Software firm Mastek shares gained 2 percent intraday Friday after HDFC Securities initiated coverage with a buy call on the stock and expects it to return 50 percent.

The stock gained 19 percent in last one month. It was quoting at Rs 443.35, up Rs 3.95, or 0.90 percent on the BSE, at 13:13 hours IST.

Mastek is well placed to generate revenue/EPS CAGR of 15/16 percent over FY19-21E (despite US softness and Brexit uncertainty) and is available at attractive valuations of 8.3x FY21 versus midcap average of around 13x, the brokerage house said.

Stake in Majesco US (around Rs 79 per share), net cash position (Rs 82 per share) provides additional comfort, it added.

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Hence the brokerage initiated coverage with a buy rating and a price target of Rs 660, based on 11x FY21E EPS.

HDFC Securities said Mastek’s differentiating factors are (1) UK focus (75 percent), (2) Among the top vendors for UK government and (3) Focus on high growth UK Retail & Financial services verticals.

Under the leadership of CEO, John Owen, Mastek has strengthened its relationship with UK Govt and improved operational efficiencies, it added.

Mastek is blessed with lower exposure to Legacy (Digital is around 80 percent of revenue) but generates low-teen margins (around 13 percent) due to higher on-site revenue mix (around 72 percent versus mid-cap average of around 55 percent).

Mastek, founded in 1982, is one of the oldest IT companies in India. Mastek has experience spanning over three decades but in its current version, it’s just a four-year-old organisation (demerger with Majesco happened in Q4FY15).

The company has transformed itself post the demerger, led by (1) Appointment of experienced and capable CEO, John Owen, in November-2016 (2) Direct relationship with UK government versus being a sub-contractor earlier and (3) Acquisition of TAIS Tech (SI for Oracle ATG), which marks its entry in the US.

Under the new leadership, Mastek has delivered healthy revenue CAGR of 32 percent (around 23 percent organic) and margin expansion of around 370bps over FY17-19.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
First Published on Mar 29, 2019 01:33 pm

Here are the biggest calls on Wall Street on Monday.

RBC lowered their price target on Tesla to $210 from $245

RBC sees softer demand expectations and a delivery snag in China.

“Tesla is expected to report 1Q19 deliveries in early April… We revise down our total unit forecast by ~10% owing to meager demand and some M3 delivery issues abroad… We also incorporated lower pricing (and hence margins) on a go forward basis. Our PT moves to $210, reiterate Underperform…”

Read more about this here.

J.P. Morgan initiated Fox as 'overweight'

J.P. Morgan was impressed with the new company’s array of businesses.

“We are initiating coverage of FOX Corporation with an Overweight rating and a December 2019 price target of $46… FOXA has an impressive mix of businesses, including strong cable channels driven by live news and sports, as well as a major broadcast network with a leading local TV footprint… We believe FOXA shares will maintain a premium valuation over the average in our large-cap media universe due to its higher growth profile, implying notable upside to shares from the current level…”

J.P. Morgan added O'Reilly Automotive to the analyst 'focus list'

J.P. Morgan said the colder weather in areas of O’Reilly shops will benefit it more than Advance Auto Parts, AutoZone and Genuine Parts as the harsh winter causes more auto repairs.

“Adding ORLY to the JPM Analyst Focus List given favorable three consecutive season setup… We are adding ORLY to the JPM Analyst Focus List as growth idea as we believe ORLY is likely to regain the best comp crown in the group after yielding it to AAP in 2H18… Specific to our analysis, on geographically-weighted basis, after a favorable temperature (-3.6 degrees) and snowfall experience (+143 inches across its footprint) in 2018, ORLY ranked first in terms of summer temperature YOY (+1.6 degrees)… Moreover, the 2019 winter saw temperatures only modestly higher (+0.8 degrees, similar to peers) with snow actually up YOY (+129 inches across markets)…”

Susquehanna upgraded Hibbett Sports to 'positive' from 'neutral'

Susquehanna said the athletic-inspired fashion retailer issued impressive an impressive earnings report.

“Better than expected SSS, operating margin, inventory levels, FY20 outlook, and indications that the City Gear acquisition was a very good idea are proving out have led us to upgrade the stock… Further, strong relationships with major vendors, and initiatives to jumpstart B&M sales are evident… We are raising our FY20/FY21 EPS estimates from $1.76/$1.93 to $1.93/$2.25, and increasing our PT [on HIBB] from $20 to $27…”

Wedbush added Signature Bank to the 'best ideas' list

Wedbush said Signature is one of the better positioned banks to benefit from lower rates.

“We are adding Signature Bank to the Best Ideas List as we believe it is one of the best positioned banks to benefit from the Fed having become more dovish than the market anticipated in its most recent FOMC meeting last week. Furthermore, Trump’s nomination of Stephen Moore on Friday to the Fed board could tilt the board to be even more dovish given Moore has publicly criticized Fed chairman Powell’s interest rate policy as being too tight. Fed fund futures are now predicting a 58% probability of a rate cut by year-end 2019…”

Bernstein downgraded Texas Instruments & Analog Devices to 'market perform' from 'outperform'

Bernstein is nervous about the set-up into the second half and believes both semiconductor companies are more expensive than others in its coverage universe.

