The Twelfth Set of Fall 2020 Marquette AIM Program Student Equity Pitches / Q&A will be on Friday, November 20th

  AIM Class of 2021/2022 Joint Equity Research Presentations on Friday, November 20th

This weeks' presentations will feature the joint equity research assignment where senior mentors work alongside their junior mentees. 

Because of the Covid-19 pandemic, we are not pitching live in the AIM Room on Friday afternoons during the fall 2020 semester; however, you can still participate.  

 The 12th set of fall AIM equity presentations for the Class of 2021 on Friday, November 20, 2020.

This is the link for the AIM equity write-ups (each week’s write-ups will be available on Thursday mornings): Write-ups 11/20/20

This is the link for the YouTube videos of the 8-minute student presentations (each week these will be posted on Thursday afternoons): AIM Video Presentations

If you would like to participate in the live Q&A session with the student presenters at 11:00 am CST on Teams, please email Jessica Hoerres at: jessica.hoerres@marquette.edu

Please feel free to submit questions to be asked of the students by emailing them to david.krause@marquette.edu

Valmont Industries Inc. (VMI) by Johnny Nick & Sam Shilbilski

Curtiss Wright (CW) by Adán Jiménez and Dominic Brisson

Mitsui & Co. LTD. (MITSY) by Andrew Diedrich

KB Financial Group (KB) by Joseph Vitrano and Matt Schembari

Fox Factory Holding (FOXF) by Luca Cardamone and Maddy Aubry

Cerus (CERS) by Alexander Warstler and Jack Cyganiak

A Small Cap Equity holding: PetMed Express, Inc. (PETS, $29.95): “Who Doesn’t Love Pets?” by: Maddy Aubry, AIM Student at Marquette University

PetMed Express, Inc. (PETS, $29.95): “Who Doesn’t Love Pets?”

By: Maddy Aubry, 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

• PetMed Express, Inc. (NASDAQ: PETS) provides prescription and non-prescription medication for pets and other health products and supplies for dogs, cats, and horses. They market their products to consumers through national television, online, and direct mail or print advertising campaigns. 

• 2020, Quarter 3 earnings showed that reorder sales increased by 9.6% for the quarter in comparison to the same quarter in 2019. 

• As of September 30, 2020, PETS has no debt. 

• The advancement of the 2020 eCommerce platform reconstruction is well under way which could result in increased sales for PETS. 

• PETS has maintained good relationships with manufacturers resulting in the ability to keep prices stable. 

Key points: PETS is dedicated to continuing to provide medications to customer’s pets throughout the pandemic. They have seen demand start to normalize with vets and brick and mortar pet retailers opening back up. One disruption the company has had due to the pandemic is delayed delivery times, but they are adjusting. PETS is also dedicated to ensuring their employees remain safe and healthy. Therefore, they have continued to work from home where possible and if not possible, they are providing enhanced disinfecting and increased social distancing.  

While the company has offered their products through an e-commerce platform for some time, they have found that this segment is only continuing to grow as more and more brick- and – mortar stores are going by the wayside. With this in mind, management announced to invest $5 million towards e-commerce capabilities. As of October 26, 2020, the company is now in the second phase of the eCommerce platform, and they are focusing on redesigning their website and mobile app. This will become greatly beneficial to the company as the pandemic continues as it has moved even more retail online. It has been mentioned that their dip in value in mid-2020 could be a result of this change towards eCommerce and their eCommerce platform still being in phase one. The company plans to have their website redesigned and the mobile app updated by the end of this year.

In the 10-Q released November 3, 2020, PETS recognizes that they were able to decrease their allowance for doubtful accounts from March 31 to September 30 by $25,000 due to their historical bad debts, as well as economic trends. PETS is recognizing that with the economy starting to recover from the pandemic, people will be more likely to make required payments again.

PETS is dedicated to paying out majority of their earnings to investors. In 2019, they paid out 73% of their earnings to investors. One way they do this is by paying dividends. In 2019 they declared a dividend of $1.06, and they have declared a slight increase in dividends of $1.08 for 2020. These dividends will be paid out on November 20^th.

