applied investment management (aim) program aim class of … · 2019. 1. 31. · marquette...

Marquette University AIM Class 2020 Equity Reports Spring 2019

Applied Investment Management (AIM) Program

AIM Class of 2020 Equity Fund Reports Spring 2019

Date: Friday, February 1st | Time: 10:00 A.M. | Location: AIM Research Room 488

Presenter Company Name Ticker Sector Page

Daniel Ptacek Ormat Technologies ORA Domestic Utilities 2

Erik Olson Teladoc, Inc. TDOC Domestic Healthcare 5

Edward Eisenhauer BlackBerry BB Domestic Technology 8

Nicholas Goehring Wheaton Precious Metals WPM International Basic Materials 11

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


Ormat Technologies, Inc. (ORA) February 1, 2019

Daniel Ptacek Domestic Utilities Ormat Technologies, Inc. (NSYE: ORA) is a vertically integrated holding company operating in two segments. The Electricity segment (67.6% of 2017 revenue) designs, develops, builds and owns geothermal and recovered energy power plants while selling the generated electricity. The Product segment (32.4%) manufactures and sells geothermal and recovered energy generation equipment while providing services related to the engineering, operation, and maintenance of these types of power plants. Ormat generates revenue from the Americas (50% of 2017 revenue), Africa and the Middle East (35%), Asia/Pacific (11.6%) and Europe (3.3%). Founded in 1965 in Tel Aviv, Israel, the company went public in the US in 2004 and is headquartered in Reno, NV. Price ($): 55.43 Beta: 0.67 FY: Dec 31 2017A 2018E 2019E 2020EPrice Target ($): 65.35 M-Term Rev. Gr Rate Est: 6.8% Revenue (Mil) 660.8 718.0 771.2 830.752WK H-L ($): 70.68-45.79 M-Term EPS Gr Rate Est: 8.3% % Growth 8.7% 7.4% 7.7% 6.6%Market Cap (mil): 2,620 Debt/Equity: 94.1 Oper Inc 173.0 177.8 214.3 255.7Insider Holdings 5.9% Debt/EBITDA (ttm): 3.69 % Growth 21.7% 2.8% 20.6% 19.3%Avg. Daily Vol (000s): 186.9 WACC 6.99% Op Margin 26.2% 24.8% 27.8% 30.8%Yield (%): 0.8 ROA (%): 6.06 EPS* $3.06 $2.11 $2.32 $2.61ESG Rating AA ROE (%): 13.44 P/E 20.9 26.3 23.62 21.00Short Interest 3.80 ROIC (%): 7.89 EV/EBITDA 13.2 10.7 10.2 8.9 Recommendation Since completing its IPO in 2004, Ormat Technologies now manages geothermal and recovered power operations in eight countries. The firm supports a current capacity of 862 MW and plans to increase capacity to over 1,000 MW by 2020. Over the past five years, the company has experienced a 5-year sales CAGR of 6.1%, an EBITDA CAGR of 10.8%, and a net income CAGR of 23.8%. During that same time period, Ormat has made seven strategic acquisitions of other geothermal and recovered energy producers and expanded into the energy storage industry with its 2017 acquisition of Viridity. Geothermal energy production produces little to no Co2 emissions, disturbs fractions of the amounts of land than other renewable sources, and can operate in virtually any climate during any season of the year. The demand for renewable energy is exploding across the globe, and geothermal energy is expected to see an increase in demand of 10 GW between 2017-2023. ORA is poised to meet much of this demand in the biggest current markets: Kenya, Indonesia, the Philippines and Turkey. Forecasts predict that up to 1,400 TWh of electricity per year could come from geothermal power by 2050, versus the current level of 67 TWh. Two events took place in 2018 that caused Ormat’s price per share to drop: an announcement of the reversal of a $44.7 million-dollar tax credit that resulted in the decrease of 2Q net income by $24.8 million and the Klauea Volcano eruption in Hawaii which temporarily closed the Puna geothermal plant. The markets have reacted to both events, and the Puna plant should be back online by late 2019 resulting in a positive effect on margins and it is expected that reimbursement from insurance companies for lost revenue will also offset much of the damage done. Due to the increasing demand for energy from renewable resources, the unmatched advantages of geothermal plants, and ORA’s geographically and fundamentally diverse revenue streams, it is recommended the company be added be added to the AIM Equity Fund with a price target of $65.35, representing a potential upside of 17.9%. Investment Thesis

Expanding Capacity. The firm’s plans to increase capacity to roughly 1,000 MW by 2020 are on track and underway. This would represent nearly 1 million addition MWh annually over 2018E. If these plans are achieved, even using a conservative average price estimate of $85.20 per MWh, it would imply revenue growth of $90 million, an increase of 17.2% from 2018E revenue in the Electricity segment alone.


