Dorman: The Little Automotive Parts Supplier That Could

Looking for stable growth in a difficult market? Look to high quality small caps under $2 billion in market cap like 24% founding family owned Dorman Products (NASDAQ: DORM). This supplier of replacement parts and fasteners for light trucks, heavy duty trucks, and passenger cars in the automotive aftermarket is an excellent business whose product portfolio focuses on ‘niche’ offerings as the dominant aftermarket supplier of formerly ‘dealer only’ parts. The company has successfully grown sales year over year for over a decade and has been able to generate a 5 year net income CAGR of 14%. Net sales have been growing at a 5 year CAGR of 13% (all organic) and EPS has been growing at a 5 year CAGR of 14%. Gross margins and operating margins have remained steady at around 38% and 20% respectively.

Unsurprisingly, this company creates significant value with a solid 21.44% ROIC over a WACC of around 9.5%. ROE sits over 18% and the company has an incredibly strong and liquid balance sheet with no debt and a current ratio around 5.69. Free cash flow as a percent of sales has remained consistent for the last 8 years and the company’s free cash flow margin has averaged around 4.7% over the last 3 years which suggests strong cash flow generation.

As for price, although Dorman is currently trading at a P/E of around 20 vs. an industry average of 12, an earnings based DCF with a 14% growth rate decreasing to 7.5% over an 8 year period, a terminal growth rate of 3.5% and a WACC of 9.5% suggests a fair value of $69.73. The company has been firing on all cylinders yet competition remains fierce and a significant amount of the firm's sales are tied to a small number of customers, including the likes of O'Reilly, Advance Auto Parts, and other auto retailers. The strength of these retailers should be watched closely for clues as to Dorman’s vitality yet with the average age of active light duty vehicles on the road increasing, Dorman should be able to continue expanding market share while rewarding shareholders over the long term.

Disclosure: Logos LP is long DORM.

Munro Muffler: Continued Growth in Auto Retailing

Monro Muffler Brake Inc. is a quality company trading below intrinsic value. The company is a leading provider of automotive repair and tires services that has been growing steadily during these turbulent times. Sales have been growing by low single digits and they are opening new stores to meet growing automotive service demand. The company saw non-tire categories grow in the mid single digits with total gross margin increasing to over 39% in its latest quarter. Last quarter was particularly difficult for the company, as warmer than expected weather resulted in lower tire sales than the same time last year. For the first nine months, net income grew by high single digits while sales grew by over 5%.

What is the story on Monro?

The key for the company will be continued consolidation in this space given the significant amount of segregation by independent dealers, which is a large reason for the company increasing liquidity via its new $600 million credit line. Fiscal 2016 acquisitions completed year-to-date represent a total of over $30 million of annualized sales and include Car-X which is a franchise of locations in ten different states. The company is also driving positive momentum technically to support its fundamentals: the company is 1.51% above its 20 day SMA, 5.48% above its 50 SMA and 4.05% above its 200 SMA. Further, the organization does a good job of creating value with its +32% Return on Capital and has increased retained earnings by $50 million over the past 5 quarters. Only time will tell whether the growth will continue, and investors need to watch out for Munro taking on too much debt, but these positive catalysts during uncertain macroeconomic times make Munro Muffler an attractive opportunity.

Credicorp: An Emerging Market Opportunity?

Credicorp (NYSE: BAP) is a unique undervalued financial services name operating in Peru trading at a forward earnings multiple below 11. The company provides services and products in banking, insurance, pension funds and investment banking under five operating subsidiaries. On multiple metrics, it looks like Credicorp is cheap with its current market price trading well below its DCF earnings base multiple, median P/S value and Graham value. Unsurprisingly, the company has an astounding 192% ROIC with ROE over 20%. Revenue growth over the last three years has grown at a CAGR of over 26% with EBITDA growth exceeding 11% over the same timeframe. Book value has grown by nearly 60% while retained earnings have grown by over 40%.

Year-to-date the company is up over 23% and is above both 50 and 200 day moving-averages implying positive movement despite being down 17% over the past year. The company has a great dividend yield of 1.82% with a 5-year growth rate of over 6%. Further, this is not a cheap “cigar-butt” like stock despite trading below many fair value multiples. Over the last 3 months, net interest margins increased by over 4% to over 56% with yearly earnings increasing by over 235%. Despite this positive margin expansion, loan loss provisions have declined which have no doubt improved FCF. With emerging markets in turmoil over the last few months due to uncertainty, Credicorp could provide patient global investors with above average long-term returns.

Amazon: Is It On Pace To Be The Ultimate Tech Solutions Provider?

By Peter Mantas Inc. (NASDAQ: AMZN) has been on a tear recently with the stock compounding at over 120% CAGR over the last 10 years. That is truly an unbelievable feat for any company, especially a mega cap technology company that is one of the largest in the world. The key question for most investors looking to get into or who are already holding the name is whether this company can continue its meteoric rise.

There is no question we are in the early-to-mid stages of a bull (stock) market as seen by the incredible rise in startup venture capital inflows and many big cap tech names that seem to do no wrong. Most investors may not realize this, but the current market period is eerily reminiscent of the 1996-1998 period, where despite increasing levels of volatility, big cap, small-cap and mid-cap tech names continued their incredible rise which eventually culminated into the tech bubble of 2000. Now, this is not to say that AMZN or the market in general is in “pre-bubble” territory (that in itself is a separate article), that it is not worthy of an investment for the next 10 years or that the company has not done an excellent job of executing and providing consumers and enterprises key services. Rather, I am here to merely to provide a little bit of color and taste as to where we might be while keeping perspective as to the rise of an interesting business.

Overall, I believe that AMZN will continue to outperform the overall market and will be a major player in the mega-cap tech scene. Given the ubiquity of its services, enhanced portfolio, flawless execution, and financial metrics that I believe are under-appreciated, there is no reason why this company should not be worth as much as MSFT (or $500 billion market cap) implying roughly at least a +40% return over the next 3-5 years. Given this conclusion, let’s look at why AMZN will continue to rise as this bull market matures over the next little while.

Over the last 10 years, AMZN has grown revenue by over 10x and in its latest quarter, net sales grew by 23% from the previous year. Free cash flow less principal lease repayments over the last year has grown by from -$99 million to over $3 billion. Operating cash flowgrew 72% over the last year to $9.8 billion and net income was $79 million for the quarter versus a net loss of $437 million the previous year. Despite these impressive, “turning of the switch” type of financial results, what is most underrated about AMZN is actually its gross margin growth. Amazon has been widely criticized due to a significant portion of its revenue on the retailing business which in turn has given the tech giant lower than desirable margins. However, over the last 3 years, AMZN’s margins have grown by over 15% to 31.3% gross margin for its TTM.

Interestingly, the main driver for this margin expansion is none other than the new solutions it is providing as part of its enhanced portfolio, including Amazon Prime and Amazon Web Services (AWS). The latter has really propelled the company’s revenue into a salesforce-esque like trajectory with the only difference being that this segment of Amazon’s business is incredibly profitable. In its latest quarter, AWS has nearly doubled (78% growth over the last year) while operating income has grown 432% year-over-year with YTD net sales reaching $6.9 billion. These are obviously very good numbers but what is key is the operating ratio of this part of Amazon’s business. Operating margin for AWS is at nearly 25% for the latest quarter, up over 3x from 8% a year ago. Although Amazon has had quite the run-up, the story for Amazon is quite clear: anchor the business by offering the most complete retail experience to the consumer despite the lower margins, utilize those cash flows to expand higher margin pieces of their portfolio (i.e. AWS, Prime) and continue to expand those margins which will in turn enhance cash flows to be invested into new services, products and opportunities (which hopefully, have higher margins). Needless to say, it is quite the interesting cycle as Amazon seems to be creating a complete technology solutions provider to attack its higher margin mega cap tech peers like never before.

Of course, there are concerns for Amazon and its strategy. The main issue with Amazon is not only its ability to deliver and execute which is difficult to achieve unless market conditions are in their favor, but Amazon has yet to prove that, at its current market cap, it is a consistent and quality earner that so many investors look for when evaluating shareholder value creation. Amazon has a paltry ROIC and ROE in addition to lackluster free cash flow/sales of 4.56 which is a more important metric when evaluating your typical growing technology company. These concerns, although very valid, would certainly be extinguished if Amazon continues to grow and utilize its cash flows from its peripheral businesses, but only time will tell whether these will be sustainable for a long period of time.

Overall, Amazon has given investors a reason to be long the name over the last decade. Although I’m always weary of mega cap tech due to the fact that they trade in incredibly efficient markets, Amazon is the most interesting name to be in given its unique strategy, FCF growth and strong execution which gives current and would be investors hope over the next little while. Look to get into the name below our $522 “buy” target.

 DISCLOSURE: Logos LP has no position in the stock mentioned above.

Shorting Opportunity? - SBUX

E.Coli breakout found at SBUX. Technicals show a downtrend despite tightening range and break below 20 day MA. Look for a drop to 57$.


Disclosure: Logos LP has no position in SBUX.