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mid-cap

Mid-Cap Stocks to Buy With Conviction - OGN, KNX, BXS

Jun 18, 2021 | Team Kalkine
Mid-Cap Stocks to Buy With Conviction - OGN, KNX, BXS

 

Organon & Co.

OGN Details

Organon & Co. (NYSE: OGN) is a global healthcare company focused on women’s health issues and biosimilars business, and was formed in June 2021 through a spinoff from Merck & Co., Inc. The company operates via three segments namely, 1) Women’s Health, 2) Biosimilars, which are lower-cost alternatives to existing biologic medicines that treat some of life’s most serious diseases, and 3) Established Brands, representing a broad portfolio of mature brands, developed and launched by Merck across multiple therapeutic areas and geographies. OGN has a portfolio of over 60 medicines and products across a range of therapeutic areas primarily related to reproductive health, and serves people in over 140 markets, with a majority of its business coming from the US. OGN was listed on the NYSE on May 14, 2021, on a when-issued basis. As of June 18, 2021, the company’s market capitalization stood at USD 7.97 billion.

FY20 Pro Forma Revenue by Portfolio (Merck Investor Day Presentation, May 03, 2021)

Expansion Into the Medical Device Category: On June 16, 2021, the company closed the acquisition of Alydia Health, a commercial-stage medical device company focused on preventing maternal morbidity and mortality caused by postpartum hemorrhage (PPH) or abnormal postpartum uterine bleeding. The total transaction value was USD 240.0 million, including USD 215.0 million upfront plus a USD 25.0 million contingent milestone payment.

FY20 Results: Total pro forma revenue in FY20 (ending December 31, 2020) was USD 6.61 billion, down 16% from USD 7.78 billion in FY19, with Established Brands and Women’s Health segments contributing ~70% and ~24% of the total revenue in FY20, respectively. EBIT in FY20 was USD 2.75 billion vs USD 3.70 billion in FY19.

Key Risks: The manufacturing and marketing of OGN’s products, are subject to extensive regulation by federal and state governmental authorities in the US (FDA) and worldwide, and hence, any suspensions/withdrawal of prior approvals if its products fail to comply with the regulatory requirements could negatively impact its business and financial condition. In addition, the company also faces continued pricing pressure globally from managed care organizations, government agencies, and programs that could adversely affect its sales and profit margins.

Outlook:

FY21 Pro Forma Guidance (Merck Investor Day Presentation, May 03, 2021)

OGN Daily Technical Chart

Stock Recommendation: OGN stock corrected 20.05% in the past one month and is currently trading at 96.71% of its initial trading price of USD 31.00. Considering the attractive valuation of the newly listed company, sizeable product portfolio, recent accretive acquisition of Alydia Health, and positive outlook, we recommend a “Buy” rating on the stock at the closing price of USD 29.98, down 4.70% as of June 18, 2021. The target price of USD 35.04 represents a Price/Earnings multiple of 5.99x on FY21E earnings per share of USD 5.85.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV. 

 

Knight-Swift   Transportation Holdings Inc.

KNX Details

Knight-Swift Transportation Holdings Inc. (NYSE: KNX) is North America’s largest truckload carrier and transportation solutions provider. In addition, the company also contracts with third-party capacity providers to provide various shipping solutions. KNX operates in the following segments: 1) Trucking, which earns revenues through irregular route and cross-border transportation of various goods with 13,130 irregular route tractors and 5,094 dedicated route tractors, 2) Logistics, which consists of brokerage and other freight management services utilizing third-party transportation providers and their equipment, and 3) Intermodal, which includes arranging the movement of freight over the rail in the containers and other trailing equipment. As of June 18, 2021, the company’s market capitalization stood at USD 7.46 billion.

Acquisition of UTXL Inc. (UTXL): On June 01, 2021, the company acquired the equity interests of UTXL, a leading third-party logistics company. The purchase price for this transaction was USD 22.50 million, a portion of which was placed in an escrow account to secure obligations. KNX will support the UTXL independent processes while leveraging technology and economies to scale to create synergies.

Robust Q1FY21 Results: The company reported a 10.32% rise in revenue, excluding fuel surcharge to USD 1,133.10 million in Q1FY21 (ending March 31, 2021) as compared to USD 1,027.09 million in Q1FY20 (ending March 31, 2020), primarily due to a 50% rise in total revenues from the Logistics segment. In addition, net income increased 1.97x YoY to USD 129.84 million in Q1FY21 compared to USD 65.78 million in Q1FY20. As of March 31, 2021, the company stood at the cash and cash equivalents of USD 194.65 million with a total debt of USD 626 million.