What has the stock done lately?

While PETS’ 3-month change is -7.48%, they are still seeing long term growth. The stock seemed to take a dip in July causing the decreasing 3-month-change but has remained steady since. Over the past month, PETS has seen a positive 1.25% change. While that does not seem like much due to their dramatic 12-month increase, they are continuing to grow despite the setback in July.

Past Year Performance: Over the last 12 months, PETS has increased value by 27.77% in comparison to the benchmark, Russel 2000, being up 9.03%. Nearly all of PETS growth has come within 2020 as their YTD increase is 27.34%. PETS was added to the AIM Small Cap portfolio in January 2020, resulting in the portfolio benefiting from nearly that entire value increase, YTD. PETS’ 52-week high was $42.88 and low was $21.20. the current price is $29.95.

Source: FactSet

My Takeaway

With COVID-19, many equities have suffered from dramatic decreases throughout 2020. The pandemic has created many uncertainties and resulted in many different short-term losses. PETS took a hit in July and has remained at the lower valuation since then, but this is just a short-term affect. I believe that their YTD growth better represents the company as a whole. YTD, the value has increased nearly 30%, and I believe they will continue to have growth. This will be in part due to the company’s ability to maintain business through the pandemic and the positive effects that their eCommerce platform update will bring. After the AIM Small Cap Fund’s quarter three performance measures were released, it was clear that PETS is one of the strongest performers in the portfolio YTD, and I believe this will continue into the future. With the price being slightly lower over these past few months, I believe this is an opportunity to buy at the lower price and see the growth over the next several years as PetMed Express bounces back and continues to grow.

Source: FactSet

 

 

An International Equity holding: Eaton Corporation (ETN, $114.01): “Outlook is neat on Eaton" by: Manuel Cukaj, AIM Student at Marquette University

 Eaton Corporation (ETN, $114.01): “Outlook is neat on Eaton"

By: Manuel Cukaj, 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

 

• Eaton Corporation (NYSE:ETN) provides solutions that help its customers manage electrical, hydraulic and mechanical power. The power management company operates in over 175 countries in the segments of Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace, Vehicles and eMobility.

 

• Strong Q3 results were driven by better-than expected operational efficiency and margin control as well as positive end market trends and secular shifts caused by the pandemic.

 

• The commercial and residential construction and aerospace segments face headwinds that will negatively impact revenues

 

• Future catalysts will be secular tailwinds for data centers, electrical vehicles, and clean energy in the wake of electrification and digitalization

 

• Upcoming hydraulic divesture and possible acquisitions could play out beneficial for ETN

 

Key points:

 

Eaton achieved better-than expected third quarter results, beating market estimates by declining less-than feared. Reported revenues of $4.5B beat the consensus of $4.2B and were driven by tailwinds in the data center market due to growing demand for digitalization and connectivity. The stay-at-home policies across the world only contributed to this trend and helped offset declining demand in aviation and construction. 

 

Operating margins beat consensus by over 50bps. Over the past years, ETN has shown a consistent execution in controlling margins and being able to replicate this during the pandemic is an affirmation of the company’s operational efficiency. Considering that the company is in the process of integrating an acquisition, the result is even more a positive sign. 

 

The future performance of the company is strongly determined by the head and tailwinds that each of its end markets are facing. While the overall demand is expected to be solid the company expects several headwinds. Commercial and residential construction are both expected to be down and negatively impact revenues. Even though the aerospace segment is expected to improve, the recovery will be slow. At the same time, management is concerned about the industrial segment of ETN’s electrical business. Continued weaknesses in oil and gas will negatively impact those industrial markets. However, solid secular tailwinds in Eaton’s dominant segments will help offset and outperform these negative trends. In particular, expansion is expected in markets connected to electrification and digitalization. This will spur growth for Eaton’s electrical products, data centers, and clean energy products and solutions. Other end markets expected to support strong growth are the electrical vehicle market and overall e-commerce. The question will be whether the company can break out of this upcycle and outgrow the economy.

