applied investment management (aim) program …...marquette university aim class 2020 equity reports...

Marquette University AIM Class 2020 Equity Reports Fall 2019

Applied Investment Management (AIM) Program

AIM Class of 2020 Equity Fund Reports Fall 2019

Date: Friday, September 13th | Time: 3:00 P.M. | Location: R.W. Baird Road Trip

Presenter Company Name Ticker Sector Page

Matthew Prinske Employers Holdings, Inc EIG Financial Services 2

Robby Metcalf Creditcorp Ltd. BAP Intl Financial Services 5

Chez Daggs HealthEquity, Inc. HQY Healthcare 8

James Oddo Essent Group Ltd. ESNT Financial Services 11

Nicholas Goehring Berry Global Group BERY Materials 14

These student presentations are an important element of the applied learning experience in the AIM program. The students conduct fundamental equity research and present their recommendations in written and oral format – with the goal of adding their stock to the AIM Equity Fund. Your comments and advice add considerably to their educational experience and is greatly appreciated. Each student will spend about 5-7 minutes presenting their formal recommendation, which is then followed by about 8-10 minutes of Q & A. David S. Krause, PhD Director, Applied Investment Management Program Marquette University College of Business Administration, Department of Finance 436 Straz Hall, PO Box 1881 Milwaukee, WI 53201-1881 mailto: [email protected] Website: MarquetteBuz/AIM AIM Blog: AIM Program Blog Twitter: Marquette AIM Facebook: Marquette AIM


Employers Holdings, Inc (NYSE: EIG) September 13, 2019

Matthew Prinske Domestic Finance Employers Holdings Inc. (NYSE: EIG) is an insurance firm that operates in the workers’ compensation segment of the industry. The firm maintains a focus specifically on small businesses in low hazard industries. EIG markets its products through independent local, regional, and national agents and brokers; alternative online distribution channels; and through national, regional, and local trade groups and associations, as well as directly to customers. The firm operates in 44 states and the District of Columbia, with half of their business concentrated in California. Employers Holdings was founded in 2005 and is based in Reno, Nevada. Price ($): 43.73 Beta: 0.63 FY: Dec 2018A 2019E 2020E 2021EPrice Target ($): 60.91 M-Term Rev. Gr Rate Est (%): 2.50 Revenues (Mil) 800.40 846.44 856.31 874.5252WK H-L ($): 47.97 - 39.31 M-Term EPS Gr Rate Est (%): 3.50 Growth (%) 2.04 5.75 1.17 2.13Market Cap (mil): 1370 Debt to Equity 0.00 Net Income (Mil) 141.30 151.65 155.08 159.16Insider Holdings (%) 2.50 WACC (%) 7.12 Growth (%) 39.62 7.32 2.27 2.63Avg. Daily Vol (mil): 0.12 ROA (%): 3.61 Net Margin (%) 17.65 17.92 18.11 18.20Yield (%): 2.05 ROE (%): 13.88 EPS ($) 4.30 4.63 4.73 4.86ESG Rating B ROIC (%) 13.61 P/E 10.17 9.45 9.24 9.00Short Interest (%) 7.70 Investments / Unpaid Losses 1.24 P/B 1.41 1.23 1.19 1.11

Recommendation Employers Holdings is a pure play workers’ compensation company, earning premiums from customers and paying out injury claims when they are warranted. Specifically, EIG sells workers’ compensation to small businesses (with between 3-20 employees) in non-hazardous industries, such as florists, beauty parlors and physicians’ offices. The firm does not insure workers in the construction, mining or logging industries. While the firm is based in Nevada, they derive over 50% of their revenues from employers located in California. EIG has grown EPS over the last five years at a CAGR of 6.2% and dividends paid to stockholders grew from $0.24 to $0.80 per share over the same period. During the Financial Crisis of 2008, Employers Holdings managed to increase their cash and maintain the same conservative capital structure. Their positioning in California, which targets non-hazardous small businesses, is an ideal fit within the technology-focused region. California makes up 20% of employment in the United States information technology sector and the state is disproportionately skewed to non-hazardous jobs. The frequency of workers compensation claims has trended down since 2003, with the largest decreases occurring in 2008 and 2009. This recessionary decrease in claims is likely due to workers’ fears of being terminated for filing a claim. If there is a slowing of the economy, this trend could result in lower future claims resulting in margin accretion for EIG due to lower expenses. Based on their ability to safely navigate recessionary trends and increase margins, it is recommended that EIG be added to the AIM small cap equity fund with a price target of $60.91, representing a 39% upside. Investment Thesis

California Exposure. The recently passed Assembly Bill 5 (AB5) in California expands the definition of who is an employee and will push an estimated 2 million individuals from the “gig-economy” to full employee status – increasing the need for workers’ compensation insurance. Currently, EIG holds a 3.3% market share in workers’ compensation in California. If they manage to maintain their market share in workers’ compensation in California, they would be adding 65,000 new policies on to their books, representing a 72% growth in total polices. The average premium for the California market is $710 monthly per policy, meaning the net impact on revenues could be as high as $550M over the next several years.

