More Optimizing to Maximize the Value
publication date: Aug 13, 2018
author/source: Valuentum Analysts
We continue to help readers find some of our best ideas for consideration, and some of the companies in this article didn’t make the cut for our long-term perspective. We’re allocating resources elsewhere.
By The Valuentum Team
Verizon has completed its acquisition of Yahoo's operating assets, leaving behind an investment company now named Altaba.
In June 2017, Yahoo sold its operating business to Verizon for ~$4.5 billion, leaving behind a publicly traded investment company that was renamed Altaba. Since the company's assets are primarily equity investments, short-term debt investments, and cash, it was required to register as an investment company.
The deal with Verizon did not include Yahoo's stakes in Alibaba and Yahoo Japan, its primary investments, or its cash. Investors can find our thoughts on Alibaba's valuation and outlook in its 16-page report.
A massive portion of Altaba's intrinsic value comes from its ~15% stake in Chinese e-commerce giant Alibaba, which Altaba reported had a fair value of more than $54 billion as of the end of the second quarter of 2017. It's next largest investment is in Yahoo Japan, which was reported as having a fair value of over $8.8 billion as of the end of the second quarter of 2017.
In addition to its more than $75 billion in affiliated investments at fair value as of the third quarter of 2017, which includes positions in Gomanji Corp and Hortonworks in addition to its Alibaba and Yahoo Japan investments, Altaba holds another ~$8.1 billion in unaffiliated investments
Altaba's unaffiliated investments consist of money market funds, corporate debt, commercial paper, agency bonds, sovereign government debt, in addition to a number of call options. The majority of its fixed-income securities are of the short-term variety
Our published fair value estimate range for Altaba’s is $51-$77 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Neutral.
Addus HomeCare (ADUS)
Addus HomeCare has a pretty impressive long-term opportunity as it serves a high utilization and high risk population.
Addus' services include personal care and assistance with activities of daily living, and adult day care. Its consumers are individuals with special needs who are at risk of hospitalization such as the elderly, chronically ill and disabled. The company was founded in 1979 and is based in Illinois.
Addus serves a high utilization and high risk population, or the 5% of the population that consume 50% of healthcare dollars. This segment of the population is now living longer than ever before, meaning they need care for longer.
Addus has a pretty impressive long-term opportunity. Medicaid expenditures for home and community based services are over $45 billion annually, and the segment represents the fastest growing within the homecare market. The US population of persons aged 65 and older is expected to double by 2050.
It is important for investors to note that the firm's revenue is tied to Medicaid funded and waiver programs. In 2016, for example, just over 70% of its net service revenues from continuing operations were derived from agreements paid for by state and local government agencies. More than half of revenue is generated in the fiscally-troubled state of Illinois.
Barriers to entry in the home and community based services industry are limited, with over 33,000 homecare and hospice agencies in the US alone. Heightened competition could pressure performance.
Our published fair value estimate range for Addus HomeCare’s is $23-$38 per share, with a Valuentum Buying Index rating of 7 and an Economic Castle rating of Attractive.
Almost Family (AFAM)
Almost Family has agreed to a merger of equals with LHC Group. Our new fair value estimate approximates the deal price in which shareholders will receive 0.9150 LHC Group shares per share of Almost Family owned.
Almost Family is a leading provider of home health nursing, rehabilitation and personal care services. Its goal is to promote independence, allowing seniors to age in place for as long as possible. The company has ~330 branches in 26 states. It was founded in 1976 and is based in Louisville, Kentucky.
The home healthcare industry is evolving from post-hospital stay to serve a broader category of patients. One of the company's goals is to improve 'pre-acute' care to avoid unnecessary hospitalizations for patients. Hospital inpatient stays are down ~4% over the past 5 years.
Almost Family has agreed to a merger of equals with LHC Group. Shareholders will receive 0.9150 shares of LHC Group for each Almost Family share owned. The combined company will be a leader in in-home healthcare and should experience a higher growth rate than the standalone entities. The deal is expected to close in the first half of 2018 and is expected to bring pre-tax annual cost synergies of $25 million.
Almost Family is focused on bending the cost curve for post-acute service. Home health care is about one-tenth the cost per day of similar care in a hospital. This will also significantly lower costs to Medicare programs and will help prevent mild aggravations from turning into serious situations.
The visiting nurse industry is highly competitive and fragmented. Competitors include larger publicly held companies such as Amedisys, Gentiva Health Services, and LHC Group, and numerous privately-held multi-site home care companies.
Our published fair value estimate range for Almost Family’s is $44-$80 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Amedisys' scale is an important consideration in the highly fragmented home healthcare and hospice space.
Amedisys is a leading home health and hospice care company focused on bringing home the continuum of care. The firm delivers personalized home health and hospice care to thousands of patients and their families, in the comfort of their own homes. Amedisys was founded in 1982 and is headquartered in Baton Rouge, Louisiana.
