Editor’s note: Standpoint Research, an independent research provider, will periodically share three investment ideas generated from its proprietary 155-variable computer model. Recommendations are made only after heavy fundamental and subjective overlays are applied. For more information on Standpoint Research visit www.standpointresearch.com or contact Ronnie Moas, president and director of research, at ronnie@standpointresearch.com or ronnie.moas@verizon.net.
Western Union WU ($15.53)
Buy Recommendation / 2013-2014 Target: $19 / Upside: 22% / P/E: 11X
We recently ran 780 of the Russell-1000 names through our 155-variable computer model. WU ranked # 167 out of 780. One of the marks against WU was on relative strength, but we see that as a contrary indicator. Below are excerpts from our 16-page February 2013 report available on request to those who agree to a free trial. WU has been an open recommendation of ours since January 28, 2013 and remains undervalued. WU reported Q1 on April 30.
Big brand and size: Western Union is the leading brand in money transfers with ~ 20% market share. WU is a globally recognized brand offering service through a network of 510,000 agent locations in nearly 200 territories and countries worldwide. Internationally, WU benefits from strong brand awareness with ~ 90% of its agents located outside of the US. The Western Union brand is protected by trademark registrations in many countries. The most significant competitive factors in this service relate to brand recognition, customer service, trust and reliability, convenience, speed, variety of payment methods, service offerings and price.
Profiting from the immigration market: Immigrant workers, in the US, remitted in excess of $120 bln, last year. According to the World Bank, money transfers are estimated to have topped $400 bln in 2012, an increase of > 5% versus 2011. These transfers are expected to rise by 8% in 2013 and by 10% in 2014 – by 2015 we expect this figure to be near $525 bln. WU mainly earns its money by charging fees to transfer cash around the world and through foreign exchange fees. The majority of these revenues come from immigrants transferring money back to their homeland. Western Union’s high global brand awareness provides it with an excellent opportunity to take advantage of these under-served markets.
New growth drivers: Focused on the fastest growing electronic channels including direct-to-bank delivery and mobile access. During FY12, revenues increased 50% in the electronic account based segment. The company currently has agreements with more than 100 banks globally, and 100,000 ATMs have WU money transfer available globally. In Feb-13, the company signed an agreement with Carrefour Argentina and Wal-Mart Canada to offer its services in more than 300 locations.
Tech fuels new growth engine: WU is keying in on the fastest growing electronic channels, including direct-to-bank delivery and mobile access in order to capture additional customers. www.westernunion.com money transfer transactions increased by > 40% in FY12 and is expected to deliver higher transaction growth in FY13. WU is on track to meet its $500 mln revenue goal in digital transactions for 2015. Electronic account-based money transfer transactions through banks increased by > 50% in 2012 and is also expected increase in the near-to-medium term. B2B is well-positioned to deliver positive results in 2013.
Financial advantage: With a dominant industry position, WU has market capitalization ($9.2 bln) nearly 9X that of its closest competitor MGI ($1 bln). It earns more than 4X times the revenue generated at MGI. Because of its deep pockets, the company can keep competition depressed. Recently, it has been observed that many competitors were offering similar services at lower fees in various locations. In response, the company announced it would change its pricing in order to remain in the lead. The company’s ability to withstand pricing pressure from other competitors gives it a strong, long-term competitive advantage.
Wide range of services: WU offers a range of products and services including “goCASH” that lets consumers purchase money transfers, and “Cash-to-Card” service that provides consumers an option to direct funds to a Western Union branded stored-value card. Customers can also access directly from their bank’s Internet or ATM services. Mobile money transfer service with > 15,000 WU agents is available, and WU can process payments using customer credit cards, debit cards, bank accounts or cash.
Cost saving initiatives: In order to increase productivity, the company plans to incur $45 mln of expenses in FY13, in addition to $31 mln absorbed in Q4, 2012. WU estimates its expenses on new cost saving initiatives will result in savings of $30 mln in FY13, $45 mln in FY14 and $45 mln in FY15.
Investment towards value creation: WU continues to concentrate on upgrading its anti-money laundering and compliance capabilities; and will continue to invest $100 mln every year for these programs while maintaining its best-in-class status.
Loyalty card program: The loyalty card program is available in more than 100 territories internationally. There are more than 20 mln active cards, and that figure has been growing annually by double-digits in recent years. Loyalty card customers generally initiate more transactions and have a higher rate of retention than non-carded customers.
Strong balance sheet: WU has $1.8 bln in cash with $4.0 bln in debt on its balance sheet. More than $1 bln was returned to shareholders through a combination of stock buybacks and dividends in FY12.
Steady revenue and margins: WU reported revenue of $5.67 bln for FY12, which represented a 3.2% increase versus FY11 revenue of $5.49 bln. In FY12, the C2C segment contributed nearly 80% of the company’s total revenue. WU reported a gross profit margin of 43.6% ($2.5 bln) compared to 43.5% in FY11. Net income margin for FY12 was 18.1% compared to 21.2% in FY11. The decrease was mainly attributed to an increase in the income tax rate.
Teva Pharmaceuticals Israel TEVA ($37.80)
Buy Recommendation / 2013-2014 Target: $48 / Upside: 27% / P/E: 8X
We recently ran 150 names from the Healthcare sector through our 155-variable computer model. TEVA ranked # 5 out of 150. There were a couple of dark orange (ninth decile) marks against TEVA on relative strength, but we see those as contrary indicators. Below are excerpts from our 22-page June 2012 report on TEVA, HITK and the generic drugs industry. That report is available on request to those who agree to a free trial. In our opinion this stock is undervalued with the market focusing on drugs going off patent instead of the unrivaled pipeline. TEVA reported Q1 on May 2.
Commanding position: TEVA is a global leader in the generic pharmaceuticals markets in the US, Europe and Japan with the widest portfolio in the industry. Teva has > 150 applications pending at the FDA and more than 2,000 marketing authorization applications pending in Europe. The company has > 70 production sites and > 30 R&D centers. The company’s direct presence spans across 60 countries with distribution of products in more than 120 markets.
Balanced portfolio: TEVA’s balanced portfolio of products comprise of generics, branded and over-the-counter (OTC) products. Teva has 40 innovative drug products in development with almost half in Phase III clinical trials or under FDA review.
Geographical footprint: TEVA has direct presence in 60 countries and distribution of products is executed in more than 120 markets. Regionally, the US generates nearly half of all revenues; Europe (all European Union member states, Switzerland and Norway) 30%; and the remaining 20% was from Rest of World (Latin America, Canada, Israel, Russia and other Eastern European countries that are not members of the EU).
Key strategies: TEVA’s aggressive yet disciplined acquisition strategy, complex generic manufacturing capabilities, global low cost and vertically integrated operations which provide access to high quality APIs has helped the company to evolve as the world’s largest generic manufacturer. The strategy of the company to have at-risk generic launches enables it to gain from specific opportunities by being the first to introduce generics to market.
Penetration of key Asian market: TEVA has assumed a dominant position in Japan, one of the world’s most attractive generics markets, through the acquisition of Taiyo, the third largest generics manufacturer in Japan and the purchase of a 50% stake in its joint venture with Japanese company Kowa Pharma.
Blockbuster products: Teva’s key branded products include Copaxone (multiple sclerosis), Azilect (Parkinson’s disease), biopharmaceuticals and biogenerics, and respiratory and women’s health products.
Strengthening range of women’s health care products: In 2008, Teva acquired Barr in order to strengthen its range of women’s health care products. The acquisition of Barr has also provided Teva with the opportunity to expand in European markets including France, Italy and Spain, where the penetration of generics is low and profitability is high. Teva is working on growing the women’s health segment into a billion dollar business in the US.
Robust pipeline: Teva has the largest generic drug pipeline as measured by 77 pending ANDA (abbreviated new drug applications) that are worth $54 bln in brand value. Though Teva’s main focus is on the development of treatments for multiple sclerosis (MS), it also has candidates which focus on Crohn’s disease, lupus, oncology and asthma. Teva is expanding its branded product portfolio via in-licensing and acquisition of promising candidates.
Consolidating position in the over-the-counter market: Teva recently entered into a partnership agreement with Procter & Gamble targeting the consumer health care market. The joint venture is expected to record significant sales. The primary drivers of the $200 bln OTC market are the aging population, improving standards and quality of life, and increasing purchasing power. Teva’s acquisition of Cephalon should help the company expand and strengthen its branded and specialty pharma business.
Update: Teva Pharma reported Q1 on May 2, 2013. Earnings were $1.12 per share versus the consensus estimate of $1.11; revenues declined 3.9% y/y to $4.90 bln versus the $4.86 bln consensus. Net revenues in the United States in the first quarter were $2.4 bln, a decrease of 11% compared to the first quarter of 2012, driven primarily by the decline in Provigil sales due to generic competition that began in the second quarter of 2012. Net revenues in Europe in the first quarter were $1.5 bln (30% of total revenues), an increase of 11% compared to the first quarter of 2012, or 10% in local currency terms. Net revenues in the Rest of the World in the first quarter totaled $966 mln, a decrease of 3% compared to the first quarter of 2012. Teva is expected to earn $5.47 per share in 2014 on 20.66 bln in revenue versus $5.04 per share on $20.19 bln in revenue in 2013. Generic pharmaceuticals and branded products generate ~ 55% and ~ 35%, respectively, of the company’s revenues.
