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Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

Business Strategy and Outlook

Tesla is the largest battery electric vehicle automaker in the world. In less than a decade, the company went from a startup to a globally recognized luxury .Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car.

Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. To do so, the company is undergoing a massive capacity expansion to increase the number of vehicles it can produce. Tesla also invests around 5% of its sales in research and development, focusing on improving its market-leading technology and reducing its manufacturing costs. For EVs to see mass adoption, they need to reach cost and function parity with internal combustion engines. To reduce costs, Tesla focuses on automation and efficiency in its manufacturing process.To reach functional parity, EV will need to have adequate range, reduced charging times, and availability of charging infrastructure.Tesla continues to grow its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. The company is attempting to take a larger share of its customers’ auto-related spending, which includes selling insurance and offering paid services such as autonomous driving functions.

Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

On Jan. 2, Tesla reported strong fourth-quarter and full-year vehicle delivery numbers. On the year, Tesla reported 936,172 vehicles delivered, which is up over 87% year on year versus 2020. Morningstar analyst have updated our model to incorporate higher 2021 sales volumes and have raised our outlook for 2022 as well as forecasted that Telsa will deliver a little over 1.5 million vehicles in 2022, which represents over 60% year-on-year growth. Separately, Morningstar analyst have decreased  2022 gross margin forecast for Tesla as they increased production costs associated with the opening of the two new production plants in Austin, Texas, (U.S.) and in Berlin, Germany. Our long-term outlook is largely unchanged as we continue to expect Tesla’s sales growth will slow. Having updated model to reflect these changes, Morningstar analyst have increased Tesla fair value estimate to $700 per share from $680.

Financial Strength

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of Sept. 30. Total debt was roughly $8.2 billion; however, total debt excluding vehicle and energy product financing (nonrecourse debt) was around $2.1 billion. Cash and cash equivalents stood at $16.1 billion as of Sept. 30.To fund its growth plans, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. Morningstar analyst thinks this makes sense as funding massive growth solely through debt adds near-term risk in a cyclical industry.Management has stated a preference to pay down all debt over time and continues to make progress on this goal. Regardless, with positive free cash flow generation and a clean balance sheet, we think Tesla could maintain its current levels

Bull Says

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems. 
  • Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years. 
  • Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market, which should result in its maintaining its market leader status as EV adoption increases.

Company Profile

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

 (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.

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Shares Technology Stocks

Reinitiating Coverage of Ceridian HCM With Narrow Moat, Stable Trend Rating and $80 FVE

Ceridian offers payroll and human capital management solutions via its flagship Dayforce platform, secondary platform Powerpay targeting small businesses in Canada, and remaining legacy Bureau products such as tax services. The company benefits from high customer switching costs, allowing it to retain clients, upsell add-on modules, and earn a steady stream of recurring revenue at a low marginal cost, underpinning our narrow moat rating. Morningstar analysts expect Ceridian’s growing record of performance should help to attract new business, increase market share, and expand into new global markets. The shares currently screen as overvalued, trading at a 30% premium to our fair value estimate.

Ceridian has disrupted incumbent providers and taken share of the expansive and growing HCM market through the appeal of its agile, cloud-based solutions that offer an alternative to legacy on-premises solutions or solutions cobbled together using multiple databases or platforms. The company derives most of its revenue from Dayforce, which is geared to larger enterprises wishing to streamline complex human resources operations across multiple jurisdictions on a unified platform and leverage the platform’s scalable infrastructure. Dayforce offers real-time continuous payroll calculation and, as a natural extension, on-demand pay. Leveraging this functionality, Ceridian introduced Dayforce Wallet in 2020, which allows clients’ employees to load their net earned wages to a prepaid Mastercard, generating interchange fee revenue for Ceridian when purchases are made. While this innovation is being replicated by competitors, we expect it will create a promising new high-margin revenue stream for Ceridian that leverages the firm’s exposure to millions of employees and their earned wages.

Morningstar analysts estimate revenue to grow at an 18% compound annual rate over the five years to fiscal 2025, driven by mid-single digit industry growth, market share gains, and mid-single digit group revenue per client growth. As per Morningstar analyst perspective, 12% average annual growth in Dayforce recurring revenue per client due to an increasing skew to larger businesses and greater module uptake. This growth will be offset by low single-digit revenue growth per Powerpay client due to minimal price increases and modest module uptake. Across both platforms, Morningstar expects fierce competitive pressures to limit like-for-like pricing growth to low single digits. Over the same period,  expect operating margins to increase to about 14% from less than 1% in a COVID-19-affected 2020 and 9% in a pre-COVID 2019. We anticipate this uplift will be driven by operating leverage from increased scale and higher interest on client funds.

Ceridian has made a tactical shift to target larger businesses and move further upmarket into the large enterprise and global space. While this drives higher revenue per client and exposes the company to a larger pool of client funds, we expect fierce competitive pressures and powerful clients will lead to increased pricing pressure, limiting margin upside potential over the long run. Morningstar analysts assume Ceridian will achieve midcycle operating margins around 31% in 2030, which is comparable with our forecast for wide-moat Workday, which also targets large enterprises with its cloud-based HCM software. By comparison, morningstar analyst forecast wide-moat Paychex, which targets small and midsize clients with significantly lower bargaining power, will achieve mid cycle operating margins of 43%. Ceridian operates in a highly competitive market, and  expect it will need to maintain high levels of investment to ensure that the functionality of its product suite is comparable with peers’ and meets clients’ needs.

Company profile

Ceridian HCM provides payroll and human capital management solutions targeting clients with 100-100,000 employees. Following the 2012 acquisition of Dayforce, Ceridian pivoted away from its legacy on-premises Bureau business to become a cloud HCM provider. As of fiscal 2020, nearly 80% of group revenue was derived from the flagship Dayforce platform geared toward enterprise clients. The remaining revenue is about evenly split between cloud platform Powerpay, targeting small businesses in Canada, and legacy Bureau products.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Erkan resigns as co-CEO of First Republic Bank; however, future is projected to be strong

Business Strategy and Outlook:

First Republic Bank is one of the more unusual banks. It has a uniquely focused business model, with a high service offering aimed at wealthy clients concentrated in costal urban areas. The bank is still led by its founder, Jim Herbert, and has been able to churn out remarkably high organic growth year after year, resulting in compounded asset growth of roughly 20% over the past 10 years compared with an industry growth rate of closer to 5%.

The great strength of First Republic Bank’s approach is the strict adherence to its strategy of retaining and attracting high-net-worth clients through uniquely personal service. This strategy requires retaining talent, which the bank accomplishes through its culture and compensation structure. As such, the bank’s efficiency levels tend to be middling compared with peers. However, this model has worked, and the bank is able to generate substantially lower client attrition rates and higher client satisfaction levels as measured through Net Promoter Score. The bank is also a conservative underwriter, with losses consistently coming in below peers through the cycle.

Financial Strength:

The fair value of this stock is $195 per share, which equates to 2.9 times tangible book value as of September.

First Republic Bank is in sound financial health. The bank reported a common equity Tier 1 capital ratio of 9.8% as of September 2021 and given its low appetite for risk and excellent underwriting record. The bank has consistently delivered superior performance in past recessions with very low credit costs and has also performed admirably through the pandemic-driven downturn. The banks loan book is conservatively positioned with more than 50% of mortgages and approximately 80% of loans collateralized by real estate. The bank has a favorable liability mix with total deposits making up approximately 90% of total liabilities with the remainder of liabilities made up of FHLB advances and long-term debt. The bank also had roughly $2.1 billion in preferred stock outstanding. The capital-allocation plan for First Republic Bank is quite atypical in our banking coverage as it regularly raises additional capital through share issuances to fund its aggressive growth. The bank does not engage in share buybacks and maintains a relatively low dividend pay-out ratio.

Bulls Say:

  • First Republic is a rare, high-growth bank in a mature industry that tends to see GDP-like asset growth levels. The bank is also a conservative underwriter. This is a valuable and powerful combination that should drive peer-beating earnings growth for years. 
  • First Republic’s wealth management business is growing assets at a solid double-digit percentage rate, further cementing switching costs and revenue growth. 
  • First Republic’s culture and structure are difficult to replicate, meaning, its business model should continue to take share and see success for years to come.

Company Profile:

First Republic offers private banking and wealth management services to high-net-worth clients. Services are primarily offered in the San Francisco, New York City, and Los Angeles markets. The bank was founded in 1985.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Nordson Crop Is Poised to Deliver Strong Organic Growth Fueled by Advanced Technology Solutions

Business Strategy and Outlook

Nordson is a leading manufacturer of equipment used for dispensing adhesives, coatings, sealants, and other materials. The company enjoys strong market share across its business lines, and its products are often used in niche applications where competition is limited. Nordson differentiates itself by offering highly engineered and customizable solutions which perform a mission-critical role in a customer’s manufacturing process. Nordson thrives in times of change, as innovation in its end markets drives demand for new and improved solutions. In the long run, Nordson is poised to capitalize on favorable secular trends such as increasing adoption of 5G and autonomous vehicles, which we expect to create new opportunities for its dispensing business.

Financial Strength

Nordson’s financial health is satisfactory, which should help the firm navigate uncertainty due to the coronavirus outbreak. As of Oct. 31, 2021, the company owed $782 million in long-term debt while holding $300 million in cash and equivalents. Additionally, Nordson can tap into its $850 million revolving credit facility, which remains undrawn. It is estimated that Nordson will have a debt/adjusted EBITDA ratio of roughly 1.0 times in fiscal 2022, which is roughly in line with many of its industrial peers. Its generate that average annual cash flow of around $750 million over the next five years, sufficient to meet its debt obligations and maintain its dividend. After updating our model following Nordson’s 10-K release, its increase fair value estimate to $231 from $224. 

Bulls Say’s 

  • Nordson is poised to benefit from innovation in its end markets, including autonomous vehicles, 5G, and 3D wafer stacking, as new technologies drive demand for the firm’s dispensing solutions. 
  • Over half of Nordson’s revenue is recurring, which helps mitigate the firm’s exposure to cyclical end markets. 
  • Nordson has a large installed base of equipment and strong market share across a number of niche end markets.

Company Profile 

Nordson is a manufacturer of equipment (including pumps, valves, dispensers, applicators, filters, and pelletizers, among other equipment) used for dispensing adhesives, coatings, sealants, and other materials. The firm serves a diverse range of end markets including packaging, medical, electronics, and industrial. Nordson’s business is organized into two segments: industrial precision solutions (53% of sales in fiscal 2021) and advanced technology solutions (47% of sales in fiscal 2021). The company generated approximately $2.4 billion in revenue and $615 million in operating income in its fiscal 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.

Categories
Shares Technology Stocks

Gentex’s Balance Sheet Gives the Firm Strength to Handle the Unexpected

Business Strategy and Outlook

Gentex manufactures auto-dimming rear- and side-view mirrors that use electrochromic technology. These mirrors automatically darken to eliminate headlight glare for drivers and have many other applications. With over 1,700 patents worldwide, some valid through 2044, and a dominant 94% market share, up from 77% in 2003, Gentex has a narrow economic moat it should be able to protect for a long time, in our opinion. 

The growth prospects for auto-dimming mirrors look strong. Gentex estimates that in 2018, about 31% of all cars had interior auto-dimming mirrors, and about 13% had at least one exterior auto-dimming mirror. Demand remains healthy with annual revenue growth often exceeding industry vehicle production growth. Growth will come from increased vehicle penetration as more original-equipment manufacturers make the safety benefit of auto-dimming technology available and as Gentex’s research leads to new, advanced-feature mirrors that ultimately become standard products.

Financial Strength

Gentex is in excellent financial shape, with no debt and $270 million of cash on its balance sheet at the end of third-quarter 2021. Cash and investments were about 28% of total assets at that time. The company has ample cash on hand to fund more R&D or a higher dividend if the board chooses. Total cash and investments was $481.6 million, or $2.03 per diluted share. Gentex has been paying a dividend since 2003. Gentex took on $275 million of debt for the HomeLink acquisition which it finished paying off in 2018. In October 2018, Gentex obtained a new $150 million unsecured credit facility that expires in October 2023. 

Gentex can request an additional $100 million on the credit limit under certain conditions. The investments mostly consist of short-term government obligations, blue-chip stocks, and mutual funds. As of March 2018, the company targets cash and investments of $525 million, down from its previous target of $700 million. Management will often just speak in loose terms and say it targets around $500 million.

Bulls Say’s 

  • Auto-dimming technology has applications to other parts of the car like headlights, as well as outside autos such as airplane windows. Although small now, markets outside the auto industry could prove to be very large businesses down the road. 
  • The company’s financial health is so strong that we think Gentex can survive any downturn in the U.S. easier than other auto suppliers can. 
  • Biometrics, surgical room utlraviolet lighting, and electronic toll payments could open up new revenue streams for the company.

Company Profile 

Gentex was founded in 1974 to produce smoke-detection equipment. The company sold its first glare-control interior mirror in 1982 and its first model using electrochromic technology in 1987. Automotive revenue is about 98% of total revenue, and the company is constantly developing new applications for the technology to remain on top. Sales from 2020 totaled about $1.7 billion with 38.2 million mirrors shipped. The company is based in Zeeland, Michigan. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Penske Has a Long Growth Runway in a Variety of Businesses

Business Strategy and Outlook:

Penske Automotive Group receives 93% of its light-vehicle dealer revenue from import and luxury brands. This percentage is significantly higher than many dealers and helps mitigate the cyclical nature of auto sales; these brands have more-affluent customers who will not limit their discretionary spending during a downturn. Despite this wealthy customer, the firm’s operating margin tends to be on the lower end of the publicly traded dealers. The main reasons for this are that Penske gets less of its gross profit from higher-margin finance and insurance commissions than its peers, and selling, general, and administrative expenses (including rent expense) as a percentage of gross profit are higher than the other public dealers. Penske cannot get as much finance business–a 100% gross margin business–as its peers because more of its customers lease vehicles or pay cash. When excluding rent, Penske’s SG&A ratio is competitive.

Penske has moved into heavy-truck distribution in Australia and New Zealand, truck dealers in the U.S. and Canada, and 23 CarShop used-vehicle stores in the U.S. and U.K. with 40 targeted by 2023. Total company pretax income is targeted at $1 billion by then, up 41% from 2020.

Financial Strength:

EBIT covered interest expense 5.5 times in 2020, up from about 3 times during the Great Recession. At year-end 2020, Penske had notable debt maturities in 2023 ($128.4 million) and 2025 ($689.6 million). In 2020, it issued $550 million of 3.5% 2025 notes and on Oct. 1, 2020, fully redeemed the $550 million 5.75% 2022 notes, reducing annual interest by $17 million. The company issued $500 million of 3.75% 2029 senior subordinated notes in second-quarter 2021 to fully redeem the $500 million 5.50% 2026 notes. Total credit line availability at Sept. 30 was about $1.1 billion. Debt/EBITDA at year-end 2020 was 2.2 from 4.7 at year-end 2008 and was just 0.9 times at Sept. 30 due to debt reductions and turbocharged earnings. Management reduced debt by $670 million in 2020 and by over $900 million since the end of 2019.

Bulls Say:

  • Auto dealerships are stable, profitable businesses with a diversified stream of earnings coming from parts, service, and used cars. 
  • Parts and service revenue should continue to be lucrative over time because most manufacturers require warranty work to be done at the dealership, and large dealers can more easily afford the technology and training needed to service increasingly more complex vehicles. 
  • Penske is well suited to acquire dealerships because many small dealers do not want to keep paying expensive facility upgrades mandated by the automakers.

Company Profile:

Penske Automotive Group operates in 22 U.S. states and overseas. It has 144 U.S. light-vehicle stores including in Puerto Rico as well as 161 franchised dealerships overseas, primarily in the United Kingdom. The company is the second-largest U.S.-based dealership in terms of light-vehicle revenue and sells more than 35 brands, with 93% of retail automotive revenue coming from luxury and import names. Other services, in addition to new and used vehicles, are parts and repair and finance and insurance. The firm’s Premier Truck Group owns 37 truck dealerships selling mostly Freightliner and Western Star brands, and Penske owns 23 CarShop used-vehicle stores in the U.S. and U.K. The company is based in Michigan and was called United Auto Group before changing its name in 2007.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.