Online Push. Employer’s Holdings recently launched an innovative online platform, Cerity, which offers a digital direct channel to consumer workers’ compensation insurance, making it


more convenient for individuals in the gig economy to acquire workers’ compensation. Presently, the workers’ compensation industry has only a few online platforms allowing for the purchase of insurance, whereas auto and health insurance generate over 25% and 33% of purchases from online platforms. With Cerity, Employers Holdings is now one of the first firms to market a quick and easy online portal that provides workers’ compensation to individuals around the country. Cerity is capturing an underserved portion of the customer base who need immediate workers’ compensation coverage in order to provide proof of insurance to contract with large companies. Another side of this business is a small number of individuals who need workers compensation for three months for a contracting job, but do not want to pay for it. These individuals are logging on to Cerity and buying insurance, but waiving the actual coverage, and paying a $10 monthly management fee directly to Employers. The number of customers doing this is currently an insignificant amount of revenues; however, Cerity is only operating in 14 states and with scale this portion of revenue will become a fee generating segment with limited loss risk. Independent contractors represent 7% of total U.S. employees and will be the most likely users of Cerity for both full coverage and customers who just want the proof of insurance.

Valuation In order to reach an intrinsic value for EIG a dividend discount model was created. Using a terminal growth rate of 2.00% and a weighted average cost of capital of 7.12%, an intrinsic value of $52.09 was reached. A 100 bps sensitivity analysis on the terminal growth rate and WACC ranged from $38.91-$82.31. Additionally, a P/E multiple valuation was calculated using a LTM EPS of $4.60 and a blended average P/E mutplie of 18.21x, resulted in an intrinsic value of $83.62. Finally, a P/TB (tangible book) multiple valuation was conducted using a blended average P/TB multiple of 1.89x, resulting in an intrinsic value of $64.64. By weighing the three models 60/20/20, a price target of $60.91 was reached, resulting in a 39% potential upside. EIG has been paying quarterly dividends of $0.22 this year – yielding over 2%. Risks

Increased Regulations. Many states have been implementing further regulations on to the insurance industry – which is a risk that would materially affect EIG’s margins and the firm’s ability to remain profitable within these states. Federal regulation is also possible, but unlikely in this Administration.

Changes in Regional Economy. With over half of the firm’s exposure in California, a dramatic downturn in the state’s economy would significantly decrease the firm’s profitability. Furthermore, a decrease in the technology or tourism industries would impair EIG’s growth mechanisms.

Improperly Priced Assets. As an insurance company, Employers Holdings marks-to-market their financial assets. If the market price of some illiquid securities is incorrect or outdated the firm’s balance sheet would be materially affected.

Management Douglass D. Dirks is the CEO and President of Employers Holdings and has been so since the company was founded in 2005. Douglass serves on the Board of Governors of the Property Casualty Insurers Association of America and is a CPA with an MBA from the University of Texas. Thomas M. Warden is the Chief Data and Analytics Officer for Employers Holdings. He took on that position in May 2017 and holds an MBA from Harvard.


$39

$40

$41

$42

$43

$44

$45

$46

$47

$48

43.22

Employers Holdings, Inc. - Price

90

95

100

105

110

115

120

104.69

Employers Holdings, Inc. - Price Relative to Russell 2000

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

0.0

0.2

0.4

0.6

0.8

0.11

Employers Holdings, Inc. - Volume

Source: FactSet

Source: FactSet


Credicorp Ltd. (BAP-US) September 13, 2019

Robby Metcalf III International Financial Services Credicorp Ltd. (NYSE: BAP) is the largest financial holding company in Peru, offering a vast range of financial solutions through its diverse set of subsidiaries. Credicorp operates through four different business segments: universal banking (72% of 2Q19 net income), insurance & pension funds (14%), microfinance (9%) and investment banking & wealth management (5%). Its principal operating subsidiaries include Banco de Credito del Peru, Atlantic Security Bank, Pacifico Compania de Seguros y Reaseguros, Prima AFP SA, Credicorp Capital Ltd, and Banco de Credito de Bolivia. Credicorp was established in 1995 and is headquartered in Lima, Peru. Price ($): 212.00$ Beta: 0.80 FY: Dec 2018A 2019E 2020E 2021EPrice Target ($): 270.00$ M-Term Rev. Gr Rate Est: 3.0% Revenues (Mil) 4,020 4,335 4,745 5,16552WK H-L ($): 252.00 -199.00 M-Term EPS Gr Rate Est: 3.0% % Growth 2.02% 7.84% 9.46% 8.85%Market Cap (mil): 16,915 Debt/Equity 99.8% Net Interest Income 2,557 2,735 2,948 3,210Insider Holdings 13.9% Cost of Equity 7.0% % Growth 5.3% 6.96% 7.79% 8.89%Avg. Daily Vol (mil): 385,142 ROA (%): 2.4% Net Interest Margin 5.26% 5.40% 5.51% 5.63%Yield (%): 2.90% ROE (%): 17.8% EPS (diluted) 15.21 16.71 18.63 20.72ESG Rating BBB Tier 1 Capital Ratio (%) 12.0% P/E 14.50 12.68 11.37 10.23Short Interest 0.50% Loan Provisions/Loans (%) 1.40% P/TBV 2.73 2.13 1.92 1.74 Recommendation With more than 129 years of experience in the financial sector, Credicorp Ltd. has earned its status as one of the best long-term growth stories among the large caps in the Latin American financial sector. Credicorp’s largest segment of business is universal banking conducted through its subsidiary, Banco de Credito (BCP), which has maintained its leadership position among the four leading Peruvian banks with over $39 billion in total assets. BCP has a 38% market share in corporate loans, 36% in middle-market, 33% in mortgages, 22% in credit cards and 19% in consumer lending. With 29% of total loans and 32% of total deposits in the system, BCP has superior control in almost every category of financial services in Peru, on top of their microfinance business operated through Mibanco and pension fund management. Credicorp continues to demonstrate its ability to maintain a strong market share of 30% and high profitability, as in 2Q19, the company reported ROE of 18%, EPS growth of 12% and an improvement in their efficiency ratio to 43%, amid a somber industry outlook. Additionally, Credicorp’s loan portfolio has multiplied by 15 times in the last 22 years, despite having experienced several episodes of national and international turmoil. Low cost of funds paired with the largest market share in deposits ensure high profitability and continuous growth. Given BAP’s leading market share among its core business, opportunities in Peru’s unbanked population and its digitalization initiatives, it is recommended that Credicorp Ltd. be added to the AIM Equity Fund with a price target of $270.00, representing a potential upside of 28%. Investment Thesis