 

Another determining factor for Eaton’s future will be the company’s portfolio choices. With the upcoming divestment of the hydraulic business in the first quarter of 2021 and global M&A activity picking up, it will be interesting and important to see what deals ETN decides to pursue.

 

What has the stock done lately?

 

Over the past three months, ETN returned 10.9% compared to the 6.3% return of the MSCI AC World ex USA. This superior performance is partially due to company’s the better-than expected Q3 results that show good signs of recovery. Adjusted EPS were reported at $1.18 and ahead of market consensus of $1.05.

 

Past Year Performance: 

 

YTD Eaton Corporations stock has grown bullish compared to the world market. While ETN’s year to date return is at 19.6%, the MSCI AC World ex USA has basically stayed stagnant at a return of 0.2%. Comparing the returns from the lowest price at the end of March 2020, Eaton outperformed the market by a staggering 46%. 

 

YTD Returns vs Benchmark

Source: FactSet

 

My Takeaway

 

Since ETN was added to the Marquette International Portfolio, the stock has returned above 50% for our fund. During the pandemic and an economic downturn, the company has proven its ability to operate efficiently, that it can benefit from the secular shifts caused by the pandemic, and surprised investors by beating market estimates. Even though some of Eaton’s business segments are expected to face headwinds, the strong growth in areas of electrification and digitization are undeniably going to help the company grow. Considering this and Eaton’s global diversification, the stock can be viewed a thematic play on efficient energy and power solutions. I believe we should hold on to the stock while it will benefit from secular trends and generate more returns.

 

1 Month Price Chart

 

Source: FactSet

 

An International Equity holding: Wheaton Precious Metals Corp. (WPM-US, $45.45): “Mining the Most of Covid-19” by: Sam Shibilski, AIM Student at Marquette University

 Wheaton Precious Metals Corp. (WPM-US, $45.45): “Mining the Most of Covid-19”

By: Sam Shibilski, 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

• Wheaton Precious Metals Corp. (NYSE: WPM) is a mining company focusing on in Gold, Silver, Palladium, Cobalt, among others. WPM has revenues across the globe; however, they heavily focus in Brazil (42.4%), Peru (19.8%), Mexico (16.2%), and Canada (8.6%).

• WPM enters a definitive Precious Metals Purchase Agreement with Caldas Group; effective July 1, 2020.

• Management has indicated a Q4 2020 dividend increase of 20% from Q3 to $0.12.

• Company and revenue value have been driven by rising precious metal prices and company leverage.

• All WPM’s mining partners have resumed excavations and operations if they were suspended due to Covid-19.

Key points: Caldas Gold Group and WPM have agreed to a definitive Precious Metals Purchase agreement concerning a mine in Columbia. WPM will pay $110 million USD, $38 million upfront and 18% of the commodity spot price until the remaining $72 million has been paid, for 6.5% of the gold production up to 190,000 ounces of gold and 100% of the silver up to 2.15 million ounces of silver. Subsequently, after the thresholds, WPM will acquire 3.25% of the gold production and 50% of the silver for the life of the mine. Additionally, after the $110 million, WPM will pay 22% the commodity spot prices for the gold and silver for the life of the mine. This marks one of the first agreements WPM has entered since the Covid-19 pandemic. 

WPM has been affected by Covid-19 in a multitude of ways. Firstly, many of their mining partners understandably had to close down operations both in compliance with regulations and in order to look out for their workers well beings. These shutdowns occurred industry and world economy wide; thus, causing a precious metal shortage which bring up another way Covid-19 affected WPM. Due to the precious metal shortage, many precious metals have seen a drastic increase in price the last few months; most notably is gold, one of WPM’s main commodities, since March of 2020 gold has risen 27.53% in price, from $1478.60 to $1885.70. These precious metal price increases have positively affected WPM’s revenues and share value.

Furthermore, although production did drop since the pandemic began, WPM is still on track for their long-term average goals of 750,000 ounces of gold produced per year on average from 2020 to 2024. Currently, WPM expected to finish the year between 655,000 and 685,000 ounces. The Caldas Gold Group agreement will help WPM achieve their gold moving forward.

Lastly, in response the Covid-19 pandemic WPM has pledged a $5 million USD fund in order to address the adverse effects the pandemic has had on the communities which WPM operates. A large amount of this fund has been dedicated to Brazil, Peru, and Mexico in respect to them being WPM’s three highest revenue driving countries.

What has the stock done lately?

For the first 3 quarters of 2020, as of September 30^th, WPM has generated $565 million in operating cash flows, an increase of 51.88% from the first three quarters of 2019. This has allowed for WPM’s 2020 Q4 dividend to increase by 20%. With Q3 earnings being released on November 10^th, production for gold, silver, and palladium, their largest commodities, are down 7% from 2019 Q3, however they are up 22% from 2020 Q2 due to Covid-19 mine shutdowns resuming excavations. 

Past Year Performance: WPM has increased 61.92% in price over the past year. This large increase in stock price is largely driven by the increased demand and as such increased price of precious metals that has arisen during the Covid-19 pandemic. This affect is even more evident when looked at the March to July price jump of 97.35%, from $27.53 to $54.33.  

Source: FactSet

My Takeaway

The Caldas Gold Group agreement will greatly help Wheaton hit their production targets moving into future years and as such also increase revenues for the firm and continue to help create value for shareholders through dividends. However, as more and more mining sites become operational again and increase operations post-prime Covid-19 the supply of precious metals which WPM specializes in will increase industry wide and as such cause the commodities prices to decrease. This is a large risk which WPM has to deal with and will adversely affect their revenues and likely their share price moving forward.

Source: FactSet

 

An International Equity holding: Accenture PLC (ACN, $241.78): “An Unforgettable Accent(ure)” by: Riley Arnold, AIM Student at Marquette University

Accenture PLC (ACN, $241.78): “An Unforgettable Accent(ure)”

By: Riley Arnold, 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

• Accenture PLC (NYSE: ACN) engages in the provision of management consulting, technology, and outsourcing services in three primary markets: North America, Europe, and Growth Markets. 

• Despite the continuing economic difficulties due to COVID-19, in Q4 2020, ACN announced an increase in dividends from $0.80/share to $0.88/share. Additionally, management approved further share repurchase programs to benefit shareholders.

• Bookings for the year surpassed $50 billion, a company record. Along with the success from the bookings vertical, ACN’s revenue pipeline has remained robust, with losses in certain SBUs compensated by large gains in other areas.

• Demand for digitization services and cloud platforms has been accelerated by the pandemic and continues to increase as more companies shift online. Higher R&D spending coupled with the expansion of ACN's client base has built a solid foundation which the company has used to navigate the pandemic.

• ACN has outlined several ESG initiatives within the company culture, proving to be a global leader in company ethics, diversity, and community inclusion. 

Key points: Accenture Plc has continued to grow and expand their expertise in their already established positions across all 13 covered industries. As the company continues to employ their large cash base to acquire talent and expand their offerings, ACN continues to expand their market share, growing at four times the rate of FY 2019.

Around the same time, the company announced an increase in their dividend to $0.88/share, an increase in 10% from FY 2019. Furthermore, management approved more than $5B in outstanding shares to be repurchased in the short-term. Despite the hardships initially endured by the firm, they have continued to emphasize the importance of the shareholder. Benefits from ACN's programs will continue to help the portfolio in the near- and mid-terms.

ACN's strong recovery from the initial pandemic crash has come in large part to their success with cloud storage and other digitization services. In their Q4 2020 earnings call in August, the company disclosed how they current deliver 17 clients with over $100MM in bookings revenues each, with these numbers expected to increase. With the announcement of Accenture Cloud First, the company has established a new, multi-service group of over 70,000 cloud professionals to aid their future clients. As ACN continues to capitalize on the tailwinds from this digitization trends, the firm is poised for strong growth through FY 2022.

