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March Midness 2015 Round IV: Competitive Advantage

Which company is better positioned within its industry?

Hello mid cap stock fans! We are now in Round IV of our March Midness tournament, with our Final Four stocks, GNTX, MMS, PII, and TARO. Here is the bracket with today’s match-ups:

march midness bracket [7]

If you want to know how we got here, check out the earlier rounds of the tournament:

 

In this round, we’ll be comparing the competitive context for these companies. You may remember that the original screener we used to find the 32 March Midness stocks ensured that the companies had equal or better returns than their industries over a 1- and 2-year period. So we already know that these companies are probably outperforming their industries. To be sure, I quickly ran through some 2-year charts for each of the four companies, and they all handily beat their respective sector and industry. Now let’s take a closer look at some of the factors that are likely contributing to that strong performance.

To truly gain a nuanced understanding of the competitive landscape for any of these companies, more homework is required than the simple tasks I’ll be doing in this competition. Nonetheless, I hope to at least scratch the surface such that we can get a basic grasp of whether or not the company’s profitability can be easily undone by competitors—what Morningstar calls an “economic moat.” [12] We also want to see how its profitability metrics compare to its industry and sector averages.

To do this I’ll be looking at a mix of qualitative and quantitative data.

Qualitative Scoring

On the qualitative side, I’ll be assembling a quick profile of the company, and then, in what will be the most subjective element of the whole tournament, either awarding or docking a point for every significant competitive advantage or disadvantage that I find. To fill out a quick profile for each competitor, I will consult the company summary (in the first tab of Stock Rover’s Insight panel), the company website, and the most recent annual SEC filing. I will also scan any recent news and Seeking Alpha articles for anything juicy.

I want to stress that this method is cursory and incomplete at best, but it does give us the opportunity to focus on the company as a company, not just a collection of numbers.

Quantitative Scoring

On the quantitative side, I’ll be scoring it much like I did in the last round, where the competitors are compared in all categories, and awarded a point for each category that they win. I’ve put together a view in Stock Rover that contains most of the “vs Industry” and “vs Sector” metrics for profitability, as well as industry and sector deciles for growth and profitability. Nearly all of these metrics incorporate factors we have already used in this tournament, but this time we’re looking at how those stats look when you hold them up against those of industry and sector peers. The company that outperforms its peers by a greater margin gets the point.

GNTX vs. MMS

Our first final four matchup is between Gentex (GNTX) and Maximus (MMS). Here is a brief competitive profile of each.

 

Company Name: Gentex

Sector: Consumer Cyclical

Industry: Auto Parts

What is the main service or product the company provides? Designing and manufacturing automatic-dimming rear-view mirrors and electronics for the automotive industry.

What secondary services or products does the company provide? Designing and manufacturing dimmable windows for the aviation industry and commercial smoke alarms and signaling devices for the fire protection industry.

What countries/continents does the company mainly serve? North America, Europe, Asia

Who are the company’s direct competitors? Magna International (MGA), Samvardhana Motherson Reflective, Murakami Kaimedo Company, Ichikoh Industries, Tokai Rika Company, and Grupo Ficosa International.

What are the primary risks to the company’s profitability?

How does the company protect its product or service from these risks?

Any other items of interest?

Summary: Gentex appears to withstand a highly competitive environment by having staked out a niche for itself and becoming the highest quality and most well known provider in that niche. As other companies encroach, Gentex has expanded its offerings, making it more flexible and readily adaptable to consumer trends, which are already favorable for the company’s industry.

Qualitative Score: 3

 

Now for Gentex’s opponent in this round…

 

Company Name: Maximus

Sector: Industrials

Industry: Business Services

What is the main service or product the company provides? Provides business process services such as case management, consulting, and automated systems for a wide variety of federal and state programs—especially in the health services segment—such as Medicaid, Affordable Care Act (ObamaCare), child support, employment services, and more.

What secondary services or products does the company provide? Business services to county and municipal governments.

What countries/continents does the company mainly serve? United States, Australia, Canada, UK, and Saudi Arabia

Who are the company’s direct competitors? ACS (a Xerox company), EDS (an HP company), Serco, Atos Origin, and specialized private service providers.

What are the primary risks to the company’s profitability?

How does the company protect its product or service from these risks?

Any other items of interest?

Summary: Maximus does indeed seem like a savvy company with dominance in its market, thanks to its long-term contracts and high barriers to entry in its field. It also appears to have the technological and intellectual resources to continually take advantage of new opportunities presented by changing government programs and the increasing desire to lower healthcare costs.

Qualitative Score: 2

 

So Gentex has a slight edge on the qualitative front, let’s now compare GNTX and MMS in quantitative fields. Cells in green indicate which company gets the point in each category. Note that for the industry and sector deciles, a lower number is better.
gntx vs mms [18]

Well, that settles it. MMS outpaces its industry and sector to a greater degree than GNTX and is therefore headed to the championship round!

PII vs. TARO

Now to see who will be MMS’s opponent in the final round. Will it be #1-seeded TARO, the Kentucky of this tournament, or the consistently strong, #5-seeded PII? You may recall from last round that these were the only two Elite Eight stocks that both received a grade of A for profitability from Morningstar.

 

Company Name: Polaris Industries

Sector: Consumer Cyclical

Industry: Recreational Vehicles

What is the main service or product the company provides? Designing, engineering, and manufacturing off-road vehicles (ORVs) such as ATVs. Products are primarily sold through a network of independent dealers and distributors.

What secondary services or products does the company provide? Designing, engineering, and manufacturing snowmobiles, motorcycles, small electric vehicles, and parts, garments, and accessories (PG&A).

What countries/continents does the company mainly serve? United States, Canada, and Europe

Who are the company’s direct competitors? Deere & Company, Kawasaki, Yamaha, Arctic Cat, Kubota Tractor Corporation, Honda, and BRP’s Can-Am line.

What are the primary risks to the company’s profitability?

How does the company protect its product or service from these risks?

Any other items of interest?

Summary: Polaris seems to be finding its way amid powerful direct competitors in a highly competitive market, suggesting that it has good management and a good reputation.

Qualitative Score: 4

 

Last but not least, TARO.

 

Company Name: Taro Pharmaceuticals

Sector: Healthcare

Industry: Drug Manufacturers – Specialty & Generic

What is the main service or product the company provides? Develop, manufacture, and market prescription and over-the-counter pharmaceutical products—mainly generic versions of brand-name products that have been developed by other companies.

What secondary services or products does the company provide? Develop and manufacture active pharmaceutical ingredients.

What countries/continents does the company mainly serve? United States, Canada, and Israel

Who are the company’s direct competitors? The original manufacturers of the brand-name equivalents to Taro’s generic products, including Novartis, GlaxoSmithKline, Bayer AG, Eli Lilly & Company, Merck, and Pfizer, as well as other manufacturers of generic products such as Apotex Inc., Teva Pharmaceuticals, and Mylan Pharmaceuticals.

What are the primary risks to the company’s profitability?

How does the company protect its product or service from these risks?

Any other items of interest?

Summary: We know TARO has been doing something right, as its growth and profitability have been tremendous in the last two years. However, reading the 20F, I was reminded of the “Side effects include” portion of a drug commercial on TV, where a bunch of ominous-sounding warnings whiz by you, undermining what had seemed like a miracle drug just seconds ago. Basically, this company is exposed to a lot of risk from many angles. The company does not seem inclined to brag, either, which made it harder to recognize its competitive advantages.

Qualitative Score: -1

 

PII continues to looks strong while TARO has faltered for the first time in the competition. Still, it’s clear that these are both companies that can hack it in highly competitive industries with formidable foes. Let’s see how they measure up against their industry peers:
pii vs taro [23]

PII was not able to maintain its lead here, despite posting very respectable numbers in almost every category. TARO’s numbers are strong across the board and astronomical in several categories. Apparently the company is truly holding its own against the big dogs in its industry and sector. The final score is PII 6, TARO 7. Close game!

The Championships

Here is the updated bracket for next week’s championship round:

march midness bracket [24]

All of these four companies have proved to be worthy of finalist status, but it is Taro and Maximus that will face off next week.