Tag: US Market
Business Strategy & Outlook
Penske Automotive Group receives over 90% 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. 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 heavy-truck distribution in Australia and New Zealand, 39 truck dealers in the U.S. and Canada, and 21 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 but less than 2021’s $1.6 billion. The National Automobile Dealers Association reports that as of 2021, the number of U.S. new-car dealerships was 16,676, down from 25,025 in 1987. This highly fragmented industry is always consolidating because smaller players cannot compete with the scale of the public franchise dealers. Parts and service was only 10% of 2021 retail automotive revenue but made up 34% of gross profit. This significant contribution to profitability is less volatile than new- and used-vehicle sales and will continue to mitigate the cyclical risk of the auto industry. Large dealers are enjoying a growing competitive advantage for repair work because the increasingly advanced technology of cars presents an obstacle for smaller repair shops that are less able to afford the equipment and training needed to provide competent service. Consumers incur search costs (most notably time) to get many service estimates, which makes it more likely that they will keep going to the dealer.
Financial Strengths
EBIT covered interest expense was 13.7 times in 2021, up from about 3 times during the Great Recession. At year-end 2021, Penske has one large debt maturity over the next few years, which is $550 million of 3.5% notes due in September 2025. 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 June 30 was about $1 billion and a mortgage line has an additional $142.8 million available. Debt/EBITDA at June 2022 was under 1 times from 4.7 at year-end 2008 due to debt reductions and turbocharged earnings. Management has reduced debt by nearly $1 billion since the end of 2019. Penske’s non-floor-plan debt financing mostly comes from bank lines in the U.S. and U.K. The U.S. facility is $800 million of revolving loans for working capital, acquisitions, capital expenditures, and other purposes. The facility matures Sept. 30, 2024, and had no balance outstanding at the end of June. The U.K. facility has two parts: a GBP 150 million revolver expiring in December 2023 and a GBP 52 million overdraft line of credit. It also has a GBP 100 million accordion clause to request more capacity if required. As of June 30 there were no borrowings on the U.K. facility. At June 30, availability was $800 million on the U.S. facility, GBP 162 million on the U.K. facility, and AUD 40 million on an Australian line. The company has about AUD 30 million outstanding on loan agreements in Australia. The Penske Corporation or other Roger Penske-controlled entities could provide additional liquidity if needed but one can see the firm in good financial health with what one can see as ample room to take on debt for a large acquisition if needed.
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 Description
Penske Automotive Group operates in about 20 U.S. states and overseas. It has 152 U.S. light-vehicle stores including in Puerto Rico as well as 180 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 over 90% 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 39 truck dealerships selling mostly Freightliner and Western Star brands, and Penske owns 21 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)
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
W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $13 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing.
Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019). Grainger continues to expand its endless assortment strategy, but one can be skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. Still, Grainger has distinct competitive advantages in its traditional business, such as its long-standing relationships with large customers and its inventory management solutions, which should help it earn excess returns over the next 10 years.
Financial Strengths
In 2021, Grainger had $2.4 billion of debt outstanding, which net of $241 million of cash, represents a leverage ratio of about 1.2 times 2022 EBITDA estimate. Grainger’s leverage ratio is relatively conservative for the industry. The company certainly has room to increase leverage if needed, but management looks to be committed to keeping its net leverage ratio between 1-1.5 times. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047. Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. By the mid cycle year, the company is expected to generate over $1 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Given the firm’s reasonable use of leverage and consistent free cash flow generation, the Grainger exhibits strong financial health.
Bulls Say
- With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts.
- As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending.
- Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by nearly 45% over the last 20 years.
Company Description
W.W. Grainger distributes 1.5 million maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves about 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 300 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.
(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
UPS is the giant among global small-parcel delivery companies, and it’s one of three commercial providers that dominate the marketplace; FedEx and UPS are the major U.S. incumbents, while DHL Express leads in Europe. UPS has also raised its exposure to the asset-light third-party freight brokerage market, especially with its 2016 acquisition of truckload broker Coyote Logistics. Note the firm divested its LTL trucking division, UPS Freight, in second-quarter 2021 as part of new CEO Carol Tomé’s “better, not bigger” framework. Despite its unionized workforce and asset intensity, UPS produces operating margins well above those of its competitors, thanks in large part to its leading package density—it’s been around much longer than FedEx in the U.S. ground market. In the United States, FedEx’s express and ground units together handled 13.4 million average parcels daily in its four fiscal quarters ending in November 2021, while UPS moved 21.5 million in calendar 2021.
Shippers appreciate the convenience of using the same driver to handle both express and ground packages in UPS’ single network, but during peak holiday season, FedEx’s separately run ground division’s variable-cost model shows merit. Despite near-term normalization, favorable e-commerce trends should remain a longer-term top-line tailwind for UPS’ U.S. ground and express package business. That said, growth won’t be costless; UPS is amid an operational transformation initiative aimed at mitigating the challenges of a rising mix of lower-margin business-to-consumer deliveries. Amazon has been insourcing more of its own last-mile delivery needs at a rapid pace to supplement capacity access amid robust growth. This removes some incremental growth opportunities for UPS while creating risk that Amazon decides to take in-house the shipments it currently sends through UPS—the retailer made up approximately 12% of UPS’ total revenue in 2021. That said, Amazon still very much needs UPS’ capacity, and taking that all in-house would very likely require a massive level of incremental investment.