Peru’s Unbanked Population. Since the beginning of the decade, there has been a wide gap between developed and undeveloped markets in the number of adults with a bank account at a formal financial institution as only 20% of Peruvians had accounts compared to 88% in the U.S. In 2015, Peru’s banking association (ASBANC) launched the National Financial Inclusion Strategy with the goal of accelerating progress towards universal financial access and inclusion. Since implementing this initiative, Peru has lowered the gap as account ownership increased to 42% in 2017. Peru still lags other countries such as Argentina at 49%, Brazil at 70% and Chile at 74% signaling that Peru has more opportunity for growth in the space. To promote inclusion, ASBANC launched Peru’s groundbreaking nationwide mobile money platform called, “Bim”, allowing Peruvian residents with any mobile phone to open a bank account, transfer funds, and


make utility payments. BCP was one of the first institutions to partner with platform which gave them 38% of the electronic money market in 2016, more than any other bank.

Strategic Digital Transformation. The company has increased its use of digital channels aimed at improving its lending decisions, better engaging with their retail customers and reducing costs. Credicorp has already seen progress from this strategy as digital users now represent 35% of the bank’s total client base and the company’s P2P payments app, Yape, has over 1 million users. Management has made it clear they do not see slowing in its digitalization initiative despite a weaker macro backdrop as they continue to develop, partner with and invest in fintech disruptors. These investments have already shown positive trends as improvements in efficiency are already materializing as digitizing the loan process reduces costs by nine times compared to the physical process. The ASBANC’s goal of 75% Peru’s population banked by 2021 gives BCP the best opportunity to capture the new customers which is already being seen as from 2016 to 2018, their digital customers grew by 33% to a total of 6.2 million giving them 42.2% market share in the space.

Economic Growth Expectations in Peru. Peru has been the fastest growing country in Latin America over the past decade due to its low-inflation economy, strong fiscal position and limited government position. Peru’s Economy and Finance Ministry (MEF) published their 2020-2023 Multiannual Macroeconomic Framework, in which GDP growth of 2.7–3.0% is projected for 2019 and of 4.4% on average for the next four years with gradual acceleration from 4% in 2020 to 5% in 2023. This acceleration will mainly be driven by the domestic demand reflected in expectation of a 5.7% gain in private investment and an increase of 6% in public spending.

Valuation In order to reach an intrinsic value for Credicorp, an excess return model was constructed. Using a terminal growth rate of 3.00% and a cost of equity of 7%, an intrinsic value of $315 was reached. A sensitivity analysis on the cost of equity and ROE ranged from $234 - $367. Additionally, a P/E multiple valuation was calculated. Using a 2019E EPS of $16.71 and utilizing a blended average P/E multiple of 14.67x, resulted in a intrinsic value of $231. Lastly, a P/TBV multiple valuation was conducted using a blended average P/TBV multiple of 2.83x, resulting in an intrinsic value of $250. By weighing the three models 40/30/30, a price target of $270 was reached, resulting in a potential upside of 28%. BAP pays a dividend of $6.07, yielding 2.9%. Risks

Economic Climate Uncertainty. In the past, economic instability has resulted in share price volatility and this uncertainty remains the important long-term investment concern related to Latin American banks.

Demand for Commodities. A drop in demand for commodities and specifically copper from China, which is Peru’s top trading partner, could affect GDP growth in Peru and also affect the exchange rate.

Political Scenario. The Vizcarra administration has called for early presidential elections with the goal of removing corruption and impunity; however, this leaves Peru in a political state of uncertainty.

Management Mr. Walter Bayly has been the Chief Executive Officer of Credicorp since April 2018. Prior to being named CEO, he served as the as the Chief Executive Officer of Banco de Crédito del Perú and Chief Operating Officer of Credicorp. He currently serves as the Chairman of the Board of Mibanco, Prima AFP and Credicorp Capital.