“Overall we are growing increasingly nervous about the set-up for the industry into the 2H (with inventories remaining elevated, expectations higher, and valuations less favorable).. Consequently, after the recent run we are taking the opportunity to move to the sidelines on TXN and ADI (more broadly exposed, and more expensive, in our coverage)… We wouldn’t talk anyone out of owning either for the long term (and we remain positively biased on the quality of the business franchises and execution) but given the broader set-up we might prefer to put new money to work in other parts of the space with more valuation support….”

Welcome, reader. In this article, we are going to review the state of Polaris Industries, Inc. (NYSE:PII) as they are today, following the company’s rapid expansion from $1.6B annual sales to their most recent report’s $6B sales (Polaris Industries’ FY2008 10-K, FY2018 10-K). Growth has come primarily through acquisition and expansion into the Australian market.

After reviewing the company’s financial results, which I outline below, I have to say the company appears to be in good shape. I am bullish Polaris Industries stock as I believe their operating earnings and business position are being undervalued at $84.43.

Polaris Industries’: Activity From The C-Suite

The growth through acquisition since 2008 has transformed the state of this business: From carrying no long-term debt outside of their credit facility to issuance of a couple billion in debt of which $1.95B in long-term bonds remains outstanding. The company also operates on a more global scale, coming with the commensurate risks in foreign currency incomes such as from their expansion into Australia.

Returning to favorable aspects of the business, reviewing the company’s reports from both pre and post the great recession indicate a surprisingly resilient sales number. The company made a full 80-90% as many sales or better, taking out revenues acquired during the period, during the recessionary period as they did during the years 2004-2006 and maintained profitable operations to boot.

The robust profitability of those lines is a good sign the business will continue generating enough cash to protect shareholder value from negative economic events so long as they do not become much more leveraged. Continuing their streak of strong sales is important here because the company’s growth in long-term debt will be a substantial weight on the bottom line until the bonds are retired.

All in all, because of the robustness of profits during downturns, so far, their acquisitive behavior is defensible for conservative investors.

How Threats To Polaris Have Increased Throughout This Period Of Rapid Growth

Inventory turnover has slowed down considerably from typically exceeding 8 turns per year, which the company achieved over many years, to recent reports of a turn rate at 6.6. Adding more high-cost products such as with the company’s recently closed acquisition of Boat Holdings, LLC for $805M is likely going to drag their inventory turnover lower.

The threat here is, while selling bigger and more expensive items for a healthy profit margin is great (and reduces the turnover number cited above), in the case of an economic slowdown, we’re going to see worse performance from the business as credit for big purchases dries up. So, in the case of setbacks, the stock won’t be able to avoid being depreciated due to earnings deterioration despite their history of robust earnings.

Polaris’ Top Tier Brands

As a result of the Boat acquisition, the company now owns the boating names Bennington, Godfrey, Hurricane, and Rinker. Through this acquisition, Polaris has increased their exposure to the growing popularity of the pontoon boat.

Their ATV and Snowmobile businesses are each among, if not the biggest, players in their respective industries. And, the company’s Indian Motorcycles brand is legendary among bikers. All in all, the branding picture is good, with Polaris owning top global brands in most of their lines of business.

Money Talks: I Am Bullish Polaris Industries

Polaris cleared $251M of free cash flow available to owners for 2018 after making their typical volume of capital expenditures. Hence, the maximum dividend distribution they might be able to make at today’s earnings, and stock price level attains to a theoretical dividend yield of 4.77%.

Cash from operations came in at $477M during the recent year, about $100M lower than their all-time high takes of 2016 and 2017. The stock is trading at a price to earnings ratio of 16.51x, a 27% discount to the broader market as measured by the S&P 500 and a more modest 9% discount to the DOW Industrials Index at a P/E of 16.99.

I believe the DOW Industrials is a good comparison because of the large amount of manufacturing operations (reflected in that index’s lower P/E). However, I believe Polaris deserves a premium to the DOW P/E because of their strong profit margins and industry-leading position.

Odds are good we will see the company’s cash from operations improve, in part because of the addition of more big-ticket items to their product mix via the Boat purchase. Big ticket durable products tend to generate a lot of cash upfront.

The figures are stacking up nicely, with a long track record of successful business operations, the company has built up substantial vertical integration in their product manufacturing process which helps them protect profit margins long term.

My take: Polaris is a solid pick for a long-term buy and hold from today’s price.

Supplementary Data:

Data by YCharts

In the red line, we can see the Polaris has shrunk total shares outstanding by roughly 9% since 2015, making steady progress. Juxtaposed with their share price, it appears management has been chasing the stock price up on these purchases, which is unfavorable for long-term shareholders.

The company is in the first innings of its second decade as a leveraged corporate. At 33% debt to revenue, the company is soundly positioned, and as an investor, I’d like to see them accumulating cash while maintaining the dividend and deploying a small portion of cash to buy back stock below $100 per share.

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Disclosure: I am/we are long PII. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is not intended to provide tax, legal, insurance, or investment advice, and nothing in the article should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by Faloh Investment. We are not investment advisors. You alone are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation.