Wednesday, November 27, 2019

A Current AIM Small Cap Equity Holding: Kennametal Inc. (KMT, $34.19): “Time to Hit the Brakes and Move On”


Kennametal Inc. (KMT, $34.19): “Time to Hit the Brakes and Move On”
By: Brook Seifu, AIM Student at Marquette University

 

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

·         Kennametal Inc. (NYSE: KMT) is a global industrial technology leader that focuses on helping customers across the aerospace, earthworks, energy, general engineering and transportation end markets with precision and efficiency. KMT offers metalworking and wear applications that includes turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. KMT operates in three segments: industrial accounting (53% of revenues FY19), widia (8% FY19), and infrastructure (39% FY19). The company was founded in 1938 and is headquartered in Pittsburgh, Pennsylvania.

·         The company has suffered unexpected decline in organic sales by 11% vs. 10% growth in 2018. This is mainly due to a slowdown in global market conditions primarily within the transportation, energy and general engineering end markets.

·         With the introduction of the simplification and modernization programs, KMT is expecting to reduce future cost of production and restructure facilities to enhance efficiencies.  

·         Investments in R&D is paying off after KMT showed signs of revival with the new HARVI Ultra 8X, HARVI TE and KOR 5 innovations.

·         Dividends over the past four years has been fairly constant, and the company has paid its shareholders $0.80 per share.

Key points:

Management has been focusing on improving performance throughout KMT’s production and operating cycle. New program called simplification/modernization has been implemented to cut costs. Recently, the company ceased a key production facility in Germany and moved units to a lower-cost facility. In the near future, this restructuring and cost reduction programs are set to continue and further improve production processes.

KMT’s management believes there is still untapped growth opportunities in the aerospace and general engineering areas. This year, KMT released the HARVI Ultra 8X which is used by aerospace customers for rough milling titanium and offers market-leading metal removal rates. Besides the positive reactions from the street, this product was among the 2019 R&D 100 awards finalist. In Addition, KMT has introduced the HARVI TE for general engineering customers and KOR 5 which is offered to aerospace customers.

What has the stock done lately?

KMT has had a rough year so far mainly due to a significant decline in sales and economic contraction key market segments. For the Q1 reported in Nov 4th, the company announced adjusted EPS of $0.17. On that same day, poor financial performance led the stock to drop by 8%. During the following day, the stock rallied back, representing a 7% gain. KMT generates revenue through the sale and service of tungsten and related products. In the second half of this year, the prices of tungsten significantly dropped from $270 to approximately $200. Following that price drop, KMT’s operating margin significantly suffered with fixed costs remaining the same.

1 Month Stock Chart from FactSet
Source: FactSet
Past Year Performance:

Over the past year (November 2018 – November 2019), KMT’s stock has declined 16% after dropping to $34.19. As stated earlier, KMT has had all sorts of bumps this year leading it to a three-year low of $28.83 in August 21st, 2019.


1 Year Stock Chart vs. Benchmark from FactSet
Source: FactSet
My Takeaway

Since KMT was added to the AIM portfolio in April 27th, 2018, the stock is nowhere close to reach the price target of $50.23. Revenue was projected to grow by 8% for the current year, instead the company is experiencing negative growth rates. In addition, positive macro trends were listed as one of its drivers. However, the macro for major operating areas like energy, transportation and manufacturing is going the opposite way. Although the company is working towards cost reduction programs and introducing new products, there is still a quite bumpy road ahead for KMT. With increasing exposure to business downturn and ongoing trade war with china the company is even less suitable. By considering major macro and firm conditions, its recommended KMT should not be held in the AIM portfolio anymore.

A Current AIM International Equity Holding: Bank of Nova Scotia (BNS, $57.86): “The Banking Nova Refusing to Dull”


Bank of Nova Scotia (BNS, $57.86): “The Banking Nova Refusing to Dull”
By: Dominic Maio, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Bank of Nova Scotia (NYSE: BNS) The Bank of Nova Scotia is a multinational bank headquartered in Toronto, Canada and was founded in 1832. Scotiabank is one of the big 5 banks of Canada. BNS engages in a wide range of financial services and products including wealth management, private banking, commercial banking, investment banking, and capital markets. These services are primarily offered to retail, commercial, and corporate customers.  

• BNS has maintained a strong capital position over the past five years and continues to operate at a CET 1 ratio of 11.2% as reported in Q3. The strong ratio can be contributed to increasing cash flows organically and divestures from current operations. 

• BNS’s international banking segment continues to see growth year over year with a 14% increase in Q3 to $616 million. The increase is driven by increased loans and acquisitions in the Pacific Alliance Countries. 