Guess GES ($27.32)
Buy Recommendation / 2013-2014 Target: $34 / Upside: 24% / P/E: 13X
We recently ran 780 of the Russell-1000 names through our 155-variable computer model. GES ranked # 271 out of 780. One of the marks against GES was on relative strength, but we see that as a contrary indicator. Below are excerpts from our 23-page December 2012 report on GES. The report is available on request to those who agree to a free trial. GES has been an open recommendation of ours since 24-Aug-12 and remains undervalued for those with a longer-term view as this is a store count growth story. The company did warn in February so those who are risk averse may not want to jump in with both feet until after the May 22 earnings announcement.
Global expansion strategy: GES has in place an aggressive global expansion strategy that has resulted in impressive geographic diversification of its operations. Revenues generated from outside the US and Canada accounted for approximately half of all revenues in FY12 compared to less than 25% in FY05. At the end of FY12, GES had 1,559 stores of which only 504 stores were located in the US and Canada. 561 were in Europe and the Middle East, 423 in Asia and 71 in other locations. In FY12, GES, along with its distributors and licensees, opened 261 new stores globally of which 224 stores were located outside of the US and Canada. Guess has taken up a mission to significantly increase its number of stores worldwide and close underperforming stores – and that (net increase) is one of the driving factors behind our recommendation.
Strong brand portfolio: Guess, a manufacturer of discretionary fashion apparel is vulnerable to changing fashion, consumer taste and preferences. GES seeks to innovate and refine collections across all categories that support the sexy, fun and adventurous global lifestyle of its customers. The company’s portfolio of licensed businesses enables brand extension and contributes significantly to profits.
International markets driving revenue: The company is less reliant on US department stores — Macy’s accounted for just 3% of total sales in FY12 — as international sales have grown faster than the North American wholesale business. GES plans to reallocate capital in regions with growth potential such as Eastern and Northern Europe as well as Asia. The company also has plans to improve the performance of its stores in the US and Canada by shortening its development cycle which will enable it to quickly adapt to changing fashion trends.
Sustained top line growth: GES revenues have more than doubled since 2006 to $2.7 bln for FY12 while EPS has jumped by nearly 115% from $1.34 to $2.86 in FY12. The company’s revenues increased by 8% for FY12; the ninth consecutive year of top line growth. Though the recent recession, expenses related to new stores, and investments to expand business has put pressure on profit margins, the increasing scale of its growing business will lead to margin expansion in the long-term. The company ended FY12 with nearly $500 mln in cash, and a negligible amount of debt with additional credit capacity and access to capital. GES has returned $166 mln to its shareholders via buyback of the company’s common stock and dividends.
Healthy Cash Balance: During the first three quarters of FY13 GES repurchased > 5 mln shares at an aggregate cost of $140 mln, bringing the cash balance down to $287 mln. GES full year FY13 planned capital investments are expected to be $105-$115 mln. We expect GES to generate decent cash in the near-term and maintain a healthy cash balance going forward. GES has a solid financial position with negligible debt on its balance sheet.
Declining trend in cotton prices: The declining trend in cotton prices is expected to offset/eliminate the impact of other price rises and lessen the pressure on cost of goods sold; keeping the cost of goods sold flat. We forecast FY13 gross margin in the 42%-43% range. All other margins are expected to decline in FY13. SG&A is expected to rise in FY13 because of GES aggressive sales and promotional campaigns globally, especially in North America. EBITDA margin is expected to decline to 14%-15% versus 18% in FY12. A tax rate of 33% is considered for our projections. Net margin is projected to be in the 7%-8% range for FY13.
Multiple distribution channels: GES distributes its products using multiple distribution channels including retail, wholesale, e-commerce and licensing. Distribution through directly operated retail stores and concessions enables GES to influence the merchandising and presentation of products, build brand equity and test new product design concepts.
Diversifying and developing new markets in Europe: The Company is facing challenges in the European region due to weak economic conditions. However, the company is diversifying and developing newer European markets including Germany, Russia, Portugal and Holland. These markets act as a strong complement to the fragile Italian market, which presently accounts for less than 40% of European business compared to 52% four years ago. The company has recently been performing well in Russia and Germany, two major markets for the company in Europe. The company witnessed declining shipments to the wholesale channel in Italy which was offset by growth in new markets such as Russia.
Share Repurchase Program: On 26-Jun-12, the Board of Directors authorized a new program to repurchase up to $500 mln of the Company’s common stock. The 2012 Share Repurchase Program is in addition to the existing 2011 Share Repurchase Program.
Standpoint Research is the only research firm to beat the S&P-500 by at least 500 bps with > 69% of its recommendations versus more than 150 active firms having a statistically significant sample size of recommendations on file. All 319 recommendations we made since 2008, and through May 6, 2013, have been time-stamped by Briefing.com, Bloomberg and Dow Jones. We did this the hard way — without taking a sector bet, market capitalization bet or beta bet. Ideas are generated by a 155-variable computer model I developed 1998-2003 … recommendations are made only after heavy fundamental and subjective overlays are applied. Standpoint Research is an Independent Research Provider with no conflicts of interest.
Long reports on each of the three names highlighted above can be forwarded on request to those who agree to a free trial.
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