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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:
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If you want to know how we got here, check out the earlier rounds of the tournament:
- Introduction [8]
- Round I: Growth [9]
- Round II: Financial Health [10]
- Round III: Efficiency [11]
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.” 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?
- Magna Mirrors (a subsidiary of Magna International) is competing for foreign and domestic sales to automakers and “may present a formidable competitive threat” (10K [12]). (-1)
- A few Japanese and Chinese companies are also competing in local markets (10K).
- Complexity of innovation and increasing manufacturing costs (“3 of Today’s Worst Stocks” [13]). (-1)
How does the company protect its product or service from these risks?
- Has a proprietary electrochromic technology. (+1)
- Is the “leading producer of automatic dimming rearview mirrors” with 90% market share worldwide (10K). (+1)
- “Significant performance advantages over competing products” (10K). (+1)
- Acquired HomeLink, a former competitor that will help the company expand its wireless in-vehicle communication offerings (10K). (+1)
Any other items of interest?
- Favorable macro trends such as growing markets in India and China. (+1)
- Possible acquisition target for Magna Mirrors or other companies (“Gentex: Solid Product, Growing Market, Attractive Valuation And An Acquisition Target” [14]).
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?
- Competitive market and “subject to rapid change” (10K [15]). (-1)
- Seasonality and margin fluctuations of health services segment revenue due to enrollment periods and other factors (10K).
- Legislative tides and government budgetary changes (10K).
How does the company protect its product or service from these risks?
- Long-term contracts with governments (3-5 years) provide revenue stability and predictability, as well as stronger client relationships (10K).
- Combs legislative initiatives for growth opportunities. According to the 10K, legislative initiatives have generally favored the company by providing expansion opportunities. (+1)
- Complex bidding process, expertise needs, and scalability factors create barriers to entry for new firms. (+1)
- Acentia acquisition expands management solutions capability (+1)
Any other items of interest?
- A Seeking Alpha article [16] points out a negative exposé in Australia on Maximus, but the company seems to have been unharmed by the bad publicity (one commenter on the article describes the company as “very savvy”). (-1, although the company was apparently unscathed and clearly knows how to smooth over bumps, the negative news item itself raises doubts about the company’s integrity in all quarters. Integrity and profitability are unfortunately not always directly linked, at least in the short term, but for my money, it matters that a company operates legitimately.)
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.
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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?
- Highly competitive market, in which several of Polaris’s competitors are more diversified and have substantially greater financial and marketing resources (10K [18]). (-1)
- Subject to many safety and environmental regulations; failure to comply could result in fines and damage to the company’s reputation (10K).
- High exposure to product liability claims (based on how products are used) (10K).
- Sensitive to economic conditions that affect consumer discretionary spending (10K).
How does the company protect its product or service from these risks?
- Competitive pricing of its products (10K). (+1)
- Vertically integrated in many components of manufacturing (10K). (+1)
- While competitors primarily market their ORVs through their affiliated dealers, Polaris sells though independent dealers and distributors (10K). (+1)
- Is expanding motorcycle dealer network and sales in North America, Europe, and Australia (10K). (+1)
Any other items of interest?
- Motorcycle sales have increased dramatically in the last few years, overtaking Harley Davidson and rising 59% in 2014 (“Polaris Will Slingshot Investors to Gains” [19]).
- Increasing consumer discretionary spending likely to benefit the company in foreseeable future. (+1)
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?
- Highly competitive market with extremely powerful and established competitors. (-1)
- Volatility of global markets with a less-than-favorable prognosis for the coming years (20F [20]).
- Based in Israel, where political, economic, and military conditions may directly affect operations (20F). (-1)
- Brand-name drug companies occasionally attempt to prevent generic drug makers from being accepted or from producing certain products; brand-name companies sometimes also introduce generic versions of their own in order to pre-empt competition on drugs with expiring patents (20F). (-1)
- Increasing product pricing pressure from consolidation of mass merchandisers and large buying groups (20F). (-1)
How does the company protect its product or service from these risks?
- Focus on expanding and upgrading manufacturing facilities and IT systems. (+1)
- Vertical integration of manufacturing gives the company competitive advantages in access to high-quality raw materials, reliability of supply, and costs of ingredients. (+1)
Any other items of interest?
- Sun Pharmaceuticals controls 79.2% of the voting power of the company, and according to this Seeking Alpha article [21], Sun would want to own the company outright.
- Market for generic drugs has grown. (+1)
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:
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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:
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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.