• BNS has invested heavily into FinTech, which is expected to see large growth in the nearby future. With the company being the industry leader in Canada through the launch of their mobile banking app, BNS is expected to capture a large portion of the demand.  

• BNS saw a 9.76% CAGR in Net Income between year ends 2014 and 2018, and with strong growth in 2019 so far, the number can be expected to grow in the future.   

Key points: 

BNS was added to the AIM International Portfolio in November of 2018 at $53.38 with a price target of $65.57. The investment thesis placed a forward-looking emphasis on strong capital position. Since the addition of the company to the portfolio, BNS has capitalized on this area. BNS has managed to maintain strong capital positioning with a CET 1 capital ratio of 11.2% an increase of 10 basis points from the prior quarter. This increase can be contributed to continual growth in cash flows driven by strong internal capital generation and divestures of current operations.  In Q3, BNS announced the sale of its operations in Puerto Rico and the U.S. Virgin Islands, which is projected to increase available capital significantly moving forward. With extra available capital, BNS has been able to increase dividend yields by 6%, and investments into their international banking segment. The bank of Nova Scotia expects the CET 1 ratio to remain above 11% moving forward.  

BNS has seen strong growth in International banking by delivering another quarter of double-digit earnings growth with adjusted earnings up 14% YoY, offering diverse revenue streams. Acquisitions have played essential in this segment's growth. BNS has invested heavily in the Pacific Alliance Countries, with over 6 acquisitions since 2018.  The growth in International Banking has led to an increase in both Non-Interest Income and Net Interest Income. Net Interest Income has increased $289 million in Q3, due to an increase in commercial and retail lending in the Pacific Alliance Countries. Additionally, Non-Interest income was up $189 million driven by global acquisitions in the Dominican Republic and Peru. With a 5-year net income CAGR of 9.76%, International Banking will continue increasing EPS through acquisitions, projecting a $0.70 increase by 2021. 

Moving forward, BNS looks to capitalize on the growing movement of FinTech. With FinTech expected to grow by a forecasted 5-Year CAGR of 22.7%, BNS looks poised to capture the rise in demand. In Q3, the company was recognized as the industry leader in mobile banking by J.D. Power and launched a new mobile banking app in Canada. By capitalizing on this area, BNS should see tremendous growth with a forecasted 5-Year CAGR of 3.32% in net income.  

What has the stock done lately?

Following the Q3 earnings call, BNS has seen an 11.29% increase in the stock price from $51.48 to $57.83 due to significant growth in the International Banking Segment.  In the last month, BNS’s stock has risen by 1.99% peaking at $58.00. The most recent increase can be contributed to the integration of the mobile banking app launched towards the end of Q3, which in the last month has seen tremendous growth.  

Past Year Performance: 

BNS has seen steady growth over the past year with a 52 week range from $48.34 to $58.22 (November 2018-November 2019). The low came in December of 2018 due to a downturn in the markets and as a result of the Q4 earnings call. BNS’s stock has seen an increase of 7.97% over the past year and shows positive signs of growth. Given a dividend yield of 4.6% and a P/E ratio of 10.05 (2% lower than peers), the stock is still showing signs of being undervalued as compared to peers. 


1 Year Stock Chart vs. Benchmark from FactSet here
Source: FactSet

My Takeaway

BNS should remain in the AIM International Portfolio. After 4 consecutive misses on earnings, BNS finally got on track in Q3 with an adjusted EPS of $1.88, 2% above consensus. The company is positioned for growth moving forward due to a strengthened risk profile from their latest divestures, mobile banking, and through the integration of several acquisitions in their International Banking Segment. In addition to mobile banking, International Banking will also drive the company moving forward, after continual growth in the past five years and 6 acquisitions into the segment since 2018. With the combination of strategic acquisitions in International Banking, strong capital positioning, and the rise of FinTech, BNS will maintain strong growth in the foreseeable future.  

1 Month Stock Chart from FactSet
Source: FactSet

Tuesday, November 26, 2019

A Current AIM International Equity Holding: ICON Plc (ICLR, $145.28): “A Global ICON”


ICON Plc (ICLR, $145.28): “A Global ICON”
By: Mia Albian, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

ICON Plc (NASDAQ: ICLR) is a Global Clinical Research Organization (CRO) that provides services to the pharmaceutical, biotechnology, and medical device companies. ICLR specializes in the strategic development, management and analysis of programs that support the clinical development process, from compound selection to Phase I-IV clinical studies.