Buy While It’s Low. As noted, Ormat experienced two events during 2018 which caused its share price to drop: the major one being the Klauea Volcanic eruption in Hawaii. That plant is expected to be operational with additional capacity by late 2019. The second event was the $44.4 million-dollar reversal of recorded tax benefit for 2017 in the first quarter of 2018 that resulted from a decision by the board that there were errors in calculating the tax provision based on the company’s ability to utilize federal tax credits before expiration. After assessing the financial strength and growth strategy of Ormat, it appears that these two events have opened a window to buy while the price is low.

Increasing Margins. The Puna plant’s closure was a major cause to the roughly 9%, or $11 million-dollar decrease in overall gross margin versus Q3 2017. However, management reiterated their guidance for overall gross margin hitting between 45% and 50% by 2023 which would be at least a 6% increase from 2018E. The drivers of the expected margin expansion are the Puna coming back online and newly operational plants such as the McGuinness 3 and Olkaria projects driving future gross profit increases.

Valuation

In order to reach an intrinsic value for ORA, an EV/EBITDA multiple valuation was administered using a blended average multiple of 11.7x, resulting in an intrinsic value of $60.76. A 2019E PEG multiple was also calculated, and using the current price of $55.43 and a blended avergae multiple of 2.75x, an intrinsic value of $65.52 was reached. A P/B model was also constructed using a multiple of 2.42x, and a value of $70.50 was reached. Weighing the three models 35/35/30, a price target of $65.35 was reached, resulting in an upside of 17.9%. ORA’s dividend yield in 2017 was 0.64%. Risks

Political Uncertainty. A significant portion of the energy production is done outside of the US in emerging markets. While this provides its upsides, it also carries a significant amount of uncertainty and instability. If a significant political event happens in a country where Ormat has invested heavily, it could adversely affect their long-term growth plans.

Natural Disasters. As with most Utility companies, Ormat’s infrastructure is susceptible to natural disasters such as earthquakes or volcanic eruptions like the Klauea eruption in 2018 which can halt energy production and hurt margins while the plants are down.

Product Segment Customer Concentration. Over 50% of ORA’s Product segment revenue is derived from Turkey. While this country has one of the highest forecasted demands for geothermal energy, this poses a large risk to profitability in this area if an economic or political event disrupts contracts and financing for projects here.

Management Isaac Angel has been the CEO since 2014 and has held executive and board positions at a number of electronic engineering companies. Doron Blachar has been the CFO and Principal Accounting Officer for the past six years, having previously held positions as CFO and VP of Finance at a number of firms.


Source: FactSet

TickerMarket Cap

(mil)Total

Debt/EquityEV/EBITDA PEG P/B

ORA 2,576 94.12 10.67 2.37 1.90CPK 1,311 112.94 13.30 3.20 2.70LNT 10,075 123.49 13.00 3.00 2.10CMS 14,759 235.71 11.40 3.10 2.70ALO 7,728 82.50 11.20 2.40 1.80AES 9,385 463.58 8.30 1.40 3.00ATO 10,582 76.40 13.00 3.40 2.20

8,468 182 11.70 2.75 2.4Source: Factset

Alliant Energy Corp.CMS Energy CorporationAlstomAES Corp.Atmos Energy Corporation

Peer Valuation Analysis

Name

Ormat TechnologiesChesapeake Utilities Corp.

Ticker Revenues ROE ROAGross

Margin %5 yr NI CAGR

ORA 692.8 13.4 6.1 35.8 23.8CPK 618 12.50 4.40 16.20 15.00LNT 3,382 11.00 3.20 22.40 6.50CMS 6,583 10.58 2.06 24.60 4.20ALO 3,756 13.20 3.00 15.90 -12.00AES 11,616 25.00 2.40 23.30 -11.10ATO 3,116 13.90 5.00 32.10 21.20

Peer Averages 4,845.0 14.4 3.3 22.4 4.0Source: Factset

Peer Fundamentals

AlstomAES Corp.Atmos Energy Corporation

Name

Ormat TechnologiesChesapeake Utilities CorpAlliant Energy Corp.CMS Energy Corporation


Teladoc, Inc. (TDOC) February 1, 2019

Erik Olson Domestic Healthcare Teladoc, Inc. (NYSE: TDOC) is the largest telehealth company in the world. The company provides virtual access to physicians with expertise in over 450 subspecialties that range from non-urgent to chronic to even complicated medical conditions. The company provides virtual access in over 20 different languages in more than 125 countries including most of the 50 states in the United States. Teladoc derives revenue from subscriptions both domestically (~77%) and internationally (~8%) as well as from visit fees (~15%). Teladoc was founded in 2002 and is headquartered in Purchase, New York.

Recommendation Recognized by MIT Technology Review as one of the “50 Smartest Companies”, Teladoc prides itself on the quick, 24/7, and low-cost access to physicians it is able to provide to its members. The company offers services in general medicine, dermatology, and behavioral health. Importantly, Teladoc doctors are permitted to prescribe certain medications given a patient’s need. Through the use of a proprietary artificial intelligence (AI) machine learning (ML) algorithm, estimated wait times are more than 90% accurate - with the average being only 10 minutes. Teladoc is driven to provide its members with value; in fact, subscribers save on average: $141 versus an office visit and $2,561 versus an ER visit when using Teladoc. With 92% of issues resolved after the first visit and a 95% customer satisfaction rate, Teladoc’s 23 million subscriber base is rapidly growing. Between 2014-2018, the company experienced a 44% CAGR in US paid-access memberships as well as a 75% revenue CAGR (29% organic revenue CAGR) over the same time period. As consumers gain a wider acceptance for the new technology, it is expected that Teledoc will become profitable in 2019. This profitability will be driven by the increase in subscription fees as their membership base continues to rapidly grow. Teladoc’s massive growth has been fueled by strategic acquisitions which has become an integral part of their business model. Most recently, the company acquired Best Doctors Holdings, Inc, the world’s leading expert medical consultation company. This acquisition helped expand Teladoc’s international footprint while simultaneously adding 2.2 million members to the subscriber base. During 2017, Best Doctors generated $18.3 million in international subscription fees. Teladoc’s doctors have performed more than 1.6 million visits and have on average over 20 years of experience and between 2014-2018, total consolidated visits experienced a 71% CAGR (57% organic visit CAGR). TDOC is positioning itself well for continued double digit organic growth and it is recommended that it be added to the AIM Equity Fund with a potential 32% upside. Investment Thesis

Disruptive Innovation. By offering primary care services over video conference, telehealth is a revolutionary breakthrough in the healthcare sector. Teladoc, an industry leader, is well positioned to capitalize on this growing market. They control approximately 75% of the telehealth market share and continually stresses the need to innovate and further capture market share. Most


recently, the company announced the launching of a new program, Teladoc Back Care to address back pain, which is the third highest driver of medical costs behind obesity and diabetes.

Increasing Telehealth Reimbursement. The Centers for Medicare and Medicaid Services (CMS) are acting to modernize the Medicare Advantage (MA) program. These MA changes would add additional telehealth benefits starting in 2020. Medicare Advantage currently has 21 million members, significantly increasing Teledoc’s target market. Their current relationships with insurers and healthcare systems will allow them to capitalize on this new opportunity. The additional revenue increase as a result of the MA changes is predicted to be nearly $138 million in the years following the changes. Additionally, according to the Center for Connected Health Policy, at least 46 states introduced some form of telehealth legislation in the current legislative session. This legislation will likely continue to increase in the future as state Medicare agencies typically look to CMS to model their programs.

UNH Partnership. UnitedHealth Group has approximately 8.5 million people within their network. Teladoc is currently working with UNH in order to expand their platform throughout United’s network. Recently, Teladoc launched an initial pilot program for Tricare with Optum, owned by UNH. Additionally, TDOC continues to expand into government programs by launching a pilot in southern states with the help of UnitedHealthcare. Furthermore, TDOC was selected to be the virtual care platform for WellMed which is under the Optum umbrella and has over 1,000 physicians. UNH and TDOC are currently in the late stages of contracting as Teladoc has been chosen to be the virtual care provider for another large population of UNH.

Valuation In order to reach an intrinsic value for TDOC, a ten year DCF model was constructed. Using a terminal growth rate of 2.00% and a WACC of 13.90%, an intrinsic value of $72.30 was reached. A sensitivity analysis on the terminal growth rate and WACC ranged from $70.58-$74.38. Additionally, a price-to-sales multiple valuation was calculated. Using a 2017 average peer P/S multiple of 11.38x, resulted in an intrinsic value of $90.27. An EV/Sales multiple valuation was also conducted using an average EV/Sales multiple of 10.72x, resulting in an intrinsic value of $80.12. By weighing the three models equally, a price target of $80.81 was reached, resulting in a 32% potential upside. TDOC does not pay a dividend. Risks

Legal Challenges. Telehealth is a relatively new concept and with that comes the possibility of new regulations. Some of the regulations enacted in the past have resulted in litigation that caused operations in certain states to be modified or halt altogether. While compliance is a top priority, changing laws may adversely affect business operations in certain jurisdictions.

Cyber Attacks. Teladoc operates with an enormous amount of confidential information. At the same time, the company relies on data center providers, internet providers, other third parties. If any of their providers were to become a victim of a cyber-attack, the business could be adversely affected even if the attack was out of Teladoc’s control.

International Operations. Operating internationally poses additionally risks that may not be present domestically. These risks result from different legal/regulatory requirements, political, social, and economic conditions. These risks include: ‘theft’ of intellectual property, adverse tax consequences, and other disadvantages to domestic firms as a result of government or social actions.

Management Jason Gorevic has been the CEO since 2009. He is also on Teladoc’s board of directors and has a BA in International Relations from the University of Pennsylvania. Before joining Teladoc, Mr. Gorevic served as Senior Vice President and Chief Sales & Marketing Officer of WellChoice Inc. Currently, Gabriel Cappucci, Chief Accounting Officer, is serving as interim CFO.


Source: FactSet


BlackBerry Limited (BB) February 1, 2019

Edward Eisenhauer International Technology BlackBerry Limited (NYSE/TSX: BB) is an enterprise software and services company focused on security and connectivity management. The company operates through five revenue streams: Enterprise Software and Services (45% FY 2018), BlackBerry Technology Solutions (BTS) (21%), and Licensing, IP and other (21%), Handheld devices (.6%), and Service Access Fees (12%). The company was founded by Michael Lazaridis, James Laurence Balsillie, and Douglas E. Fregin and is headquartered in Waterloo, Canada. Price ($): 7.98 Beta: 1.32 FY: Feb (CAD) 02/28/2018 02/28/2019 02/29/2020 02/28/2021

Price Target ($): 10.09 M-Term Rev. Gr Rate Est: 12.25% Revenue (Mil) 1,200.05 1,167.38 1,480.55 1,649.81

52WK H-L ($): $6.57 - $13.64 M-Term EPS Gr Rate Est: 10.37% % Growth -30.08% -2.72% 26.83% 11.43%

Market Cap (mil): 4,410 Debt/Equity: 31.22% Oper Inc -159.60 -67.68 166.69 264.81

Insider Holdings -- Debt/EBITDA (ttm): 8.67 % Growth -24.86% -57.59% -346.28% 58.86%

Avg. Daily Vol (mil): 1.2 WACC 8.82% Op Margin -13.30% -5.80% 11.26% 16.05%

Yield (%): 0.0 ROA: 11.38% EPS ($) 0.74 0.15 0.27 0.35

ESG Rating AA ROE: 17.75% P/E (Cal) 10.78 51.69 29.90 22.73

ROIC: 13.51% EV/EBITDA 113.5 72.1 24.18 18.04 Recommendation BlackBerry was a well-known handheld device company in the first decade of the 21st century and has since transformed itself into an enterprise and security software company. Since the restructuring initiative in 2017, the company has returned to profitability for the first time since 2012 and is now a multi-industry leader in automotive enterprise and mobile cybersecurity software. Blackberry’s management focuses on growing their Enterprise Solutions; BlackBerry Technology Software (BTS); and Licensing, IP and Other segments while phasing out their Handheld Devices and the Service Access Fees segments. In FY19, the BTS segment had 23.3% YoY growth while the Licensing, IP and Other segment had 26% YoY growth. The company’s guidance reiterates high future double-digit revenue growth for both segments in CY2019. Despite negative 2018 YoY growth of -7.5% for the Enterprise Solutions, this segment’s products are expected to reach revenue growth in the upper teens starting in 2020 and continue strong growth through 2022 as its products are broadly implemented in the auto industry. Management has also focused on a cost cutting strategy that lifted gross margin to 75.2% from 74.3% in FY2019 and is estimated to increase to the gross margin to 78% by 2020. With the acquisition of Cylance in 2019, BB will achieve the CEO’s strategic goal of becoming a global leader in cybersecurity, citing the need from growing digitalization and connectivity. The acquisition of Cylance reflects the company’s step in their restructuring and growth strategy. Based on strong management and a clear vision moving forwards, it is recommended that BlackBerry be added to the AIM International Equity Fund at a price target of $10.09, representing a potential upside of 26.48%. Investment Thesis

Driverless Car Evolution. Within the last two years, BB has partnered with Ford Motor Co. and Jaguar Land Rover to use their industry leading QNX enterprise architecture and industry leading Hypervisor automotive cockpit software. Since these partnerships, BB has had a 100% bid win rate and has completely controlled the market. The autonomous vehicle industry is expected to grow by a CAGR of 26% to $65 billion in 2023. BlackBerry became the only vendor recognized by Gartner in all eight categories of their Market Guide for Information-Centric Endpoint and Mobile Protection with a single platform. With the rapidly evolving and growing driverless vehicle market along with 100% attachment rate, BB’s QNX system is well positioned to dominate the autonomous vehicle industry.


New $18b Market Opportunity with Recent Acquisition. The acquisition of Cylance has been approved and is expected to be completed in February 2019 and BB currently services 70% of the US personnel’s mobile devices. Cylance’s addition will strengthen BB’s partnership with the US government and others by adding the global leader in cybersecurity to its industry leading mobile security segment. It will also greatly increase the effectiveness and security of the QNX system, further adding value and strengthening its dominant market position. Cylance will also be adding 90% recurring revenue, and the company’s guidance predicts Cylance segment revenues to increase by 60% in FY2020. BlackBerry mobile security segment received the highest rank in all six categories in Gartner’s High-Security Mobility Management report for the second year in a row.

Growing Importance of Cybersecurity. As the world continues to evolve and implement the IoT and Enterprise of Things (EoT), there is an increasing importance and need for cybersecurity. 2018 has shown the world this need through the interactions with North Korea, Russia, and China hacking rival governments and data firms. Whether it be Iranians hacking American Universities, Russian grid hacking, or massive data exposures, the world needs higher levels of cybersecurity. A survey between the US, UK, and Canada concluded that 80% of businesses do not trust their internet connected devices and 58% are willing to pay more for additional security.

Valuation In order to reach an intrinsic value for BB, a five year DCF model was constructed. Using a terminal growth rate of 2.25% and a WACC of 8.82%, an intrinsic value of $10.74 was reached. A sensitivity analysis on the terminal growth rate and WACC ranged from $10.24 - $11.33. Additionally, a P/E multiple valuation was calculated. Using a 2019E EPS of $.15 and utilizing a blended average P/E mutplie of 59.18x, resulted in an intrinsic value of $9.14. Finally, an EV/S multiple valuation was conducted using a blended average EV/S multiple of 5.06x, resulting in an intrinsic value of $10.71. By weighing the three models equally, a price target of $10.09 was reached, resulting in a 26.48% potential upside. BB does not pay a dividend. Risks

Automated Vehicle Market. The largest potential risk that Blackberry faces is the uncertain growth and evolution of the automated car industry and emergence of smart cities. If automated cars were to be setback by government regulation or severe ethical implications, BB’s revenue and stock price would suffer.