Source: FactSet

Ticker Market Cap (m) P/E P/TBV10-Yr EPS CAGR (%)

Div Yield (%)

BAP 16,915 13.45 2.40 9.93 3.00IFS 4,571 11.45 2.30 5.02 4.17

SCOTIAC1 7,282 18.21 2.96 5.62 2.19Banco BBVA Peru BBVAC1 5,762 12.97 2.65 3.67 3.70

ITUB 78,316 13.19 3.12 3.23 6.80CHILE 14,646 17.95 3.29 1.18 3.40

Peer Averages 22,115 14.75 2.83 3.74 4.05Source: FactSet

Itau Unibanco Holding

Peer Valuation

Name

Credicorp Ltd.Intercorp Financial ServicesScotiabank Peru

Banco de Chile

TickerNet Interest Income (m)

ROE (%) ROA (%) Debt/Equity (%) NPL/TL (%)

BAP 2,557 17.75 2.40 99.80 3.91IFS 958 18.40 2.00 153.77 3.02

SCOTIAC1 1,164 15.55 1.92 190.09 5.47Banco BBVA Peru BBVAC1 965 19.52 2.05 174.72 5.15Itau Unibanco Holding ITUB 17,112 20.33 1.71 427.10 5.95

CHILE 2,055 17.50 1.63 296.18 3.07Peer Averages 4,451 18.26 1.86 248.37 4.53

Source: FactSet

Banco de Chile

Peer Fundamentals

Name

Credicorp Ltd.Intercorp Financial ServicesScotiabank Peru


HealthEquity, Inc. (HQY) September 13, 2019

Chez Daggs Domestic Healthcare HealthEquity, Inc. (NASDAQ:HQY) provides a range of solutions for managing healthcare reimbursement and flexible spending accounts. The firm offers a variety of products through its technology enabled platform such as healthcare savings accounts (HSA), investment advisory services (401k), healthcare reimbursement arrangements (HRA), and other healthcare incentives. They offer various solutions for employers, health plans, insurance brokers, consultants and financial advisors. HQY earns revenue from three primary sources: Custodial Revenue (43.9% of FY19 Revenue), Service Revenue (35.0%), and Interchange Revenue (21.1%). The company was founded by Stephen D. Neeleman on September 18, 2002 and is headquartered in Draper, UT. Price ($): 58.25 Beta: 1.43 FY: Dec 2018A 2019E 2020E 2021E

Price Target ($): 76.68 M-Term Rev. Gr Rate Est (%): 26.74 Revenue (mil) 287.2 344.1 393.7 413.7

52WK H-L ($): 101.58 - 50.29 M-Term EPS Gr Rate Est (%): 49.91 % Growth 25.1 19.8 14.4 5.1

Market Cap (mil in $): 3722.23 Debt/Equity (%): 7.60 Oper Income (mil) 77.7 95.0 111.8 116.7

Insider Holdings (%): 2.07 Cash Flow Coverage (%): 289.92 % Growth 42.7 22.3 17.7 4.4

Avg. Daily Vol (mil): 1.22 WACC (%): 10.71 Op Margin (%) 27.0 27.6 28.4 28.2

Dividend Yield (%): 0.00 ROE (%): 20.11 EPS ($) 1.16 1.18 1.20 1.26

ESG Rating: BB ROA (%): 18.36 EPS Growth (%) 56.65 1.78 1.98 4.64

Short Interest (%): 7.45 ROIC (%): 19.35 EV/EBITDA 39.21 37.68 26.23 25.09

Source: Factset Recommendation HQY is a pioneer in the development of technology-based solutions that help consumers make informed healthcare saving and spending decisions. They have established a leadership position in the industry through a first-mover advantage by focusing the core of their platform around health savings accounts. As of FY19, HQY had approximately 4 million HSA plans on their platform – and since going public in 2014, HQY has achieved a revenue CAGR of 36%. Their platform provides a system that allows consumers to access tax-advantaged healthcare savings accounts and pay healthcare bills, access an online-only investment advisor where members can utilize mutual fund investments, and access other services like healthcare expense reimbursements and retirement funds. They have sustained their high growth by tripling their market share from 4% in December 2010 to 13% in December 2018. As of FY19, they were the integrated preferred HSA platform for 141 network partners (including health plans and employers) and 45,000 clients. In 2019, HQY completed its acquisition of WageWorks, Inc (WAGE) which helped HQY continue building its lead as an HSA administrator and provider of complementary consumer-directed benefits. The acquisition positioned HQY with a larger addressable market, presenting a $10 billion HSA opportunity with a $3 billion complementary benefits market. HQY is now able to operate on a larger scale, increasing their total membership base to about 12 million (up from about 5 million) and managed nearly $10 billion of custodial assets. Due to its leading position in the HSA market, its unique tech-enabled platform, and strong growth opportunities it is recommended that HealthEquity, be added to the AIM Equity Fund with a price target of $76.68, representing a potential upside of over 31%. Investment Thesis

HSA Concentration. Many of HQY’s competitors (direct and indirect) view HSA accounts as a non-core, supplemental offering to their businesses. These companies are under-invested in this service area, but HSAs are the main focus of HQY’s platform. As a result, they provide additional HSA solutions for employers that also benefit the consumer. The platform’s app functions include price transparency, benefits enrollment, and wellness incentives. On top of that, customers with a balance exceeding a stated threshold are eligible for a self-driven advisor which manages mutual


fund investments. HQY provides a liaison between consumers, healthcare plans and providers, and investment advisors. On top of that, their platform is more integrated than most of their competitors. The WAGE acquisition adds to HQY’s offerings to create a premier platform.

HSA Industry Expansion Continues. The number of HSA accounts in the U.S. is presently about 25 million, totaling over $54 billion in assets. This represents a YoY increase of 13% for accounts and 19% for HSA assets for the period ended December 31, 2018. Devenir Research projects the HSA market will reach $75 billion in assets by the end of 2020 with around 30 million accounts – with HQY well positioned in the market to capture even more custodial assets. They dominate the market as the nation’s largest independent HSA custodian with over $8.5 billion custodial assets. Their successful history of acquiring HSA portfolios strengthens their ability to meet industry needs. WAGE acquisitions only add supplemental offerings to their product line, giving HSA consumers more bang for their buck.

The U.S. Needs HSAs. Healthcare expenditures in the United States have risen from about 6% of GDP in 1965 to over 18% today and is projected to continue increasing. A major flaw in the industry is the lack of awareness of healthcare consumers. HSAs helps push cost control back to the consumer. Since HSAs were created in 2003, the number of HSA accounts has grown to 25 million in 2018. HSAs offer a triple tax-deductibility, helping consumers more efficiently pay for medical expenses and save for future costs. From 2007 through 2017, enrollment in high-deductible health plans (HDHPs) with a HSA (4.2% to 18.9%) and without an HSA (10.6% to 24.5%) increased among adults with employment-based coverage, while enrollment in traditional plans decreased.

Valuation In order to reach an intrinsic value for HQY, a five year DCF model was constructed. Using a terminal growth rate of 2.00% and a WACC of 10.71%, an intrinsic value of $71.91 was reached. A sensitivity analysis on the terminal growth rate and WACC ranged from $67.67-85.51. Additionally, a P/TBV multiple valuation was calculated. Using a tangible book value per share of $13.08 and utlizing a weighted average peer P/TBV multiple of 8.08x, an intrinsic value of $105.75 was the result. Finally, an EV/EBITDA multiple valuation was conducted using a weighted average EV/EBITDA multiple of 37.38x, resulting in an intrinsic value of $85.84. By weighing the three models 80/10/10 respectively, a price target of $76.68 was reached, resulting in a 31% potential upside. HQY does not pay a dividend. Risks

Regulatory Risks. Changes in regulation relating to the tax benefits available through HQY’s tax-advantaged HSAs could have a significant impact on their business. If Congress decides to limit or eliminate the tax benefits available, there will be a material effect on HQY’s operations.

Falling Interest Rates. As a non-bank custodian, HQY is partnered with custodial depository partners to hold their custodial cash assets. HQY earns a portion of revenue from fees they earn from these custodial depository partners. Therefore, a decline in prevailing interest rates will negative affect their business by reducing the yield they realize on custodial cash assets.

Data Security. As an online non-bank trustee, they are subject to constant cyber-attacks. Security breaches could result in the loss of this sensitive information as well as theft or loss of customer funds.

Management Stephen Neeleman, Founder/Vice Chair, is a former general and trauma surgeon and an expert in HSAs. He has worked hard to improve healthcare through patient empowerment. Neeleman lobbied in Washington in 2003 for the passage of HSAs into law. Steve founded HealthEquity in 2002, with the vision to repair the fractured relationship between patients and their physicians. Jon Kessler was appointed as the CEO in 2014 and previously founded WageWorks. Kessler was also previously a senior economist in Washington, DC, specializing in employee benefits and environmental taxation.


$50

$60

$70

$80

$90

$100

$110HealthEquity Inc - Price

60

70

80

90

100

110

120HealthEquity Inc - Price Relative to Russell 2000

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

0

5

10

15HealthEquity Inc - Volume

Ticker Market Cap (mil) P/S (FY1) PE (FY1) EV/EBITDA (FY1) P/TBV

HQY 3,722.23 11.39 45.81 37.68 4.45

EVH 598.43 0.71 0.00 302.36 19.82

MDRX 1,533.21 0.86 13.49 9.11 0.00

EHTH 1,848.65 4.86 41.76 0.00 4.22

HMSY 3,197.99 4.88 27.84 19.50 12.93

CERN 21,447.00 3.75 25.20 15.33 8.23

3,879.43 3.13 23.29 54.04 8.08

*Peer Weights: 15%, 25%, 25%, 25%, 10% Source: Factset

eHealth

HMS Holdings Corp.

Cerner

*Weighted Peer Averages

Allscripts Healthcare Sol

Peer Valuation

Name

HealthEquity

Evolent Health A

Ticker Revenues (mil) ROE (%) ROA (%) Op Cash Flow/Total Debt Total Debt/Equity

HQY 344.90 20.11 18.36 289.90 6.40

EVH 837.40 -9.90 -7.20 -14.10 20.70

MDRX 1,791.40 -19.70 -6.30 1.20 40.20

EHTH 380.30 1.71 1.30 -31.70 7.30

HMSY 655.90 14.22 9.50 57.10 24.30

CERN 5,723.20 12.38 8.60 107.60 19.50

*Weighted Peer Averages 1,404.83 -1.19 0.91 15.30 23.01

*Peer Weights: 15%, 25%, 25%, 25%, 10% Source: Factset

Cerner

Peer Fundamentals

Name

HealthEquity

Evolent Health A

Allscripts Healthcare Sol

eHealth

HMS Holdings Corp.