• ICLR has a globally diverse network by generating 41.1% of revenue from Ireland, 34.5% of revenue from the United States, and the rest from China, Germany, and the United Kingdom. ICLR is headquartered in Dublin, Ireland and was founded in 1990.

• ICLR recently acquired Symphony Clinical Research, a provider of site and patient clinical trial support services. This acquisition further enhances the company’s ability to help solve their client’s main challenge of getting patients faster and more efficiently.  

•Management reported in their Q3 earnings that ICLR continues to expand their relationships and revenues from customers outside their top 10, which grew by over 20%.   

• ICLR was added to the AIM portfolio on April 12, 2013 at a price of $30.66. It is currently trading at $145.28, showing a 373.84% increase from the initial purchase.   

Key points:

ICON Plc released Quarter 3 earnings on October 23, 2019, which were consistent with 2Q19 trends. Q3 earnings reported year-to-date revenue of $2.080 billion, representing a strong revenue growth of 8.5% YoY. Earnings per share on a diluted basis was $5.06, representing an increase of 13%, compared to $4.47 per share for the prior year. ICLR increased their backlog by 12%, growing to $8.4 billion. Management completed its existing share repurchase authorization of 1M shares in Q3. This total compares to ~$245M in operating cash flow YTD, resulting in ICLR having the strongest balance sheet among its peers.

The continued demand for biotechnology and the trend for outsourced development services allows ICLR to broaden their customer base. At the end of September, ICLR acquired Symphony Clinical Research. ICON can now offer patients at-home trial services, which will make it faster and more efficient for ICLR’s customers to get their patients into clinical trials. This positions the company well to continue gaining market share by differentiating themselves through a diverse patient network.

What has the stock done lately?

Over the past 3 months, ICLR has seen a change of 14.7%, with a high of $158.86 on August 19th and a low of $138.50 on October 16th. After releasing Q3 earnings at the end of October, the stock price increased ~5%, from $139.95 on October 23rd to $151.62 on November 4th.

Past Year Performance:

ICLR has a 52 Week H/L of $165.13 to $118.10. The company was trading at a high of $165.13 in July of 2019 and at low of $118.10 in January of 2019, which represents a change of 39.8%. The company has been increasing in price throughout the last year, but now is consistently staying in the mid-range from where the price has historically been this past year. Overall, ICON Plc is up 23% YoY, as the company is currently priced at $145.28, but was trading at $118.10 on January 3, 2019.

Source: FactSet
My Takeaway

ICLR has performed extremely well over the last year and since the initial purchase. ICLR is largely differentiated from their peers through its global stance, with 2/3 of revenue generated outside of the United States. Looking forward, this company will continue to grow as they serve diverse patient networks through services that integrate all phases of drug development. This is a great advantage to their company, as the CRO market is intensely competitive. ICLR may face potential risks such as a slowdown in pharmaceutical R&D outsourcing or lower pricing amid higher competition. However, ICON Plc continues to conduct clinical trials globally in many of the major therapeutic areas, which is very attractive for drug developers seeking one CRO relationship that coverall all of their drug development.


Source: FactSet


A Current AIM Small Cap Equity Holding: Sandy Spring Bancorp: (SASR $35.62): “Sandy Springs Forward”


Sandy Spring Bancorp: (SASR $35.62): “Sandy Springs Forward”
By: Matthew Prinske, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

• Sandy Spring Bancorp. (NASDAQ:SASR) operates as a community bank in the greater Washington D.C. area, with branches to the North and South in Maryland and Virginia.  Sandy Spring profits off the spread between the interest they pay for deposits, and the interest they receive on loans.

• Sandy Spring recently acquired Revere Bank in September of 2019.  The purchase brought Sandy Spring to over $11 billion in total assets, leaping over the $10 billion dollar benchmark of further regulation.

• SASR increased dividends up to 30 cents, and increase of 7%.  The stock has now become a bit of a dividend play to some investors, as the stock is currently yielding 3.4%.

• SASR is specifically impacted by the growth in the regional economy. In the past Washington D.C. has been considered to be resistant to recession, due to all of the government jobs in the area.

Key points: 

The original driver behind the purchase of this stock was the growth in the Crystal City and Washington D.C. markets.  This is beginning to play out as Amazon HQ2 is set to break ground in 2020, and will be under construction for 3 years following that.  The increased growth into the market will set Sandy spring up to have a platform of sustained growth in their regional market.  By adding to their market share through mergers and acquisitions, Sandy Spring has been able to gain an even larger footprint in a growing market.  Now that Sandy Spring has passed the $10 Billion threshold there is no more reason to hamper growth in order to protect margins, SASR can rev-up growth to the maximum extent.