Amedisys has a number of positive long-term trends backing expansion opportunities, including compelling demographics, patient preference for at home treatments, low cost of care delivery, and increased payor and hospital focus on cost.
Recent acquisition agreements have made (will make) Amedisys one of only two publicly-traded, pureplay home health and hospice companies with meaningful scale. The group remains highly fragmented, and the combined market share of the top five operators is less than 20%. Amedisys expects organic and inorganic growth in all three of its business lines in 2018.
The Centers for Medicare & Medicaid Services updated its proposed policies for 2018, which included a 0.4% decrease in payments to home health agencies. This brings the potential for lower than previously expected top- and bottom-line growth, and regulatory and other uncertainties continue to run rampant in the health-care space.
Approximately 65% of Amedisys' revenue is generated from its Home-Health - Medicare segment. The firm is expecting home health expenditures to grow at a 4.4% CAGR through 2021, while Hospice expenditures are expected to advance at a 5.2% CAGR
Our published fair value estimate range for Amedisys’ is $39-$59 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Very Attractive.
Arena Pharma (ARNA)
Arena recently announced positive results from a Phase 2 clinical trial assessing etrasimod (a treatment for ulcerative colitis). We've raised our fair value estimate, but a degree of uncertainty still surrounds the drug.
Arena is a biopharmaceutical company that is losing money hand over fist. We demand a very large margin of safety before we would ever consider investing in this speculative biotech company. Though we recognize valuation upside potential exists, significant downside risk remains. Investing in Arena is like buying a lotto ticket.
The FDA's approval of anti-obesity drug BELVIQ was a significant milestone for the company, but the firm recently amended its marketing and supply agreement with Eisai, giving Eisai global commercialization rights. Arena will continue to manufacture BELVIQ and will receive royalties.
Arena announced positive results from a Phase 2 clinical trial for etrasimod (treatment for ulcerative colitis). Ralinepag, a new novel treatment for Pulmonary Arterial Hypertension could disrupt the market if Phase 2 results can be duplicated in a larger population. We've hiked our fair value estimate, but investors should note the size of our fair value range.
BELVIQ's pricing appears to be capped, and Arena's agreement with Eisai resulted in a material drop in sales as the firm focuses on its clinical-stage pipeline. Look for the company to tap the equity and debt markets for new capital as it continues to lose money hand over fist.
Our published fair value estimate range for Arena Pharma’s is $5-$37 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Unattractive.
Occupancy rates in Belmond's North America and Europe segments significantly outpace that of its Rest of World segment.
Belmond, formerly called Orient-Express, is a luxury hotel company with exposure to both mature and emerging national economies. It has properties in Italy, Spain, Portugal, UK, Russia, and across North America, South America, Africa, and Asia. The company was founded in 1971 and is based in Bermuda.
The company launched its new singular brand, Belmond, to connect its destinations, offering a strategic opportunity to expand its presence in the luxury hotel market. The brand architecture balances the new name with established icons.
Belmond offers unique luxury travel experiences at Mount Nelson Hotel (Cape Town), Hotel Splendido (Portofino), Royal Scotsman (Edinburgh), Copacabana Palace (Rio de Janerio), El Encanto (Santa Barbara), and Orcaella (Chindwin River). We think the Belmond brand will increase awareness for existing guests and stimulate cross-visitation and repeat business.
Reducing net debt has been a key priority for Belmond during the past few years. More reasonable leverage will enable the firm to access the corporate debt markets on more favorable terms. The company has simplified its capital structure and extended maturities, but we still don't like its debt load.
Occupancy rates at Belmond have risen above 60% in recent quarters. Though this rate has steadily improved from 50% in 2009, it is still below the pre-recession peak of 64% in 2007. Occupancy rates in its North America and Europe segments significantly outpace that of its Rest of World segment.
Our published fair value estimate range for WABCO’s is $5-$15 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Unattractive.
We like the growth prospects within Chemed's higher-margin Roto-Rooter business, but the long-term prospects of its Vitas segment will be impacted by government reimbursement structure.
Chemed conducts its business operations in two segments: Vitas Healthcare provides hospice and palliative care services, while Roto-Rooter is the largest provider of plumbing and drain cleaning services in North America. The company was founded in 1970 and is headquartered in Cincinnati, Ohio.
Competition is fierce. Hospice services are largely undifferentiated, while all aspects of the sewer, drain, and pipe cleaning and plumbing repair businesses are highly competitive. The company is no slouch, however, and performance has held up quite well.
Chemed's stronger segment, in our view, is its RotoRooter operations. For example, in the first three quarters of 2017, revenue advanced more than 14% in the segment, and its adjusted EBITDA margin in the division typically comes in at 20%+. Chemed continues to buyout franchises in the segment, which holds ~15% share in the drain cleaning market and 2%- 3% of the same-day service plumbing market.