Essent Group Ltd. (ESNT) September 13, 2019

James Oddo Financial Services Essent Group Ltd. (NYSE: ESNT) is a Bermuda-domiciled private insurance holding company. Through its subsidiaries, Essent Group serves the housing finance industry by offering mortgage insurance, reinsurance and risk management products to mortgage lenders and investors to support homeownership. Essent provides private capital to bear mortgage credit risk, enabling lenders and mortgage investors to make mortgage financing available for homeowners. ESNT’s earnings come from the ratio of developed premiums to net premiums earned over a given time period and investment income. The company was founded in 2008. Price ($): 48.26 Beta: 0.96 FY: Dec 2018 2019E 2020E 2021E

Price Target ($): 54.13 M-Term Rev. Gr Rate Est: 12.8% Revenues (Mil) 719 857 912 920

52WK H-L ($): 31.08-50.51 M-Term EPS Gr Rate Est: 5.8% % Growth 24.6% 19.1% 6.5% 0.9%

Market Cap (mil): 4,780 Financial Leverage 1.33 Net Income (Mil) 467 540 583 569

Insider Holdings 2.5% Debt to Equity 9.45% % Growth 23.1% 15.6% 8.0% -2.4%

Avg. Daily Vol (mil): 441,787 Cost of Equity 8.8% EPS 4.77 5.49 5.93 5.66

Yield (%): 1.7 ROA: 15.88% Combined Ratio (%) 25.0 26.7 26.6 28.4

ESG Rating B ROE: 20.59% P/E 7.17 8.79 8.14 8.52

Short Interest 2.1% ROIC: 16.91% P/B 1.42 1.65 1.38 1.19 Recommendation In August 2019, Essent was named in the top 100 of the fastest-growing companies by Fortune Magazine. Essent’s strength is derived from its strong capital position, consistent best-in-class customer service, and collaborative approach to building long-term business relationships. ESNT is an attractively positioned post-crisis private mortgage insurer with a relatively clean balance sheet that is, absent of legacy risks. Essent has strong underwriting and risk management methods allowing them to insure high-quality customers with solid FICO scores and manageable loan values. Essent has seen impressive financial growth YTD with net premiums earned were $188.5M (versus Street estimates of $184.6M), contributing to total revenue of $211.9M (versus projected $207.3M). Essent reported Q219 adjusted operating EPS of $1.38 vs. $1.14 in Q218, and ahead of the $1.31 consensus estimate. Essent currently holds 9.74% of the Mortgage Guaranty Insurance industry market share. This trails its two major competitors, Radian and MGIC, who both hold roughly 15% market share on the industry. ESNT has seen tremendous growth since its inception in 2008 and will continue to acquire market share from its competitors though its selective pricing engine EssentEDGE. With a strong quarter, the company exceeds premiums and combined ratio estimates, and declared its first ever dividend ($0.15 per share, quarterly) offering a 1.3% annualized yield. Considering all the benefits and future growth for ESNT it is recommended that ESSENT Group be added to the AIM Equity Fund with a price target of $54.13, representing a 12.16% upside. The firm pays a dividend with a 1.70% yield. Investment Thesis

Millennials Financially Ready for a Mortgage. According to the National Association of Realtors, Millennials held the highest share of home buying activity in 2018, above all other generations for the fifth consecutive year. A Chase study found that 52% of Millennials feel financially ready to buy a home, with 93% knowing that homeownership is on the horizon (study is based on 1000 US Millennials ages 22-38).With the U.S. Federal Reserve cutting interest rates and the market expecting up to two additional rate cuts in 2019, the “mortgage ready Millennials” are expected to flock to the home owning opportunity.

CF Stability through Reinsurance Leads to Dividend Initiation. After reinsuring their 2015 and 2016 vintages through a $334M insurance-linked note (ILN) during 2Q19. This was their 3rd


ILN and 5th reinsurance transaction. This downside protection, via ILN will now collectively cover 70% of their book. This increased reinsurance reduces ESNT’s potential volatility. Also, ESNT recently signaled their financial strength by declaring a $0.15 dividend per share. Management noted that the future level of the dividend will be more related to operating cash flow rather than the balance of Private Mortgage Insurer Eligibility Requirements capital (PMIER).

Defense Play Through Loan Quality. Essent Group has a weighted average FICO score of 747, with a Loan-to-Value (LV) ratio of 92%. Essent’s competitors do not state their exact average FICO scores, but using an assumption of median values averages of 730 and 700 were calculated for MGIC and Radian respectively. ESNT’s loan portfolio is defensive and appears prepared for economic downturn. With the help of their pricing tool EssentEDGE, they appear able filter for high quality loans.

Valuation In order to reach an intrinsic value for ESNT an Excess Equity model was created. Using a terminal growth rate of 1.5% and a cost of equity for the next five years of 8.79%, an intrinsic value of $69.29 was reached. Additionally, a P/E multiple valuation was calculated - using a 2019E EPS of $8.79 and utilizing a blended average P/E multiple of 8.93x, resulted in an intrinsic value of $49.02. Finally, a P/B multiple valuation was conducted; using a 2019E BV of $29.26 and using a blended average P/B multiple of 1.33x, resulting in an intrinsic value of $39.02. By weighing the three models 40/30/30, a price target of $54.13 was reached, resulted in a 12.16% potential upside. A sensitivity analysis on the terminal growth rate (+/- 1%) and cost of equity (+/- .75%) resulted in a price between $43 to $68 per share. Risks

Incorrect Estimation of Losses and Loss Adjusted Expense (LAE). ESNT maintains and establishes reserves for any estimated loss or LAE. These reserves are an estimation of the ultimate cost and individual claims based on actuarial estimation techniques, are inherently uncertain and may not represent the exact measure of liability. Incorrect estimations can affect the results of operations and financial condition of the company.