One of the largest risks for Sandy Spring was their integration with Washington First Bank.  This risk did not materialize as the synergies with Washington First were implemented smoothly, and no major issues came from the merger.  However the risk now turns to the implementation of the Revere Bank acquisition.  So long as Sandy spring can integrate Revere as they did Washington First, Sandy Spring will be well positioned to gain off local growth.

What has the stock done lately?

After concerns over the acquisition of Revere Bank in September the stock traded down 8.5%, which has rebounded after Sandy Spring broke through the $10 Billion benchmark.  The stock opened Tuesday November 5th at its 30 day high.



1 Month Stock Chart
Source: Factset

Past Year Performance: 


1 Year Stock Chart
Source: Factset

SASR stock price hit its 52 week low back in March, bottoming out at $29.83.  The stock is trading up over 20% since this time.  The year to date return for Sandy Spring is nearly 13% and is up 5.5% since the AIM fund purchased the stock in February.

My Takeaway:

Sandy Spring’s investment thesis of regional growth has been playing out over the past year.  Amazon is moving forward with HQ2 in Crystal City, a move that came under questioning when New York backed out on their split of Amazon’s new headquarters.  Sandy Spring was not afraid of continued acquisitions as they blew past the regulation benchmark in total assets and acquired Revere Bank.  As Sandy spring continues to grow their footprint, they can begin to milk their cash cow in Crystal City. The original investment target of $40.49 dollars remains reasonable, and the stock should be re-evaluated at each large step in amazon’s HQ2 process.



Sunday, November 24, 2019

The Twelfth Set of Fall AIM Program Student Equity Pitches on Monday, November 25th - Join Us in Person or On-Line!

AIM Class of 2020 Student Equity Presentations 
Monday, November 25th



The twelfth set of fall AIM student equity presentations for the Class of 2020 will be on Monday, November 25th, 2019. 
   
Follow the link to access the student equity write-ups.  You can also find every write-up since AIM's inception in 2005 here.

November 25th Write Ups

Student
Company
Ticker
Fund/Sector
Luke Smrek
H. Lundbeck A/S ADR 
HLUYY
Intl Healthcare
Mary Kate Simon  
Mondel─ôz International, Inc. 
MDLZ
Intl Consumer Discretionary
PJ Cox
Iridium Communications Inc. 
IRDM
Consumer Discretionary

  • Location: Marquette University, College of Business Administration - Straz Hall, 1225 W. Wisconsin Avenue, Milwaukee 53233 - in Room 488 (AIM Room)
  • Presentation Times: 11:00 a.m. to 12:00 p.m. CST
  • Link to PDF Student Equity Write-ups

If you are unable to attend, you can always view them via YouTube HERE.


A Current AIM International Equity Holding: Capgemini (CGEMY, $23.08): “Capitalizing on the Exponential Growth of Innovation”


Capgemini (CGEMY, $23.08): “Capitalizing on the Exponential Growth of Innovation”
By Alex Malitas, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Capgemini (CGEMY) provides consulting and technological strategy services to global clients in order to aid them in their individual competitive industries.

• Three operating segments: Applications and Technology (70% of Revenue), Operations & Engineering (23% of revenue), and Strategy & Transformation (7% of revenue).

• The company revised revenue growth projections for fiscal year 2019 to the lower end of the previously stated range to an estimated 5.5% growth.

• The company has commenced a friendly tender offer to acquire Altran Technologies which could be a major catalyst for the future.

• After beginning 2019 at a 52-week low, the stock has rebounded and has the potential to continue rising.

Key points: 

Capgemini’s position as a leader in global technology consulting has yet to be challenged while it focuses on seven strategic priorities to address the future of technological innovation.

The company is in a unique spot to capitalize on future development of Internet of Things and 5G technologies as many firms examine how to implement these technologies into their products and services as well as internal mechanisms. Capgemini’s ability to provide highly efficient services through their in-house consultants will continue to allow the firm to develop relations with clients who wish to build out platforms for Artificial Intelligence, deep learning, and cyber security.

In June of 2019, Capgemini announced a public tender offer for Altran, a global leader in engineering and R&D services. The combined company would create what the company describes as an “intelligent industry” which connects information technology with operational technology. The combined firm would be result in a 17-billion-euro revenue firm with 250,000 professionals employed. Utilizing expertise in future technology such as AI, 5G, and IoT, the combined firm would have access to a variety of new clients with high synergies and operating model efficiencies.

This is not the first time Capgemini has used M&A. In fiscal year 2018, the company invested heavily or acquired in five companies to expand their client base. The synergies that were experienced with these previous acquisitions show managements ability to effectively execute on M&A transactions which is likely to be seen in the case of the Altran acquisition. If the merger closes, shareholders are likely to see revenue growth and higher value of Capgemini’s stock.