Its Vitas segment isn't growing as fast as its plumbing and drain-cleaning operations, nor is it as profitable. The segment is the largest provider of hospice services with severe, life-limiting illnesses with ~7% market share in the US, but investors should be aware of the impact government reimbursement structure will have on its long-term prospects.
Roto-Rooter's growth strategy is largely based on acquisition. Its ideal franchisee has $175-$200 in street sales with minimal capital expenditures and can be purchased for 4-5 times EBITDA. We like the focus on earnings and cash flow.
Our published fair value estimate range for Chemed’s is $127-$191 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Very Attractive.
Choice Hotels (CHH)
Choice Hotels' return on invested capital is worth noting, and the company garners an attractive Economic Castle rating.
Choice is one of the largest hotel franchisors in the world. It franchises lodging properties under the following brands: Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, and Econo Lodge, among others. The Clarion Inn in Pigeon Forge, TN, may be its most popular, frequently winning the firm's Hotel of the Year award.
Choice Hotels has a strong, growing, global hotel franchising operation, with ~10% share of branded US hotels. During the past 5 years, it has gained 30 basis points in branded hotel market share in the US, and we think this upward trend will continue in coming years.
Choice acquired WoodSprings Suites for $231 million in February 2018. WoodSprings' asset-light operations fit nicely with Choice's portfolio and the deal expands the firm's extended stay portfolio. WoodSprings also has a solid pipeline of development that should help boost EBITDA growth and a strong partnership with Brookfield Asset Management, one of the world's largest real estate owners.
Choice Hotels' return on invested capital is worth noting, and the company garners an attractive Economic Castle rating. Its capital 'light' franchising model helps to facilitate such strong returns. Virtually 100% of its properties are franchised. The company also benefits from strong and growing brand awareness.
The firm's focus in coming years will be to increase portfolio profitability of the Comfort brand family, refresh Sleep Inn to improve long-term brand growth potential, and invest in emerging brands--Cambria, Ascend, and International.
Our published fair value estimate range for Choice Hotels’ is $44-$73 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Choice Hotels' dividend has room for growth, and it issued a special $10 per-share dividend in 2012.
With hotel brand names such as Comfort Inn, Quality, and Sleep Inn, Choice Hotels operates in a cyclical industry where success is mainly determined by revenue per available room (RevPAR). Occupancy rates and RevPAR set highs for this millennium in 2016, but as we approach what we believe to be the peak of our current economic recovery cycle we are skeptical if the industry can maintain such performance. Choice's strong free cash flow generation--it has consistently generated more than $100 million in free cash flow--enabled it to pay a special dividend in 2012 of $10.41 per share. The recent increase in its payout may be a sign of things to come, but the potential for a special dividend makes forecasting future dividend growth difficult.
The most concerning aspect of Choice Hotels' dividend prospects lies on its balance sheet. The firm continues to allocate its capital toward repurchasing stock, despite having a material debt load and an immaterial dividend yield. Also, the financial leverage (~$600 million), taken on to pay the special dividend in 2012, has increased interest expenses by ~$15 million annually and has done nothing but hurt the company’s balance sheet health. Investors must also be cognizant of the negative effect that an economic downturn may have on Choice's financial performance and its dividend. Though Choice has a reasonable Dividend Cushion ratio, there are better dividend options operating in less cyclical environments with stronger balance sheets.
Our published Dividend Cushion ratio for Orchids Paper is 1.9 with a Dividend Track Record of Healthy.
Dorman's 'New to the Aftermarket' strategy is bearing fruit, and further market expansion opportunity exists in medium and heavy duty aftermarket sales.
Dorman is a supplier of automotive and heavy duty truck replacement parts and fasteners and service line products primarily for the automotive aftermarket. The firm markets ~155,000 different stock keeping units (SKU). Chairman and CEO Steven Berman owns ~13% of the firm. Dorman was founded in 1978 and is headquartered in Pennsylvania.
The company's ~155k-SKU product portfolio focuses on 'niche' offerings. Parts for auto body, powertrain, chassis, and hardware account for ~30%, ~35%, ~25%, and ~10% of the portfolio, respectively. It prides itself as the dominant aftermarket supplier of formerly 'dealer only' parts.
Dorman is riding some very strong demand tailwinds. The company's long-term goals of low double-digit sales and earnings growth are admirable, and it will continue to target opportunistic acquisitions. The firm's 'New to the Aftermarket' strategy is bearing fruit, and further market expansion opportunity exists in medium and heavy duty aftermarket sales.
A significant percentage of the firm's sales is concentrated among a relatively small number of customers. AutoZone, Advance Auto Parts, O’Reilly Auto Parts and Genuine Parts, in aggregate, account for about 60% of sales. Investors should pay close attention to the performance of these auto retailers.
Competition within the automotive aftermarket parts business is intense. Dorman competes with OEMs and with companies that supply parts only to the automotive aftermarket. This has always been the case.
Our published fair value estimate range for Dorman’s is $40-$66 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Endo Pharma (ENDP)
Endo Pharma is anticipating multiple headwinds in its US businesses in the near term. We've lowered our fair value estimate after reducing top-line growth expectations and near-term profitability projections.
Endo is a specialty healthcare solutions company focused on branded and generic pharmaceuticals, devices and services. Its branded pharmaceuticals include Lidoderm, Opana ER, Voltaren Gel, Percocet, Frova, and Vantas. As with many of its peers, Endo has been very acquisitive as of late. The company was founded in 1920 and is headquartered in Dublin, Ireland.
There are a considerable number of moving parts in Endo's valuation given its recent M&A activity. The firm launched ~20 generic products in 2017, which should help its top-line eventually, but fourth quarter 2017 US generic sales fell 43% on a year-over-year basis.
Endo is anticipating its US Generic Pharmaceuticals business to experience new competition in key product markets that previously had no or limited competition, and is US Branded business is expected to face revenue pressure as a result of ongoing pressure on its established products. Management expects revenue to fall to $2.6-$2.8 billion in 2018 from ~$3.5 billion in 2017.
Top line pressure in 2018 is expected to help cause declines in adjusted EBITDA and adjusted diluted EPS as well. Adjusted EBITDA is projected to be $1.2-$1.3 billion in 2018, down from nearly $1.6 billion in 2017, and its adjusted diluted EPS guidance range of $2.15-$2.55 is significantly lower than $3.84 in 2017.
Endo's strategy includes a shift from integrated health solutions to maximizing value for each of its core businesses. It is looking to participate in specialty areas offering favorable growth and margins. We wouldn't be surprised to see the firm continue its acquisition binge.
Our published fair value estimate range for Endo Pharma’s is $5-$15 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Though Hyatt has world-class brands, demand for rooms remains highly cyclical. More than 70% of its rooms are in the US.
Hyatt is a global hospitality company that has a worldwide portfolio of more than 700 properties. The company's subsidiaries manage, franchise, own and develop hotels and resorts under the Hyatt, Park Hyatt, Andaz, Grand Hyatt, Hyatt Regency, Hyatt Place, Hyatt House, Hyatt Zilara, and Hyatt Ziva brand names.
Hyatt manages ~50% of its total room mix and franchises ~20%. The remainder is generally owned and leased. Roughly 50% of its rooms are in the upper-upscale segment, with Hyatt Regency accounting for the majority. ADRs can range from $363 at the Park Hyatt to $126 at the Hyatt Place.
Hyatt owns hotels in key gateway cities, including the Grand Hyatt in New York, the Hyatt Regency Orlando, Grand Hyatt Seoul, Park Hyatt Paris-Verdome, Hyatt Regency Mexico City and Grand Hyatt San Francisco, among others. Its portfolio as measured in total rooms has growth more than 50% since 2008, and management points to a diverse pipeline as a driver for its growth expectations.
The company is one of the highest-rated credits among lodging peers, boasting investment-grade status and limited near-term debt maturities. It has ~$1.5 billion of borrowing capacity under a revolving credit facility and plans to maintain its investment grade credit rating through the cycle.
Though it has world-class brands, demand for rooms remains highly cyclical. More than 70% of the firm's rooms are (and more than 75% of total revenue is generated) in the US, indicating some geographic concentration relative to more globally-diverse peers.
Our published fair value estimate range for Hyatt’s is $38-$63 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Unattractive.
InterContinental's strong brand portfolio and loyalty program are noteworthy, and it expects to gain share alongside other international branded hotel operators in coming years.
IHG operates a number of hotel brands including InterContinental Hotels & Resorts, Hotel Indigo, Crowne Plaza Hotels & Resorts, Holiday Inn Hotels and Resorts, Holiday Inn Express, Staybridge Suites, and Candlewood Suites. It has hotels in ~100 countries and territories around the world.
The company's strong brand portfolio and loyalty program are noteworthy, and its channel management strategy is aimed at delivering the highest quality revenue to IHG hotels at the lowest possible cost. The firm's strategy is led by multilingual websites and mobile apps, call centers, and a global sales force.
Long-term macroeconomic trends such as global GDP growth, increasing disposable income, a greater number of middle-class households, and a greater propensity to travel bode well for the long-term growth of the global hotel industry. Branded hotels such as those in IHG's portfolio have shown increased resilience through economic cycles.
The branded hotel market makes up ~70% of the total US hotel market, but in developing markets such as India and China, this number is closer to 50%, offering the opportunity for increased penetration. International branded hotels are expected to increase market share in coming years, and IHG expects to capture some of this growth.
IHG expects more than 95% of its profit to be fee-based following the disposal of InterContinental Hong Kong, making it more resilient in the event of a downturn. However, it is still able to take advantage of hotel industry upside thanks to ~85% of fees being linked to hotel revenues.
Our published fair value estimate range for InterContinental’s is $33-$57 per share, with a Valuentum Buying Index rating of 1 and an Economic Castle rating of Very Attractive.
Ironwood Pharma (IRWD)
There's not much informative value in looking at Ironwood's current financials, and its success will be tied to the performance of Linzess in the near term.
Ironwood is a gastrointestinal pharmaceutical company that has three marketed products. The first, linaclotide, available in the US under the trademarked name Linzess. The therapy was also recently approved in the EU under the trademarked name Constella. The product is a treatment option for irritable bowel syndrome (IBS) and chronic idiopathic constipation (CIC).
There's not much informative value in looking at Ironwood's current financials. The company's success will be tied to the performance of Linzess in the near term, and it expects the drug to hit more than $1 billion in annual sales by 2020 with a 70%+ commercial margin.
Ironwood's strategy is to establish itself as a leading gastrointestinal therapeutics company, leveraging its development capabilities in addressing GI disorders as well as its pharmacologic expertise in guanylate cyclase, or GC, pathways. Though the firm has a robust pipeline of GI therapeutics, it remains a highly speculative entity.
Ironwood announced in October 2016 its gout drug Zurampic is now available in the US. The firm estimates its peak sales opportunity as $300+ million. It launched a second gout treatment, Duzallo, in the fourth quarter of 2017. The drugs figure to play a part in management's expectations of positive cash flow generation in 2018.
The IBS and CIC marketplace is not completely devoid of competition. The availability of prescription competitors and OTC products for GI conditions could limit the demand and price of Linzess. Given the rapid pace of new therapy developments, obsolescence risk is real.
Our published fair value estimate range for Ironwood Pharma’s is $7-$21 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Unattractive.
Kindred Healthcare (KND)
Kindred Healthcare has agreed to be acquired by a consortium that includes Humana and private equity firms for ~$4.1 billion in cash, or $9 per share.
Kindred Healthcare is the largest diversified provider of post-acute care services in the US. The company is not immune to sequestration cuts related to Medicare revenues, as it generates more than half of its revenue from the program. Hospitals account for the majority of its business-mix sales. The company is headquartered in Louisville, Kentucky.
Kindred Healthcare lists home health and hospice as its two of its key growth platforms. It expects Medicare home health spending to grow at a 7.3% CAGR through 2025, while the hospice industry advances at a 7.5% CAGR.
Kindred Healthcare has agreed to be acquired by a consortium that includes Humana and private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe for ~$4.1 billion in cash, or $9 per share. Humana will hold a 40% stake and have the option to acquire the remaining stake over time. Kindred's LTAC hospitals, in-patient rehab facilities and rehab services businesses will be owned by the PE firms.
Kindred is meeting the growing demand for care in an aging US. The number of Americans age 65 or older is expected to grow from 40 million in 2010 to 72 million in 2030, and the number of people age 85 and older is expected to triple by 2050. Opportunity exists in the need for solutions to improve the health status of Medicare beneficiaries at lower costs.
The Centers for Medicare and Medicaid Services recently released its proposed payments for 2018, which included a drop of 0.4% in payments to home health agencies. Roughly 80% of Kindred's 2015 revenue was tied to Medicare or Medicaid.
Our published fair value estimate range for Kindred Healthcare’s is $5-$13 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Attractive.
LHC Group (LHCG)
LHC Group has agreed to a merger of equals with Almost Family. The companies share an emphasis on localized care and the delivering of patient-centered home healthcare. National reach and scale will be key advantages.
LHC Group provides post-acute health care services to patients through its home nursing agencies, hospices and long-term acute care hospitals. The company operates more than 350 home-based service locations across 25 states. It was founded in 1994 and is based in Lafayette, Louisiana.
LHC Group continues to grow organically and through tuck-in acquisitions in its existing markets. Hospital joint venture projects in new markets are expected to position the firm for growth through consolidation in the future. Disciplined execution will be necessary, but we like the strategy.
LHC Group has agreed to a merger of equals with Almost Family. The deal will result in the only national home health, hospice, and personal care provider with a significant track record of partnering with hospitals and health systems. LHC shareholders will own 58.5% of the entity at closing (expected first half 2018), and it has identified $25 million in run rate cost synergies in addition to other revenue synergies.
LHC Group's positive near-term outlook is backed by the growth opportunities related to the shift to a value-based payment model from its traditional fee-for-service models. This transformation will shift financial risk to the payer and healthcare provider from existing and potential partners, making its services incrementally attractive to those partners.
There are few barriers to entry in some of the home health services markets in which the company operates. As the firm expands, it will continue to encounter larger public entities, but right now, things are going great. 80% of its agencies are in 'certificate of need' states, limiting new market entrants.
Our published fair value estimate range for LHC Group’s is $47-$71 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Attractive.