Intense Competition. Many of BlackBerry’s competitors are much larger firms with an abundance of resources to use on R&D and acquisitions, both needed to retain and grow market share. The enterprise software often performs better in a vertical integration, causing switching costs to be high. The auto industry and cybersecurity industry have not adopted any standard of software allowing for ease of access of additional competitors.

Retaining Key Employees. Within the technology space and especially within a new, rapidly evolving market, keeping key talent and acquiring additional talent is necessary to stay competitive among its peers and to stay on pace with its target markets’ evolution.

Management John S. Chen took over as CEO of Blackberry in 2013 when the company was looking to liquidate, and he has since led a full restructuring initiative. Previously, Chen was CEO of Sybase and reinvented the “dead company” to become valued at $6 billion and acquired by SAP AG. Under his reign, the firm had 26% YoY market cap growth, expanding from $362 million.


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115BlackBerry Limited - Price Relative to iShares MSCI ACWI ex U.S. ETF

Ticker Revenues ROE % ROA % Debt/Equity % Est 5 yr

NI growth %

BB 932 17.76 11.45 31.22 -13.68

CTXS 2,974 74.57 -10.94 345.48 8.26

FEYE 751 -38.94 1.75 52.10 -0.20

INXN 552 5.61 3.20 139.56 -11.92

TRMB 2,654 6.43 -10.03 38.63 2.87

QCOM 22,732 -39.14 -9.91 1,764.01 -10.25

5,099 1.71 -5.18 467.96 -2.25

QUALCOMM Incorporated

Peer Averages

BlackBerry Limited

Citrix Systems, Inc.

FireEye, Inc.

Interxion Holding N.V.

Trimble Inc.

Name

Ticker Market Cap (mil) P/S P/E EV/EBITDA EV/S

BB 4,410 5.52 39.10 68.75 5.39CTXS 13,833 5.04 26.05 17.13 4.88FEYE 3,477 4.16 90.50 37.20 3.32

INXN 4,216 6.51 105.22 22.17 9.12TRMB 9,348 3.11 59.02 15.10 3.95

QCOM 62,184 3.30 15.10 17.63 4.05

18,612 4.42 59.18 21.85 5.06

Name

BlackBerry Limited

Peer Averages

Citrix Systems, Inc.FireEye, Inc.

Interxion Holding N.V.Trimble Inc.

QUALCOMM Incorporated


Wheaton Precious Metals (WPM) February 1, 2019

Nicholas Goehring International Basic Materials Wheaton Precious Metals, Inc. (NYSE: WPM) is the world’s largest pure streaming company for precious metals. Streaming provides an investor with exposure to an underlying commodity without the operating risk of owning a mining production company. Wheaton accomplishes this by entering into agreements to purchase all or a portion of the gold, silver, palladium, and/or cobalt output from various mines in exchange for an upfront payment and per unit payments, at a discount to the market, upon delivery. WPM then sells the output into the spot market shortly after receipt of the commodity. Wheaton has agreements with mines in 10 countries across the Americas and Europe. Wheaton Precious Metals was founded in 2004, and is headquartered in Vancouver, British Columbia, Canada.

Recommendation Wheaton Precious Metals began as a pure silver streaming company in 2004. In 2010, they added gold to their portfolio – and the firm went public in 2013. WPM currently offers a diverse portfolio of high-quality assets with exposure to gold (54.5%), silver (44.7%), palladium (0.7%) and cobalt, which will be added in 2021. WPM’s streaming investments provide a reliable source of capital for mines of all sizes, and in return, they lock in contracts for a fixed percentage of production output. This provides a healthy atmosphere for gross margins between 70%-74% and continued solid organic growth. Most prominently, the Salobo III expansion involves WPM investing $800 million in return for 75% of the gold output over the life of the mine. Production from this expansion should be fully recognized by 2022. During Q2 2018, the company entered into agreements with Stillwater and Voisey's Bay to add palladium (with production to be recognized in Q3) and cobalt. The price of palladium has recently surpassed gold, at $1323/ troy oz, as demand for its use in autocatalytic converters, which help reduce harmful emissions caused by internal combustion engines, has soared to all-time highs. Cobalt is a crucial ingredient in the manufacturing of lithium-ion batteries - and Tesla forecasts a 13.8% CAGR through 2022 for demand for energy storage systems – which has caused the 2020 futures price of cobalt to double to $32/lb. Due to the strong unit economics and an expanding precious metal streaming portfolio, it is recommended that Wheaton Precious Metals be added to the AIM International Equities Fund with a target price of $29.50, representing a 51% upside. The stock’s dividend yield is currently 1.8%. Investment Thesis

