking and the Swiss universal bank. The discount that the market has imposed on the rating of Credit Suisse relative to UBS and its other peers should, however, remain in place until Credit Suisse can convince investors that it has addressed its risk management deficiencies. We believe that Credit Suisse will have to report several quarters of results free from the large non-recurring items that have historically marred its results.
There is a strong long-term secular trend that sees the wealth of high-net-worth individuals and families growing ahead of global nominal GDP. The ultra-high net worth and family office segment, where Credit Suisse has focused most of its attention, is a particularly attractive segment. The threat of digital disintermediation is reduced and the need for bespoke solutions and strong relationship between banker and client remains. The current negative interest rate environment obscures the benefits of Credit Suisse’s very strong deposit franchise that provides it with ample surplus liquidity. Currently, this is damaging to Credit Suisse’s net interest income—it needs to invest its excess liquidity in short-term risk-free assets that currently pays no or negative interest. Credit Suisse has, however, starting passing on these costs to selected clients.
Financial Strengths
Credit Suisse has a common equity Tier 1 ratio of 14.4% currently, ahead of its own internal capital target of a 14% common equity Tier 1 ratio. This is comfortably ahead of its regulatory minimum capital requirement of 10%. However, Credit Suisse’s leveraged ratio of 4.2% is more of a constraint, with a regulatory minimum requirement of 3.5% and an internal target of 4.5%. Credit Suisse intends to pay out 25% of its earnings as a dividend and it has not announced new share buybacks. We do not believe Credit Suisse will be able to return more than this to Both Credit Suisse’s liquidity coverage ratio and its net stable funding ratio are comfortably above 100%, which indicates sound liquidity. To assess, these ratios, while helpful, do not fully capture the quality of a bank’s funding. One should also consider the structure of a bank’s funding—where the relatively lower importance of wholesale deposits in Credit Suisse’s funding mix is a clear positive. However, private banking/wealth management clients will typically be more sophisticated than the average retail banking client and therefore more likely to withdraw funds in times of stress. We therefore do not believe that private banking deposits are as sticky as general retail deposits, although they remain stickier than wholesale funding.
Bulls Say
- Credit Suisse looks set to emulate UBS and transform its business model into a wealth manager with a complementary investment bank, which would increase profitability and reduce earnings volatility.
- Credit Suisse has run down a massive book of EUR 126 billion to EUR 45 billion over the past four years, incurring pretax losses of EUR 16 billion in the process. This has obscured the performance and profitability of the core business.
- Credit Suisse generates the bulk of its earnings in stable and low-risk private banking/wealth management and Swiss commercial banking.
Company Description
Credit Suisse runs a global wealth management business, a global investment bank and is one of the two dominant Swiss retail and commercial banks. Geographically its business is tilted toward Europe and the Asia-Pacific.
(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
Infineon is a leading broad-based European chipmaker, with substantial exposure to secular growth drivers in the industrial and automotive chip sectors. Infineon should emerge as a leading supplier for electric vehicles and active safety systems used in cars, with increasing exposure to car “infotainment” systems. However, like most chipmakers, Infineon’s business remains highly cyclical as demand rises and falls with the health of its various end markets. Looking at the automotive chip market, electric vehicles and cars with advanced powertrain technology and safety systems require a variety of sensors and power voltage chips supplied by firms like Infineon. Similarly, the company’s exposure to power semis allows it to benefit from trends in the electronics industry toward power conservation, not only in more efficient devices like industrial drives, but also in green energy solutions like solar panels. Infineon is also a leader in chip card and security products, such as chips for chip-and-pin credit cards.
Finally, limiting exposure to challenging markets is just as important as increasing exposure to promising markets, and Infineon has done a good job of eliminating unattractive business segments in prior years. Nonetheless, Infineon’s product lines still face formidable competition. Many other large semiconductor firms also focus on power semiconductors and have similar products. Further, Infineon focuses on discrete power products rather than analog power management integrated circuits. While the former products are valuable to customers, the latter of which has more complex products that allow leading analog firms (such as several wide-moat names) to enjoy stronger pricing power and relatively higher returns on invested capital. Infineon also has hefty manufacturing capacity for its products, which may lead to a higher fixed-cost structure and may cause significant margin compression when supply far exceeds demand.
Financial Strengths
Credit Suisse has a common equity Tier 1 ratio of 14.4% currently, ahead of its own internal capital target of a 14% common equity Tier 1 ratio. This is comfortably ahead of its regulatory minimum capital requirement of 10%. However, Credit Suisse’s leveraged ratio of 4.2% is more of a constraint, with a regulatory minimum requirement of 3.5% and an internal target of 4.5%. Credit Suisse intends to pay out 25% of its earnings as a dividend and it has not announced new share buybacks. Credit Suisse will not be able to return more than this to Both Credit Suisse’s liquidity coverage ratio and its net stable funding ratio are comfortably above 100%, which indicates sound liquidity. To assess, these ratios, while helpful, do not fully capture the quality of a bank’s funding. One should also consider the structure of a bank’s funding—where the relatively lower importance of wholesale deposits in Credit Suisse’s funding mix is a clear positive. However, private banking/wealth management clients will typically be more sophisticated than the average retail banking client and therefore more likely to withdraw funds in times of stress. The private banking deposits aren’t as sticky as general retail deposits, although they remain stickier than wholesale funding.
Bulls Say
- Infineon is now focused on its core industrial, automotive, and card security markets after a series of smart divestitures of underperforming businesses.
- The automotive semiconductor market could see healthy growth in the years ahead, as gas-powered cars are being equipped with extra sensors and processors while hybrid and electric cars require additional chip content to control new types of engines.
- Infineon’s power semis are well suited to benefit from broad-based demand across a wide variety of products seeking energy efficiency.
Company Description
Infineon Technologies headquartered in Munich, was spun off from German industrial conglomerate Siemens in 2000 and today is one of Europe’s largest chipmakers. The company is a leader in the automotive semiconductor market with prominent products used in active safety and powertrain content within vehicles. Infineon is also the market leader in power semiconductors used to deliver voltage within a wide variety of electrical systems. The company operates in four segments: automotive, industrial power control, power and sensor systems, and connected secure systems.
(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.