Dr. Reddy’s (RDY)
Dr. Reddy's is working to build a $400 million biologics business by fiscal 2022 via a lower-risk innovation model.
Dr. Reddy's is one of the largest Indian pharma companies, with an integrated business model spanning three segments: generics, pharma ingredients, and proprietary products. Its 'Global Generics' division accounts for ~80% of sales, with ~50% of sales coming from North America. The company was founded in 1984 and is headquartered in India.
Dr. Reddy's is working to build a $400 million biologics business by fiscal 2022 via a lower-risk innovation model. The business is broken down into two divisions: Dermatology Specialty and Neurology Specialty; and it has grown revenue at a ~30% CAGR over the past decade.
The basis of Dr. Reddy's long-term confidence is its pipeline of first-to-market, tough-to-make products. The company is on track for 20-25 new filings in North America in fiscal 2018. Its product portfolio is based on complex characterization and analytical chemistry, novel regulatory pathways, large and complex clinical studies, and a high technology barrier in development and manufacturing.
The firm expects growth in its North American generic business to be driven by key launches in areas without a lot of competition. It plans to continue improving its go-to-market model, in part by building scale in the branded over-the-counter space. However, pricing erosion has begun to eat away at its top-line in the region.
Its 'Pharmaceutical Services and Active Ingredients' division, which accounts for ~15% of revenue, continues to face pressure. Lower demand for key customers and a lesser number of new product launches have been weighing on performance.
Our published fair value estimate range for Dr. Reddy’s is $32-$48 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Very Attractive.
Standard Motor (SMP)
Standard Motor expects the light vehicle aftermarket market to continues its slow and steady growth rate of ~2%-3% per year through 2025.
Standard Motor is a top independent manufacturer of replacement parts for the automotive aftermarket industry. The company is heavily tied to the operations of a few key customers: CARQUEST, NAPA, Advance Auto, Autozone, and O'Reilly. Standard Motor was founded in 1919.
The company is organized into two major operating segments. Its 'Engine Management' segment makes ignition and emission parts, among other items for vehicle systems. Its 'Temperature Control' segment makes and remanufacturers air conditioning compressors and air conditioning and heating parts.
Standard Motor generates roughly 90% of its sales in aftermarket products, and its two major product lines, Engine Management and Temperature Control account for approximately 70% and 30% of its business, respectively. The firm will continue to pursue new and innovative products and strategic acquisitions. Its sales can be impacted by weather, and seasonal factors should not be ignored.
Standard Motor continues to shift production to low cost countries and reduce its debt with strong cash-flow generation. The aging fleet of vehicles and the closing of car dealerships are positives for the demand of its aftermarket parts. Vehicles are staying on the road longer.
Standard Motor expects the light vehicle aftermarket market to continues its slow and steady growth rate of ~2%-3% per year through 2025. The 'do-it-for-me' market is expected to be the driver of this growth as the DIY market is expected to remain roughly flat.
Our published fair value estimate range for Standard Motor’s is $32-$54 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Bio-Techne is working towards long-term financial goals that include revenue of $1+ billion and adjusted operating income of $400+ million in 2022 on adjusted operating margins of 40%+.
Bio-Techne is engaged in the development, manufacturing and sale of biotechnology products and clinical diagnostic controls. Net sales from the company’s biotechnology segment, which includes sales made through its Life Sciences and Diagnostics brands, are roughly two-thirds of consolidated net sales. The company was founded in 1976 and is headquartered in Minneapolis, Minnesota.
The company is one of the world’s leading suppliers of specialized proteins, such as cytokines and related reagents, to the biotechnology research community. Cytokines are of great interest because of the profound effect that a tiny amount of a cytokine can have on cells and tissues.
Investors should expect the firm to be acquisitive. It most recently acquired genomic analysis consumable maker Advanced Cell Diagnostics in mid-2016. Its goal of $100 million in sales in China may face pressure as concerns over economic growth rise, but organic revenue from the country has advanced at a double-digit annual clip in recent quarters.
Bio-Techne isn't growing at quite the breakneck pace as some other firms in its industry, but double digit revenue growth isn't uncommon. Management continues to implement its plan of moving to core organic growth into the mid-single digit range.
Bio-Techne is working towards long-term financial goals that include revenue of $1+ billion and adjusted operating income of $400+ million in 2022 on adjusted operating margins of 40%+. Protein Platforms and ACD revenue growth are expected to lead the charge at ~15%-20% and ~35%-40% CAGRs, respectively.
Our published fair value estimate range for Bio-Techne’s is $72-$149 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Attractive.
Bio-Techne's Dividend Cushion ratio is fantastic.
Bio-Techne's addressable market sits above $10 billion and is expected to grow at a 4%-10% CAGR moving forward, providing it with ample growth opportunities. We like its high-margin 'Biotechnology' segment (operating margins in the low 50% range), which accounts for roughly two-thirds of sales. The highly profitable segment makes its goals of achieving a 40%+ company-wide operating margin by fiscal 2022 realistic. The firm's annual free cash flow generation (averaged ~$125 million from fiscal 2015-2017) covering its annual run-rate cash dividend obligations of ~$47 million drives its Dividend Cushion ratio. Its debt load is worth watching as its long-term debt leapt to ~$344 million at the end of fiscal 2017 from less than $92 million a year earlier.
One of the largest risks to Bio-Techne's dividend and the health of its operations overall is the competitive nature of its rapidly evolving operating environment. The firm must continually innovate and anticipate industry trends in order to develop products in advance of consumer needs. Because of this need for innovative growth, investors can expect the company to continue to be acquisitive. Future acquisitions have the potential to impact the pace of dividend expansion at the firm as capital that could be returned to shareholders via dividends is allocated to product portfolio expanding acquisitions. All things considered, however, we're expecting continued modest increases in Bio-Techne's annual payout.
Our published Dividend Cushion ratio for Bio-Techne’s is 3.5 with a Dividend Track Record of Healthy.
Orchids Paper (TIS)
Orchids Paper's vision is to be recognized as a 100% retailer-focused, national supplier of high-quality consumer tissue products in the value, mid/premium and ultra-premium tier markets.
Orchids Paper produces rolls of bulk tissue paper and converts them into finished products such as paper towels, bathroom tissue and paper napkins. Its core customer base consists of dollar stores and other discount retailers, which continue to grow in number. Investors should be aware that Dollar General (~36%) and Family Dollar (~14%) account for half of total sales -- a key risk.
Orchids Paper's vision is to be recognized as a 100% retailer-focused, national supplier of high-quality consumer tissue products in the value, mid/premium and ultra-premium tier markets. Paper towels and bathroom tissue are its two biggest sources of revenue.
Orchids Paper recently announced the start of operations at an integrated manufacturing site in South Carolina. The project became operational in June 2017 and has significantly increased capacity but also added the capability to add value via the production of ultra-premium grades of tissue products. Long-term goals include $2.50-$3.40 in annual firm-wide earnings per share.
Orchids Paper expects to benefit from the start-up of its Barnwell plant in the second quarter of 2017. However, competitive pressures such as promotional activity by branded competitors have materially impacted recent results. Even Orchids is not immune to the price sensitive nature of retail. Our fair value estimate has been reduced as a result.
Orchids Paper's dividend yield is attractive, but we aren't as enthusiastic as we once were about its growth prospects. The recent build in its capital expenditures has significantly eaten into dividend-supporting free cash flows, but materially lower capex should be expected moving forward .
Our published fair value estimate range for Orchids Paper’s is $12-$18 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Unattractive.
Orchids Paper's Dividend Cushion ratio is not what it once was. A sizeable debt load weighs on the measure.
Orchids Paper's elevated yield is more a function of a recent collapse in its share price rather than fundamental strength or dividend safety. However, its portfolio of paper products, including paper towels, bathroom tissue, and paper napkins offers relatively stable demand, and the coming start-up of its new manufacturing facility in South Carolina is expected to add material value-add production capacity. Though free cash flow generation has been poor in recent years as a result of the significant capital spending build related to its new facility (it was negative each year from 2014-2016), we expect this to improve in the years following the completion of the project. Orchids Paper's dividend does not appear to be as safe as it once was.
Orchids Paper's Dividend Cushion ratio is not what it once was, thanks to a significant capital expenditures build related to its new facility in South Carolina and additional debt taken on to complete the project. Significant customer concentration risk exists for the firm as Dollar General accounts for ~36% of net sales, and Family Dollar accounts for another 14% of net sales. Volatile raw material (fibers) and energy prices can impact results as well, and free cash flow being starkly negative from 2014-2016 has hurt its financial health. While we expect free cash flow generation to improve in coming years, at least on the basis of normalized capital spending levels, but it may take some time before the company's dividend is back on solid ground.
Our published Dividend Cushion ratio for Orchids Paper is -2.3 with a Dividend Track Record of Healthy.
Travelzoo competes for advertising dollars with large Internet portal sites that offer travel listings, an intense competitive environment.
Travelzoo is a global Internet media company. The firm informs over 28 million subscribers in North America, Europe and Asia Pacific, as well as millions of website users, about the best travel, entertainment and local deals available from thousands of companies. The company was founded in 1998 and is headquartered in New York, New York.
Competition is fierce. Travelzoo competes for advertising dollars with large Internet portal sites that offer travel listings. The firm no longer competes with search engines like Google and Bing that offer pay-per-click listings after shutting its search business in April 2017.
There are several factors that will continue to cause businesses to increase their spending on Internet and mobile advertising: the Internet is consumers' preferred information source, there are benefits from Internet advertising versus print and TV, and mobile devices are quickly becoming the world's newest gateway for information.