As of Q4 2020, ACN announced that approximately 45% of their workforce was composed of women, with a 50/50 balance goal to be achieved by 2025. Furthermore, the company has announced programs to increase their African American, Hispanic American, and Latinx communities in the United States. With already extensive community engagement through their involvement programs, Accenture continues to create a positive brand image and foster a top-notch company culture.

What has the stock done lately?

Since the beginning of 2020, the company’s stock has increased 13.10%. Rebounding from their pandemic low of -30% return, Accenture has continued to rely on their diversified business model to recoup lost revenues in an uncertain macroeconomic environment. In the past month, the stock has risen 4%.

Past Year Performance: Accenture has returned 25.30% YoY and continues to grow from inorganic expansion and sector tailwinds. While the stock is trading near its all-time high, the increased dividend growth and continued shareholder benefits, combined with the robust revenue pipeline, marks a strong outlook for the company into 2021 and beyond.

Source: FactSet

 

My Takeaway

The initiatives undertaken by Accenture in the second half of 2020 have proven to be successful. From the recent acquisitions of N3 to Enimbos, the company continues to build their talent around cloud-based services. In addition to Accenture Cloud First, these long-term projects are certain to pay off. I believe that as ACN continues to grow this platform, diversify their product portfolio, and take care of their employees, it will see steady growth long into the future. Despite the lack of clarity into the future of the economy given the pandemic, I am confident that Accenture has the ability to overcome any challenges the firm may face moving forward.

Source: FactSet

A Small Cap Equity holding: Celsius Holdings, Inc. (CELH, $31.96): “Temperature is Rising for Celsius After Earnings Beat” by: Will Steinhafel, AIM Student at Marquette University

Celsius Holdings, Inc. (CELH, $31.96): “Temperature is Rising for Celsius After Earnings Beat”

By: Will Steinhafel, 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

• Celsius Holdings, Inc. (NASDAQ: CELH) engages in the development, marketing, sales, and distribution of calorie-burning beverages. The company operates primarily in the United States and Canada. 

• Celsius’ strategic movement towards a direct store delivery (DSD) has resulted in the growth of their distribution network across the United States. 

• E-commerce presence grows as COVID-19 related shutdowns result in decreased sales from brick and mortar stores. 

• Since announcing Q3 earnings on November 12, 2020, CELH’s stock is up 29%.  

• CELH looks to be headed towards continued growth in 2021 as distribution channels and brand recognition grow. 

Key points: 

Despite COVID-19 shutdowns, Celsius Holdings posted strong growth in 2020 and looks continue this momentum into 2021. Throughout the year, Celsius’ management team expanded its DSD distribution and wholesale networks through entering into agreements with Anheuser-Busch, PepsiCo, Keurig Dr. Pepper, Molson MillerCoors, and Big Geyser. As a result of these strategic partnerships, Celsius anticipates that its distribution network covers approximately 75% of US metropolitan markets. 

Celsius announced a recording breaking Q3 2020 that featured over an 80% revenue growth in comparison to Q3 2019, as well as the addition of 19,000 retail locations in the last twelve months. CELH’s e-commerce channels grew by over 100% in Q3 2020. Amazon sales were the dominant driver of this growth and accounted for 22% of domestic revenue in the quarter.  

Despite an industry wide aluminum can shortage in the United States, Celsius expects to meet demand in 2021 by utilizing their global relationships to source the needed cans. This disruption will result in an increase in cost of goods. Given its growing distribution network and increased brands recognition, CELH is well positioned to capture additional market share and grow revenues in the coming quarter and FY 2021. 

What has the stock done lately?

Celsius reported Q3 earnings on November 12, 2020. CELH beat expected earnings and offered promising guidance for Q4 2020 and 2021. After beating earnings, CELH’s share price increased by 29% to $31.96.

Past Year Performance: 

CELH’s share price has increased by 711% over the past year. The 52-week high-low for CELH is $32.75-$3.94. During the March sell off, Celsius dropped to a low of $3.94 but has since recovered incredibly and looks to continue growth into 2021. 