Recession Rick. Due to the risk of recession the future of the US mortgage industry is uncertain, there is a chance that private mortgage insurance as a product is utilized less in the future, which could cause revenue and earnings to fall short of estimates. However, if ESNT can gain more market share than expected, top-line growth could exceed expectations.

Loan Quality Risk. Through its underwriting practices, the company looks to underwrite business on loans where customers are likely to pay their mortgages on time while avoiding borrowers that are likely to default or be late with payments. Essent also delegates authority for certain qualified customers to underwrite loans and mortgage insurance. Selecting high quality accounts has implications for loss ratios over a period of many years.

Management Mark A. Casale, MBA, has served as ESNT’s President and CEO since July 2008. Previously, Casale served as the Presidents of Radian Guaranty. Lawrence E. McAlee has served as ESNT’s CFO since January 2009. Prior to joining Essent Group, McAlee served as the Chief Enterprise Risk Manager of Santander Holdings, USA.


Firm TickerStock Price

($)Market

Cap (mil)Dividend Yield (%)

P/B P/E

Essent Group ESNT 48.26 4,780 1.7 1.65 8.79Radian Group RDN 25.62 4,560 0 1.14 7.48MGIC Investment MTG 16.24 4,500 1.9 1.05 7.40Genworth Financial GNW 66.27 2,230 0 0.18 3.88Arch Capital Group ACGL 29.08 16,530 0 1.60 14.58NMI Holdings NMIH 16.35 1,890 0.00 2.12 11.57Peer Averages 30.71 5942 0.38 1.22 8.98

Firm Ticker EPSRevenue

(mil)

Net Income

(mil)

ROECombined

Ratio

Essent Group ESNT 5.49 857 540 20.59% 26.7%Radian Group RDN 3.00 1,463 649 15.20% 34.3%MGIC Investment MTG 1.72 1,184 637 14.20% 33.1%Genworth Financial GNW 1.14 8,610 657 4.60% 156.5%Arch Capital Group ACGL 2.80 5,896 1,195 10.80% 80.2%NMI Holdings NMIH 2.41 339 162 18.40% 42.9%Peer Averages 2.21 3498 660 12.64% 69.4%

Peer Valuation 2018 Preliminary

Peer Analysis


Berry Global Group, Inc. (NYSE: BERY) September 13, 2019

Nicholas Goehring Basic Materials Berry Global Group, Inc. (BERY) is a leading provider of flexible and rigid plastic packaging and containers. The company produces a wide variety of products spanning drink cups, lids, trash bags, diapers, medical and food packaging, and bottles. They sell primarily in North America (82% 2018FY revenues) to a wide variety of consumer-oriented end-markets. They reoriented their reporting segments Consumer Packaging, Health/Hygiene/Specialty (HH&S) and Engineered Materials (EM) which made up 32%, 34%, and 28% of 2018 revenues, respectively. Berry Global was founded in 1967 in Evansville, Indiana and went public in 2012. Price ($): 39.67 Beta: 0.85 FY: Dec 2018A 2019E 2020E 2021E

Price Target ($): 52.54 M-Term Rev. Gr Rate Est (%): 4.36 Revenue (Mil) 7,869.00 8,785.68 8,905.15 9,029.03

52WK H-L ($): 59.16 - 38.01 M-Term EPS Gr Rate Est (%): 16.99 % Growth 10.91 11.65 18.60 2.20

Market Cap ($, mil): 5,213.65 Debt/Equity: 6.12 Oper Inc 761.00 940.21 997.38 1,038.34

Insider Holdings (%) 0.11 Debt/EBITDA (ttm): 9.27 % Growth 3.96 23.55 6.08 4.11

Avg. Daily Vol (mil): 1,416.77 WACC (%) 5.35 Oper Margin 9.67 10.70 11.20 11.50

Dividend Yield (%): 0.00 ROA (%): 2.79 EPS 3.67 2.99 3.06 3.53

ESG Rating: BB- ROE (%): 19.83 P/E 13.19 13.26 12.94 11.24

Short Interest (%): 2.80 ROIC (%): 7.16 Debt/EBITDA 4.21 7.19 4.83 4.30 Recommendation Berry Global Group, Inc. is a low-cost manufacturer focused on products used every day in stable market with favorable long-term dynamics. In 2017 the total addressable market for plastic packaging was $364 billion and expected to grow at a CAGR of 3.7% to $834 billion through 2022 taking 1.4% market share from other packaging materials. However, the plastic’s industry has come under fire recently with concerns over environmental impacts causing softer end-market growth and increasing regulatory scrutiny. Central to Berry’s strategy to combat these challenges is acting as the industry’s best consolidator. In the company’s half-century existence, they have completed 45 acquisitions, growing to either the #1 or #2 leadership position in over 75% of their product offerings. Their most recent purchase was that of RPC Group, PLC., which closed on August 1st, 2019. RPC is a leading provider in European rigid and flexible plastic packaging, with numerous customer overlaps with BERY. This acquisition enabled Berry to pivot their portfolio away from single-use plastics and shift towards sustainable, recyclable consumer packaging materials and the opportunity to serve an entirely new region of the world. Before the acquisition BERY generated 82% of their revenues from North America through a network of 140 production facilities. When combined with RPC on a Pro-forma basis, their 2018FY revenue from the region declined to 55% and increased their exposure to EMEAI* to 36% with 293 facilities worldwide. With managements proven track record of successfully integrating acquisitions, dominant margins, and consistent free cash flow yields near 20% it is recommended that Berry Global Group be added to the AIM Small Cap fund with a price target of $52.54, representing a 32% upside. Investment Thesis

Innovate and Integrate. BERY has a long track record of purchasing similar companies to leveraging material science know-how, expanding their customer base, and exceeding synergy targets. The companies latest acquisition of RPC Group gives them access to not only grander scale but also a plethora of advanced recycling technologies that BERY can integrate with their existing product offerings, as well as commercializing their bio-resin technologies. Additionally, the combined entity has Pro-forma 2018 revenues of ~$13 billion placing them at the top of the global plastics packaging industry. This increased size will provide the company with ~$75 million in resin procurement savings annually through 2022, expanding its operating margin from 9.7% to 11.5%.