Financial Strengths
UPS’ balance sheet is reasonable and healthy, and no medium-term debt service issues. It held $10.3 billion in cash and marketable securities compared with roughly $22 billion of total debt at year-end 2021. Debt/EBITDA leverage came in near 1.4 times in 2021, ignoring underfunded pensions, versus 2.2 times in 2020 as the firm reduced its debt load with help from cash generation and the $800 million UPS Freight sale. EBITDA/interest coverage for 2021 was a very healthy 23 times. One will update a model once the 2021 10K is issued, but for reference, the UPS’ net underfunded pension was roughly $3.5 billion in 2020–a hefty obligation–though as per current view this as manageable given the firm’s solid free-cash generation potential; it’s been manageable historically. Furthermore, that total likely came down for 2021 given certain regulatory changes during the year that lowered UPS’ overall liability. UPS operates with a straightforward capital structure composed of mostly senior unsecured U.S. dollar notes, though it has several pound sterling-, Canadian dollar-, and euro-denominated notes. Outside of major economic disruption, one would expect UPS’ historical pattern of dividend payments to be secure. Share repurchases slowed in 2018 and 2019 on account of heavy capital investment and were suspended in 2020 (into 2021) due to pandemic risk-mitigation efforts (including debt reduction). Share repurchases restarted in 2021 and the firm will likely repurchase around $1 billion worth of stock in 2022.
Bulls Say
- While residential package demand is normalizing off lofty levels, UPS’ U.S. ground and express package delivery operations should enjoy positive longer-term tailwinds from e-commerce growth.
- UPS’ massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.
- On top of superior parcel density, UPS uses many of the same assets to handle both express and ground shipments, driving industry-leading operating margins.
Company Description
As the world’s largest parcel delivery company, UPS manages a massive fleet of more than 500 planes and 100,000 vehicles, along with many hundreds of sorting facilities, to deliver an average of about 25 million packages per day to residences and businesses across the globe. UPS’ domestic U.S. package operations generate 62% of total revenue while international package makes up 20%. Air and ocean freight forwarding, truckload brokerage, and contract logistics make up the remainder.
(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
Travel constraints and coronavirus hesitancy are receding, so consumer behavior about travel and social distancing have returned to normal for Royal Caribbean, leading to positive operating cash flow and EBITDA at the business. The redeployment of the fleet is complete, and cruise operators have successfully implemented health protocols to ensure the safety of the cruising population (as evidenced by a lower positivity rate than on land). With virus restrictions largely in the rearview mirror, Royal Caribbean should see modest pricing gains as it digests bookings paid for with future cruise credits and takes new reservations. On the cost side, some health protocols and cruise resumption costs could remain high in near-term spending, but should pare back in 2023, aiding profitability. These factors should lead to average returns on invested capital, including goodwill, that are set to languish below the weighted average cost of capital estimate (9.5%) through 2025, supporting no-moat rating.
While Royal Caribbean has carved out a compelling position in cruising thanks to its contemporary product, it still has to compete with other land-based vacations and discretionary spending for share of wallet. This could intermittently jeopardize top-line growth during transitory periods of land- and sea-based holiday discounting. Royal Caribbean reduced operating expenses and capital expenditures as a result of COVID-19. It also accessed significant liquidity, most recently raising $1 billion in debt in January 2022, to secure its ability to service debt coming due. With $4.2 billion in customer deposits as of June 30, modest liquidity risk exists, as more than $5 billion in debt maturities due in 2023 will force the company to actively seek refinancing. While Royal Caribbean is set to return to positive EPS in the third quarter of 2022, one doesn’t believe either yields or passenger counts will revisit 2019 levels until at least 2023. This should allow Royal Caribbean to generate positive EPS consistently in 2023 and beyond.
Financial Strengths
Royal Caribbean has taken numerous steps to ensure financial flexibility despite headwinds stemming from COVID-19. In March 2020, Royal Caribbean noted it was taking actions to reduce operating expenses and capital expenditures by the tune of $1.7 billion to improve liquidity. Additionally, since the beginning of the pandemic, the firm secured around $17 billion in liquidity through various debt and equity issuances. Furthermore, as of June 30, more than $4.2 billion in customer deposits were still available for use, a decreasing portion of which should represent shift and lift fares as consumers redeem their future cruise credits. Royal Caribbean has been able to amend the majority of its export-credit backed loan facilities to incorporate an extension of debt payments and a waiver of covenant compliance, helping to moderate cash demands, although payments are slated to pick up again in 2023. On the operating expense side, at the start of the pandemic Royal Caribbean’s executives took a pay cut and Royal Caribbean laid off or furloughed more than 25% of its 5,000 shoreside employees. Such efforts helped preserve capital during that difficult time, but have now fully reversed as the industry has redeployed the fleet. The surmise costs per diem will return back to 2019 levels in 2023. The company should be back to consistently positive cash generation in 2023, as restaffing and redeploying efforts are largely complete (which had been a key expense in the $300 million-plus monthly cash burn during the ramp up). With the cash on hand, the Royal Caribbean should have no near-term going concern issues, thanks to 100% of its capacity back on the seas in the summer of 2022, with full occupancy by year-end.
Bulls Say
- If COVID-19 regulations continue to pare back quickly, yields could rise faster than expected as demand rises.
- The normalization of fuel prices could help benefit the cost structure, thanks to Royal Caribbean’s floating energy prices (with only about 50% of fuel costs historically hedged).
- The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators previously had capacity for nearly 4 million passengers at the beginning of 2020, which provides an opportunity for long-term growth with a new consumer when cruising resumes in the region.
Company Description
Royal Caribbean is the world’s second-largest cruise company, operating 64 ships across five global and partner brands in the cruise vacation industry, with 10 more ships on order. Brands the company operates include Royal Caribbean International, Celebrity Cruises, and Silversea. The company also has a 50% investment in a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises, allowing it to compete on the basis of innovation, quality of ships and service, variety of itineraries, choice of destinations, and price. The company completed the divestiture of its Azamara brand in the first quarter of 2021.
(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
Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages, or those that can be stored at room temperature, in 2010 to an all-things-water business in 2020. Nevertheless, the current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business, and as a pure-play water provider, a more robust top-line trajectory and a structurally improved margin profile. Unsurprisingly, Primo’s strategy has radically evolved over the years —it now uses a conventional razor/blade business model, where it seeks to increase penetration of its water-dispensing appliances to facilitate recurring sales of higher-margin water bottles. Ideally, it wants to deliver these bottles directly to customers to avoid the increased costs and competition that go along with retail intermediation. Pre Pandemic sales skewed to the residential side (roughly 60%), but despite an even greater imbalance currently, its base of small and midsize businesses (where it tends to have higher retention) should be important longer term.
The right tech and service investments are being made, which together with various secular trends (like wellness and deteriorating trust in municipal water) facilitate a nice runway of growth. Acquisitions are also core to management’s strategy. Given the transformational nature of recent activities, the future deals will be confined to tuck-ins. Due to industry fragmentation, the rationale for efforts to increase scale and route density is sound, but continued management discipline is necessary. Primo does not walk a gilded path. It competes in a largely commoditized market, where no brand equity is evident except at the premium end (where Primo has little presence), so one does not see it as moat worthy. Additionally, the coronavirus pandemic has pressured its commercial business. Nevertheless, the firm will be able to navigate and adapt to the evolving landscape.
Financial Strengths
Primo’s financial health looks fair to us, though it leaves a lot to be desired. A torrid pace of M&A since 2014, when it acquired DS Services, has resulted in debt that has been precariously high at times and a credit rating that remains below investment-grade. Nevertheless, the disposition of its soft drink and juice finished-goods bottling business in 2018 allowed for significant deleverage. The adjusted net leverage (on an internally calculated basis) is below 4 times EBITDA today, and with a solid cash flow profile and potential synergies, the management’s goal to reach 2.0-2.5 times by the end of 2024 is ambitious but not unrealistic. Primo’s free cash flow history is muddied by its perpetual merging and divesting, but the most recent transition to a pure-play water company will improve its cash-generating capabilities. Structurally improved margins and relatively modest working capital requirements should be the primary drivers of this performance, and the model free cash flow to the firm averaging around $150 million annually through 2026 (around 6% of sales). The company’s debt profile includes long-dated senior notes and a revolving credit facility, which replaced a long-standing asset-based lending facility in 2020. The primary covenant that management monitors in relation to these obligations is the interest coverage ratio (calculated as adjusted EBITDA divided by interest), which cannot veer below 3 times. Even amid the coronavirus pandemic, the firm remains in compliance with this covenant, and one does not envision a scenario where this is breached. Additionally, there is ample liquidity, as the firm has over $125 million in cash on hand as of December 2021 and over $100 million in unused revolver capacity.
Bulls Say
- As a pure-play water solutions provider, Primo will more comprehensively benefit from secular growth in the category and more robust margins.
- Unparalleled scale in the home and office water delivery market should yield resources that allow Primo to differentiate its services.
- With offerings like water refill and exchange currently nonexistent in Europe, there should be ample room for growth in that region.
Company Description
Primo Water is a pure-play water provider that is the product of the March 2020 acquisition of the legacy Primo business by Cott. The firm’s water solutions ecosystem is anchored by an assortment of water dispensers and its water direct business. In the latter, it receives recurring revenue for delivering large-format (3- and 5-gallon) water bottles to residential and commercial customers for use in the dispensers. Supplementary offerings include water exchange, where consumers can exchange or purchase pre filled containers at retail, and water refill, where consumers have access to the network of self-service refill units that Primo manages. Most sales are generated in North America, with the remainder primarily in Europe and Israel.
(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.
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