Key Risks: The largest customer of the truckload carrier accounted for 16.80%, 13.30%, and 14.60% of the total revenue in FY20, FY19, and FY18, respectively. Undue reliance on a single customer for revenues could hurt the company’s financial and operational health in the future.

Outlook: The company expects its net capital expenditure for the FY21 to be in the range of USD 450 million to USD 500 million to maintain a modern tractor fleet, refresh the trailer fleet, up-gradation of terminals, and improvement in technology. For the full year FY21, KNX expects its adjusted EPS to be USD 3.45 – USD 3.60, assuming an increase in over-the-road contract rate, margin improvement in the intermodal segment, and continual strength in logistics revenue growth.

Valuation Methodology: EV/EBITDA per share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

KNX Daily Technical Chart

Stock Recommendation: KNX’s share price has decreased by 7.23% in the past one month and is currently trading at a mid-band of the 52-week range of USD 37.07 to USD 50.95. The stock is currently trading around its 200 DMA levels. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 50.32. Considering the market dominance of the company in North America, continuous improvements in EBITDA margins, recent acquisitions, and healthy balance sheet, we recommend a "Buy” rating on the stock at the closing price of USD 44.72, down by 0.86% as of June 18, 2021.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

 

BancorpSouth Bank

BXS Details

BancorpSouth Bank (NYSE: BXS) is a regional bank headquartered in Tupelo, Mississippi, with USD 25.80 billion in assets as of March 31, 2021. The company provides commercial banking, leasing, loan origination and servicing, brokerage, and insurance services through a broad network of 325 branches to corporate customers, local governments, individuals, and financial institutions. BXS operates in five segments, viz. 1) Banking Services Group (BSG) 2) Mortgage 3) Insurance Agencies 4) Wealth Management, and 5) General Corporate and others. The company generates the majority of its revenues from the BSG segment. As of June 18, 2021, the company’s market capitalization stood at USD 2.93 billion.

Growing Market Presence (Source: Investor Presentation, May 2021)

Inorganic Path to Strengthen the Franchise: On May 03, 2021, the bank announced the completion of its previously announced mergers with National United Bancshares, Inc. (National United) and with FNS Bancshares, Inc. (FNS), effective May 01, 2021. Earlier, on April 12, 2021, the company announced the merger agreement with Cadence Bank, under which Cadence will be merged with the company and the company will continue as the surviving entity, in an all-stock transaction with a combined market value of more than USD 6 billion to build a prominent Texas and Southeastern regional bank. This merger transaction is expected to close in the fourth quarter of FY21.

Q1FY21 Results: The company recorded a 4.59% decline in total interest revenue to USD 192.78 million in Q1FY21 (ending March 31, 2021) compared to USD 202.06 million in Q1FY20 (ending March 31, 2020). Interest earned from loans and leases contributed 87.76% of the total interest revenue in Q1FY21, while the rest came from deposits and available-for-sale securities. The company reported a 3.36x YoY surge in net income to USD 81.55 million compared to USD 24.26 million in Q1FY20. Total deposits increased to USD 21,173.18 million compared to USD 19,846.44 million as of Q4FY20. Net Interest Margin (NIM) decreased by 14 bps YoY to 3.15% for Q1FY21. Non-Performing Loans (NPLs) edged lower by 16.38% to USD 101.32 million as of Q1FY21 as compared to USD 121.17 million as of Q4FY20.

Key Risks: The bank’s business is highly concentrated in Alabama, Arkansas, Florida, Louisiana, Mississippi, Missouri, Tennessee, Texas, and Illinois. Deterioration in economic conditions in these southeastern states could impact the company’s financial condition. In addition, as of March 31, 2021, the company’s geographic NPL distribution was concentrated in Texas, Mississippi, Alabama, Florida panhandle markets. 

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

BXS Daily Technical Chart

Stock Recommendation: BXS’s share price has declined by 18.82% in the past three months and is currently trading at a around the mid-band of the 52-week range of USD 18.11 to USD 35.59. The stock is currently trading below its 200 DMA levels. We have valued the stock using the Price/Book Value-based relative valuation methodology and arrived at a target price of USD 32.80. Considering the decline in the stock price in the past three months, decline in NPLs, inorganic growth initiatives, and strong balance sheet, we recommend a "Buy” rating on the stock at the closing price of USD 27.59, down by 3.60% as of June 18, 2021.

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.