Deleveraging. Management intends on maintaining their track record of making quality acquisitions and then utilizing their strong free cash flow generation towards reducing Berry’s leverage. $6.6 billion purchase of RPC was financed with $7.31 billion of debt increasing their leverage to 7.2x. In a mid-late business cycle environment investors seem wary of any highly levered companies, especially ones well more than their peers. As a result, over the month of August BERYs stock price fell 30% recognizing all of the downside risks from the transaction. Similarly, back in 2015, their acquisition of Anitiv sent leverage to 5.1x in 4Q2015, and two years later leverage was 3.9x. Management has committed to reducing leverage to <4x, and with five years of free cash flow yielding ~20%, this seems attainable. If BERY can get to high 3x leverage multiple, they should begin to close the gap between peer valuations.

Defensive End Markets. With customers ranging from large, blue-chip multi-national corporations to small local businesses, they sell into many different sustainable end-markets including food and beverage, pharmaceutical, personal care, and industrial fields. In addition to Berry’s and RPC’s long-standing relationships with over 10,000 customers, their products make up less than 2% of customers COGS, including raw material pass-through provisions in their contracts. This diversified portfolio of staple business should insulate BERY from significant declines during the volatile times in the market.

Valuation To reach an intrinsic value for BERY, a five-year DCF model was constructed. Using a terminal growth rate of 0.5%, and a WACC of 5.34%, and a FY’19-‘24 revenue growth CAGR of 4.36%, an intrinsic value of $50.20 was reached. A ±1.0% sensitivity analysis on the terminal growth rate and WACC ranged from $131.46-25.70. Additionally, a P/E multiple valuation was calculated. Using a 2020E EPS of $3.06 and utilizing a weighted peer average P/E multiple of 17.91, resulting in an intrinsic value of $54.88. By weighing the equally weighting both models 50/50 respectively, a price target of $52.54 was reached, reflecting a 32.54% potential upside. BERY does not pay a dividend. Risks

War on Plastics BERY is one of the largest buyers of hydrocarbon resin and a global supplier of plastic packaging. Pressures from global governments and public awareness of the adverse effects of plastic on the environment could cause further volume erosion in end-market demand. Their success has been and will continue to be driven by inorganic growth, and the integration of compatible technologies.

International Operations. RPC was headquartered in the United Kingdom and added customers in over 33 countries. This acquisition adds currency, tariff, and economic sanction laws imposed by the U.S. government. Any changes in rules or policies could harm Berry’s ability to conduct business.

RPC Integration. RPC is the largest acquisition that BERY has ever perused. The leveraged purchase and challenging global integration may restrict their ability to grow their free cash flows.

Management Thomas Salmon has served as Chairman of the Board and Chief Executive Officer of Berry since February 2017. Before becoming CEO, Mr. Salmon served as Berry’s Chief Operating Officer. Mark Miles became the Chief Financial Officer in January of 2014. He has been with Berry since 2005 and previously served as Executive Vice President, Controller, and Treasurer. Aside from Mr. Salmon, top management at Berry has an average tenure of 11 years.


Source: FactSet

Ticker Revenues (Mil) ROE (%) ROA (%) Debt/EquityEst 5 yr NI growth (%)

BERY 8,786 19.83 2.79 6.12 16.99AMCR 9,458 3.89 2.51 0.55 -8.70

SEE 4,720 25.46 7.21 2.53 9.90ATR 2,838 10.79 6.41 0.68 2.50

SLGN 5,432 11.19 6.65 0.68 3.905,612 12.83 5.69 1.11 1.90

Source: Bloomberg

Sealed Air Corp.Aptar Group, Inc.Silgan Holdings, Inc.Peer Averages

Peer Fundamentals

Name

Berry Global Group, Inc.Amcor PLC

Ticker Market Cap (mil) Price/Sales P/E EV/EBITDA Price/BookBERY 5,214 0.59 17.25 10.56 3.39AMCR 15,740 1.66 27.19* 17.07 2.87

SEE 6,152 1.30 17.97 13.63 -19.19ATR 7,788 2.74 36.09* 16.98 4.82SON 5,702 1.05 19.15 10.59 3.18

SLGN 3,324 0.74 16.63 9.98 3.587,741 1.50x 17.91x 13.65x -.95x

Source: Bloomberg

Peer ValuationName

Berry Global Group, Inc.Amcor PLCSealed Air Corp.Aptar Group, Inc.

Silgan Holdings, Inc.Peer Averages

Sonoco Products Co.

* Excluded from the calculation

applied investment management (aim) program …...marquette university aim class 2020 equity reports...

Documents