Source: FactSet

My Takeaway

Celsius Holdings’ movement towards DSD distribution relationships has proven successful through Q3 2020 and shows promise of continued network expansion. Management’s successful leadership through COVID-19 and the current aluminum can shortage should give investors’ confidence in their ability to bring CELH into sustained growth. The momentum attributable to the growth of Celsius’ DSD distribution network, increased e-commerce presence, and strong management team looks to continue into 2021 as CELH aims for new highs. It is recommended that CELH remain in the AIM fund.

Source: FactSet

A Small Cap Equity holding: Envestnet, Inc. (ENV, $77.73): “Envestnet Still a Strong Envestment” by: Christian Wilber, AIM Student at Marquette University

Envestnet, Inc. (ENV, $77.73): “Envestnet Still a Strong Envestment” 

By: Christian Wilber, 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

• Envestnet, Inc. (NYSE:ENV) provides intelligent Fintech solutions that empower wealth advisory firms and delivers data analytics solutions that enhance financial institutions. The firm derives revenue from two segments, Envestnet Wealth Solutions (79% of revenue) and Envestnet Data and Analytics (21% of revenue).  

• In Q3 2020, ENV beat EPS guidance by $0.13 and revenue has grown more than 7% YOY.  

• Yodlee, a product of ENV, has recently released Insight Solutions that will use machine learning to show personalized financial statistics and help users plan for the future. 

• A head of international sales was hired this week to increase weak foreign market share. 

• ENV has capitalized on digital trends to become the highest used wealth platform by advisors.

Key points: On November 6th, Envestnet announced better than expected earnings for Q3 2020.  Adjusted earnings were $0.72 per share, beating guidance of $0.59. Reported revenues of $252.6M beat the consensus by 2.5% and have increased over 7% YOY. Q4 2020 guidance was raised to a $0.64 EPS. This continues a long trend of under promising and over delivering.  

Yodlee, which was acquired by Envestnet in 2015, is the leading account aggregation service that allows users consolidate credit card and bank statements, investments, travel rewards, and more to a single screen. In August of this year, Yodlee released Insights Solutions, a hyper-personalized solution for making informed decisions and benchmarking progress. Insights uses machine learning to show the individual predictive cash flow capabilities, alerts for credit monitoring, and analytics of subscriptions and frequently used merchants. 

Currently, 96.8% of total LTM revenue for Envestnet came from the United States. Of the rest, .7% is from China, .2% Japan, and the rest from European nations. This represents an easy opportunity to increase market share, and Jason O’Shaughnessy was appointed as Head of International Sales this week to expand cover and data enrichment across Europe and Australia. 

Envestment has predicted and embraced trends in the digitalization of finance, anywhere from delivering condensed analytics to individuals to providing high quality data to hedge funds. These adaptions have driven them to be the highest used wealth platform with $4.1 Trillion in assets in over 13M accounts. The data and analytics segment now has access with 17,000 sources, with 450 linked consumer accounts.     

What has the stock done lately?

Even after beating Q3 EPS and revenue consensus estimates, shares fell from $83.71 to $77.5 (7.42%) on Nov 6, along with a .96% daily drop in the Russell 2000. ENV established a 52-week high of $92.51 on August 7^th, but is still trading well above the low of $45.53

Past Year Performance: 

Over the past year, ENV share prices have risen 20.4% while the industry has declined 1.8%. Additionally, the Russel 2000 has only increased 9% over the same timeframe.  

Source: FactSet

 

My Takeaway

Envestment continues to be a leader in Fintech and outperforms relative benchmarks. The release of Insight Solutions will finally make data analytics useful to advisors and allow their clients personalized decision-making abilities throughout the month. Management continues to capitalize on consumer and institutional trends by providing useful and relevant solutions. Additionally, they are positioned to capture international market share in the next year after already partnering with 47 of the 50 largest domestic wealth management and brokerage firms. I believe that ENV represents a hold for the fund and will continue to provide alpha long term.

Source: FactSet

A Small Cap Equity holding: National Storage Affiliates Trust (NSA, $35.74): “Store for the Long Haul” by: Christian Musbach, AIM Student at Marquette University

 National Storage Affiliates Trust (NSA, $35.74): “Store for the Long Haul”

By: Christian Musbach, 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:

•       National Storage Affiliates Trust (NYSE: NSA) is a real estate investment trust (REIT) that owns, operates, and acquires self-storage properties located in the US and Puerto Rico. It is well-diversified across the US with exposure to 35 states with 784 properties. This makes NSA the 6^th largest U.S. operator of self-storage facilities. Given the highly fragmented industry it is in with 48,000 self-storage properties and 30,000 operators, this gives NSA much room for growth. 

•       The first driver for the pitch of NSA in October of 2019 was the growth in the self-storage industry paired with NSA’s quality properties would promote long-term growth. 

•       The second driver was NSA’s business model of seeking partnerships with individuals (PROs) which drives growth compared to competitors who use a top-down approach. 

•       The stock is currently slightly down from its high point in February, but the fundamentals have remained solid throughout the pandemic.

Key points:

The first driver in the original pitch for NSA was the industry growth numbers as well as NSA’s high-quality properties. The original estimate of the self-storage industry growing from 9.4% to 12.3% did not come to fruition as this number has only slightly risen to roughly 10%. However, the population has grown roughly 3 million since this was pitched which means the demand has grown. A critical reason for the limited growth is the pandemic and the decline in spending. Despite this, NSA has been able to sustain its occupancy rates in the high-80% range. The overall self-storage industry has also remained resilient throughout the pandemic and is the fifth-best performer YTD in the REIT sector. 

NSA was also pitched because of its unique business model of taking a bottom-up approach compared to its competitors’ top-down approach. This continues to be a focus of the firm giving the firm a tax-efficient way to acquire properties in exchange for OP units (equal to common stock) and SP units (distributions given based on performance). The structure continues to benefit NSA as PROs are invested in the process which motivates them to run the facility as efficiently as possible. This business model also thrived throughout the recent economic downturn with the reduction of downside risk. The PRO absorbs a portion of the NOI declines thus making the dividend coverage safer than other structures. 

The stock has remained resilient throughout the pandemic and this is due to its solid fundamentals. NSA has reported positive growth in sales and operating income in the past three quarters of 2020. Additionally, the capital structure remains strong. The portfolio’s interest is 100% fixed with a weighted average maturity of 6.3 years for its debt. Also, NSA does not have any significant debt due until 2023 when $380.7 million is due. It currently has around $500 million of liquidity thus allowing them to continue acquiring properties to stimulate growth. The total acquisition pipeline is currently $2.9 billion which contains over 300 properties. Despite the noise around the pandemic’s effect on the self-storage industry, this industry remains solid and NSA will continue to acquire to capture the growth. 

What has the stock done lately?

NSA reported strong third quarter of 2020 earnings on November 5, 2020. It experienced a net income increase of 29.7% year-over-year. It also increased core funds from operations by 10% from last year. However, the stock is still down roughly 6% since its February high. In the past month, it is up almost 5%. 

Past Year Performance: 

Over the past year, the stock is up almost 10% with a rise of almost 60% since its March low of $22.82. The stock trades at a 20.6x 2020E CFFO which is roughly a 5.9% discount from its peers. Despite the real estate market being hit hard by the pandemic (-25% YTD), self-storage is a solid industry to thrive in and NSA will benefit from this growth. 

1 Year Stock Chart vs. Benchmark

Source: FactSet

My Takeaway:

NSA should remain in the AIM small-cap portfolio. The current REITs in the portfolio cover the best markets within real estate. The stock is up almost 5% since it was pitched last October. However, before the pandemic hit, it was up over 11% until February 14, 2020. Self-storage is in the top five in terms of YTD performance in the REIT industry and thus shows its resiliency. NSA is well-positioned to continue to capture the growth trends in self-storage with its acquisitions and bottom-up business model. The drivers that were originally outlined for NSA are still in place and will continue to drive the stock in the future. With the combination of a strong capital structure, business model, and growth trends in self-storage, NSA will continue to steadily grow into the foreseeable future. 

1 Month Stock Chart 

Source: FactSet