What has the stock done lately?

Since reaching a high of $27.67 in mid 2018, Capgemini’s stock performance has been trading in a range of $18.86 and $25.81. The company had a major drop in stock price at the beginning of 2019 reaching the low of $18.86. Recently, the stock has consolidated in the $22 - $24 range however the positive catalyst of the Altran acquisition could provide additional value to shareholders. The company’s current stock price is $23.19.

Past Year Performance:

Over the past year the stock has returned a -4.38% coming in at $23.19 which is a discount to when the stock was originally added into the AIM portfolio at a price of $24.18 in November of 2018. However, the year to date change, shows drastic improvement in stock price increasing by 16.85%.

1 Year Stock Chart vs. Benchmark from FactSet
Source: FactSet
My Takeaway

Capgemini’s position as a leader in IT consulting in an environment where technology is outpacing many large firms gives them an advantage for continued revenue streams. The proposed combined company of Capgemini and Altran represents a positive outcome for Capgemini shareholders as the addressable market of their consulting services expands with expertise in new industries. With access to many blue-chip clients, the company and its shareholders should benefit strongly if the acquisition proceeds.


1 Month Stock Chart from FactSet
Source: FactSet


A Current AIM International Equity Holding: Lululemon Athletica Inc. (LULU, $204.13): “When Life Gives you Lululemons, Buy Their Stock”


Lululemon Athletica Inc. (LULU, $204.13): “When Life Gives you Lululemons, Buy Their Stock”
By: Riley Pollard, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Lululemon Athletica Inc. (NASDAQ:LULU) is a designer and distributor of athletic apparel and accessories for men, women and female youth. They operate under two brands: Lululemon and Ivivva. Lululemon specializes in “healthy lifestyle inspired” apparel for men and women and Ivivva specializes in athletic apparel for female youth.

• Since Q2 of FY2018, LULU has opened 45 new stores: 21 stores in North America, 16 in Asia, 5 in Europe and 3 in Australia/New Zealand.

• Net Revenue increased by 22%, or $159.9 million, in Q2 of fiscal 2019 from Q2 of fiscal 2018.

• LULU recently introduced ‘Practice’, a paid loyalty program that they implemented in key markets in 2019 and have plans to expand by 2021.

• A stock buyback of up to $500 million was announced in January 2019, increasing their stock repurchase program that previously authorized buybacks of $600 million in June 2018 and $200 million in November 2017.

Key points:

Lululemon Athletica continues to exceed analysts, and their own, expectations. In their five-year plan, they forecast annual revenue growth “in the low teens”, whereas analysts are predicting 15% growth for the next year. These are both conservative estimates considering the 22% annual growth they reported in their recent 10-Q.

LULU has growth in mind. They have been steadily closing Ivivva stores since 2017, with the intent of focusing more on menswear and international sales. Set to close the few remaining Ivivva stores in 2020, LULU will be able to focus on their goal of doubling their men’s business and online sales, while quadrupling their international business by 2023. They have already made strides towards their international goal, as 24 out of the 45 stores opened in the past year were opened outside of the United States.

While LULU already has a cult-following, their newly implemented loyalty program, Practice, has the potential to amass more loyal customers and take LULU’s sales to new heights. Set to expand to more locations in 2020 and “hit a full stride” by 2021, Practice has already garnered more new customers than expected in their test markets.

What has the stock done lately?

LULU stock hit a record high of $209.02 on October 16th, nearly double its 52wk low of $110.72. While the stock was down 6% as of November 5th, this decline has proven temporary. LULU closed at $204.13 on November 8th.  

Past Year Performance:

 YTD, LULU has outperformed the market substantially. While the S&P 500 has seen 23% growth, LULU boasts over 65% growth in comparison. EPS were up to $.96 in Q2 of FY2019, compared to $.71 the year prior. I expect we will be seeing further growth in the stock price when Q3 earnings are released December 9th.


Source: FactSet
My Takeaway

LULU was pitched and added to the international AIM fund in April 2016 at a price of $65.48, with an initial price target of $76.63. Since then, LULU’s stock has more than tripled in price and surpassed its price target by leaps and bounds. LULU management has a solid five-year plan in place that they have actively been working towards achieving. They have seen unprecedented growth in the past year and show no signs of stopping. That’s why I believe that when life gives you Lululemons, you should buy their stock. LULU is a valuable addition to the AIM International Fund and should stay as such for the foreseeable future.


Source: FactSet