Superior Contract Negotiation. Wheaton currently features a portfolio of high quality, low cost, and long-life assets. 71% of their streaming contracts fall within the first cost quartile for commodity prices. Also, they have approximately 33 years of mineral reserves proven and probable, with 30 years of resources after that. Management’s demonstrated ability to enter into low-cost contracts has led to a 3-year production CAGR of 8% from 2014-2017. With 2019 projected free cash flow of $580 million, further investments in high margin commodities should accelerate sales growth well into the future.

Buy at a Great Value. The market is not fully recognizing the growth potential of the projects in which WPM has invested. In addition to the Stillwater and Voisey's Bay portfolio expansion, in


2018 the Salobo mine announced a phase III expansion project. Currently, the mine has a throughput rate of 24 million tons per annum (mtpa) and is expected to ramp up production over the next 15 months to 36-40 mtpa. Adding in the growth opportunity of this project alone, at a spot price of gold $1,280/troy oz., should add between $159-$212 million to net income per year. WPM currently trades at 20x earnings, considerably less than the 45x average P/E multiple of their peers.

Portfolio Diversification and Growth Opportunities. With a historical beta near zero (currently calculated at 0.3), Canadian currency exposure, and gold and silver spot price exposure, which act counter-cyclical to the equities market, WPM provides diversification benefits during volatile periods for the AIM portfolio. Wheaton has committed to be a purely precious metals streaming company and is continuing to expand its interests into potentially high growth raw materials, including palladium and cobalt.

Valuation To reach an intrinsic value for WPM, a five-year DCF model was constructed. Using a terminal growth rate of 1.00% and a WACC of 5.53%, an intrinsic value of $31.97 was reached. A ±0.5% sensitivity analysis on the terminal growth rate and WACC ranged from $29.58-$36.09. Additionally, a P/E multiple valuation was calculated. Using a 2019E EPS of $0.71 and utilizing a blended average P/E multiple of 45.58x, resulted in an intrinsic value of $32.50. Finally, an EV/EBITDA multiple valuation was conducted using a blended average EV/EBITDA multiple of 16.24x, resulting in an intrinsic value of $24.02. By equally weighing the three models, a price target of $29.50 was reached, resulting in a 50.73% potential upside. WPM recently paid a quarterly dividend of $0.09 per share. Risks

Commodity Prices. Agreements to purchase production of gold and silver well below the market rate has allowed WPM to maintain operating margins of ~37.0% over the last 4 years and growing at a 2015-2017 CAGR of 12.4%. However, locking in a long-term purchases price squeezes margins should gold, and silver prices decline. A stress test for a ±$50 gold spot price and a ±$4 silver spot price reviled that 2019 revenue could range from $758 million to $1.1 billion.

No Control Over Mining Operations. The streaming contracts that the company enters with its partner mines do not involve ownership or contractual rights relating to mine operation. As a result, the cash flows for WPM are highly dependent upon the activities and decision making of third parties. Many of Wheaton’s mining streams If for some unforeseen reason a third party were to reduce or cease operations, the company could have an adverse material impact.

Strategic Acquisitions. A key element of Wheaton’s business strategy is to search for valuable new exploration, development, and mining operation opportunities in the precious metals industry. Failure to negotiate favorable prices or add streams to the portfolio could hinder future growth.

Management Randy Smallwood graduated from the University of British Columbia with a degree in Geological Engineering and from the British Columbia Institute of Technology for Mine Engineering. Mr. Smallwood was involved in the founding of Wheaton in 2004 and was appointed President and CEO in 2010 and 2011 respectively. Gary Brown currently serves as Senior VP and CFO to Wheaton. Mr. Brown joined the company in 2008, after serving as CFO of TIR systems Ltd. and holding various senior finance positions in Canada. He has 28 years of experience as a finance professional.


Source: FactSet

applied investment management (aim) program aim class of … · 2019. 1. 31. · marquette...

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