Travelzoo recently acquired the 'Travelzoo Asia Pacific Business,' which had operated independently under the Travelzoo brand. The business operates in China, Japan, Hong Kong, Taiwan, Australia, and Southeast Asia. The deal provides opportunities arising from the fast-growing number of outbound Chinese travelers.
Travelzoo's growth strategy is built on two pillars. Together with its Asia Pacific business, the firm continues to grow its audience. It is also looking to drive higher revenue per member through product enhancements.
Our published fair value estimate range for Travelzoo’s is $6-$12 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Highest Rated.
WABCO's roadmap for fuel efficiency will help drive demand for its products moving forward.
WABCO is a top supplier of safety (braking) products and efficiency systems for commercial vehicles. Though it prides itself on innovation, the operating leverage in its business model can cause uncomfortable swings in profitability. It was founded in 1869 and is headquartered in Brussels, Belgium.
Today, WABCO's vision for the vehicle safety industry is focused on collision mitigation and avoidance and driver behavior monitoring. In 2020, it expects it to be targeting accident prevention and active steering, and in 2025 it anticipates striving toward achieving autonomous driving capabilities.
WABCO believes it is effectively differentiated in that it globalized its business ahead of the curve, resulting in it being #1 in all emerging markets. It continues to focus on positioning its resources in the best cost countries and the geographic diversity of its revenue has improved nicely of late. Management continuously targets cash flow conversion in the range of 80%-90%.
Global aftermarket sales continue to be a key driver at WABCO. Aftermarket sales growth has been strong in recent years across the globe, with the exception of Brazil, whose economy has not supported demand. Price erosion and raw material input costs are worth watching as they relate to margin performance.
WABCO's roadmap for fuel efficiency will help drive demand for its products moving forward. However, initiatives such as weight reduction, fuel efficiency, and energy recovery are not unique to the firm, and as demand grows, so too will competition.
Our published fair value estimate range for WABCO’s is $90-$150 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Wyndham plans to split into two companies: a pure-play hotel company and the world's largest publicly traded timeshare company, which will be joined with the world's largest timeshare exchange company.
Wyndham is one of the world's largest hospitality companies. Its brands include Wyndham Hotels, Tryp by Wyndham, Ramada, Days Inn, Super 8, and Howard Johnson. The company is the #1 timeshare developer, which accounts for ~50% of its EBITDA. It has approximately 7,700 franchised hotels and nearly 700k hotel rooms.
More than 60% of its revenues are fee-for-service businesses (e.g. hotel franchising fees, vacation exchange fees, vacation rentals). This portion of its revenue has low capital intensity and is generally more stable.
Wyndham is one of the more reasonably priced hotel equities on the market. Its peers are trading at much loftier multiples, despite Wyndham's impressive earnings-per-share growth rate during the past five years. The company also has a very nice free cash flow yield relative to peers. It expects revenues of $5.26-$5.4 billion in 2018 and adjusted EPS of $6.90-$7.05.
Wyndham plans to split into two independent, publicly traded companies. Wyndham Hotel Group will be a pure-play hotel company, while Wyndham Vacation Ownership will be the world's largest publicly traded timeshare company, which will be joined with Wyndham Destination Network, home to the world's largest timeshare exchange company.
Wyndham's business separation is expected to be completed in the first half of 2018. Increased fit and focus for the two entities are key benefits, and the companies will enter into long-term license agreements to keep affiliation with the Wyndham Rewards program.
Our published fair value estimate range for Wyndham’s is $82-$124 per share, with a Valuentum Buying Index rating of 4 and an Economic Castle rating of Attractive.
Wyndham's dividend metrics could be better, and its debt load should not be ignored.
Wyndham is the world’s largest hotel company based on number of properties with more than 7,700 franchised hotels. Wyndham is also the #1 time share developer and makes more than twice the amount of revenue from its time shares than it does from its hotels. The company’s annual dividend has grown substantially from $0.60 per share in fiscal 2011 to $2.32 per share in fiscal 2017. Wyndham keeps no cash on its balance sheet other than for liquidity needs. Dividend increases generated from excess cash are expected to occur at least at the rate of earnings growth, and the company also has a very nice free cash flow yield relative to peers. If the company remains consistent, an increase in the dividend should follow.
At first glance, income investors may be worried by Wyndham’s long-term debt load of more than $6.0 billion, which is a key driver in the company’s poor Dividend Cushion ratio, but disciplined capital allocation has allowed Wyndham to increase its dividend substantially in recent years. The company keeps a meager cash balance for basic liquidity needs, enabling it to increase its dividend concurrently with earnings per share, which in the past 5 years has grown at a strong double-digit compound annual growth rate. Foreign exchange headwinds continue to conceal Wyndham’s underlying performance, but the firm's debt load should not be ignored, however. The implications of the pending business split on the dividend are unknown at this point.
Our published Dividend Cushion ratio for Wyndham’s is -0.1 with a Dividend Track Record of Healthy.
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