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Car Group: Revisiting the Company’s Brazil Business Following Seek’s Exit From the Region
We raise our fair value estimate for narrow-moat Car Group by 4% to AUD 27 per share following a review of its Brazil business, Webmotors. Our review was prompted by the recent announcement by narrow-moat Seek to exit Brazil and Mexico, following more than a decade of unsuccessful attempts to enter the market. We had expected Seek to be unsuccessful in the region, while we expected and continue to expect Car Group to be successful there due to differences in network effect dynamics. Following our review, we are upgrading our revenue growth and margin expansion assumptions for Car Group’s Latin American segment. At current prices, Car Group’s shares continue to screen as materially overvalued.
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Despite Its Relatively Small Size, Integral Is Uniquely Positioned to Benefit From Industry Trends
Integral’s strategy centers on capitalizing on the growing demand for diagnostic imaging. Volume growth is driven by population growth, ageing demographics, higher incidence of diseases, and wider adoption of preventative diagnostics. These drivers are often greater in regional areas which Integral focuses on.
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We Expect Most of Caterpillar's End Markets to Remain Stable Through 2024
We believe Caterpillar will continue to be the leader in the global heavy machinery market with an extensive portfolio of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. High-quality, extremely reliable, and efficient products underpin the strong brand. Customers also value Caterpillar’s ability to lower the total cost of ownership.
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We See Allison Remaining the Fully Automatic Transmission Leader for Trucks
We believe Allison will continue to be the top supplier of fully automatic truck transmissions, despite increasing regulation of emissions by government authorities. The company dominates the medium-duty market, commanding approximately 80% share in some verticals (school buses, Class 6-7 trucks, and Class 8 straight trucks). Allison's strong brand is underpinned by its high-performing and extremely durable transmissions. This has led to the company benefiting from pricing power.
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United Rentals Is the Market Leader in a Consolidating Sector
We think United Rentals will continue to be the top player in the North American equipment rental industry with 15% share. As the industry leader, the company provides customers with better equipment availability and reliability than smaller players. However, many of the equipment brands found in United Rentals’ product catalog can also be found with competitors, such as Sunbelt Rentals (owned by Ashtead), Herc, and thousands of other rental companies across North America.
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Investments Should Lead to Long-Term Sales Growth for Narrow-Moat Porsche
Because of its intangible assets, including brand strength and intellectual property, Porsche has a narrow economic moat rating. The brand is synonymous with motorsports and highly engineered, fun to drive, sports cars. Brand strength has enabled a premium to luxury price range across Porsche's product portfolio, while intellectual property supports the brand image from racing-inspired engineering and well-executed product. Porsche is one of only a handful of automakers to which we assign an economic moat.
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Sluggish China and North America Sales Weaken 2024 Numbers but Favorable Long-Term Outlook Remains
Carl Zeiss Meditec is one of the largest medical technology companies in the world and it operates in two segments: ophthalmic devices, or OPT, and microsurgery, or MCS.
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Gucci Recovery Is Key to Kering's Investment Thesis
Kering Group’s portfolio of luxury brands provides it with a narrow moat and a good platform for future growth. The flagship Gucci brand accounts for over 50% of revenue and almost 70% of the company's earnings, but brands like Saint Laurent (over EUR 3 billion revenue), Bottega Veneta, and Balenciaga are also set to support growth in future.
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Lululemon’s Immense Popularity Is an Advantage, but Competition in North America Is Heating Up
We think Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its categories, we believe Lululemon benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. Our narrow moat rating is based on the company's intangible brand asset.
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Near-Term Challenges for LKQ Do Not Change Our Long-Term Thesis
LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.
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Super Retail's Narrow Moat Sourced From Supercheap's Cost Advantage
Super Retail Group operates in Australia and New Zealand, selling automotive parts and accessories, sporting goods, and outdoor leisure equipment. The group is the market leader in all three segments in Australia, with about 20%-30% market share in auto parts, camping equipment, and sporting goods retailing. However, we believe formidable competition will constrain operating margins as the firm competes on price to maintain market share.
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Product and Channel Transitions to Drive Stabilizing Profit for Hengan
Hengan International operates in the tissue, sanitary napkin, and diaper markets in China and is one of the leading brands in tissue and sanitary napkins. Being one of the early movers in personal-care products, it has developed an extensive offline distribution network in China. It has also penetrated lower-tier cities, which contributed close to 80% of its sales in 2021. With its focus on lower-tier cities, the majority of the firm's products sit in the mass market below-premium segments.
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Best Buy Set For Third Straight Year of Sales Declines, but Industry Poised for Modest Rebound
We believe Best Buy is taking adequate steps to shore up its competitive position in an intensely competitive consumer electronics space. Moving forward, the firm plans to prioritize its digital platforms, continue to reimagine its in-store experience, and invest in incremental revenue streams.
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We See Near-Term Challenges Ahead for Snap-on but Remain Positive on Long-Term Prospects
Snap-on provides premium tools to vehicle repair shops and industrial customers. We believe it will continue to be the top player in the tool industry. The company benefits from a strong brand reputation among repair technicians. Customers value Snap-on’s high-quality and strong-performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. We think customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options.
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PG&E Making Progress To De-Risk Operations, Boost Investment
PG&E emerged from bankruptcy in July 2020 after 17 months of negotiations with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. Shareholders lost some $30 billion in settlements, fines, and costs but retained control. Bondholders were mostly made whole.
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AtkinsRealis Is Poised to Drive Profitable Growth in Engineering Services Regions and Nuclear
Since Ian Edwards took the helm as president and CEO in June 2019, management has transformed and significantly derisked AtkinsRealis' portfolio. During his tenure, the company has ceased bidding on lump-sum turnkey (LSTK) projects and divested its oil and gas business. We view the new strategic direction favorably, as cost overruns on LSTK projects led to negative cash flows in recent years. The company has steadily reduced its LSTK backlog to only CAD 0.3 billion at the end of the first quarter of 2024, which we believe significantly reduces the risk of further material cost overruns. The firm’s operating cash flow inflected positive in the second half of 2023, and we expect more stable results once the firm completes the remaining LSTK backlog.
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PVH Making Progress Toward Its Goals Despite Some Near-Term Challenges
Once known as a producer of midtier men's shirts, PVH transformed itself by purchasing fashion brand Calvin Klein in 2003, Tommy Hilfiger in 2010, and Calvin Klein licensee Warnaco in 2013. More recently, it disposed of most of its noncore labels to focus on Calvin Klein and Tommy Hilfiger. While the firm lacks diversification, we think it was prudent to focus on its highest-potential properties and returning capital to shareholders through share repurchases. However, although they are popular worldwide, we do not believe that either of PVH’s major brands has the pricing power or competitiveness to provide an economic moat.
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Wide-Moat Honeywell Continues Building Its Diverse Installed Base
In our view, Honeywell is one of the stronger multi-industry firms in operation today. Its underlying strategy is similar in each end market: to embed its own products into the operations of customers from which recurring revenue can be generated through aftermarket servicing. We predicate our long-term thesis on secular demand for warehouse automation, data analytics in power plants, remote security management, energy savings in buildings, and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit organic top-line growth, incremental segment operating margins in the high 20s to low 30s, 9%-10% adjusted earnings per share growth, and free cash flow margins in the midteens.
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MSC Lowers 2024 Guidance Following Challenged Fiscal Third-Quarter Earnings
Since its initial public offering in late 1995, MSC Industrial Direct has increased its top line at an impressive 11% compound annual rate. Over the past 25 years, MSC has become one of the largest industrial distributors in United States and is especially well known in the metalworking industry, where we estimate it enjoys approximately 10% market share. MSC has historically been a conservatively capitalized company, but it is not afraid to flex its balance sheet when the right opportunity presents itself. The company spent $900 million to acquire J&L Industrial Supply in 2006 and Barnes' North America distribution business in 2013, which bolstered its metalworking and inventory-management products and services. In our view, these acquisitions were prudent uses of capital that improved MSC’s competitive standing.
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Reckitt Has a Strong Portfolio of Brands but the Nutrition Business Is a Major Drag on Performance
The majority of Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition—a segment with substantial pricing power. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain, especially given the ongoing premature infant fomula litigation in North America. At the same time, we expect that further secular declines in birthrates in the US will continue to be a drag to the company’s mid-single-digit growth ambitions.
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Bilibili's Video Platform Experiences Rapid User Growth, but Monetization Key to Long-Term Success
Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. We believe that the advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success.