CarGurus Inc

CARG Details

CarGurus Inc. (NASDAQ: CARG) is an online automotive marketplace connecting buyers and sellers of new and used cars. The company is using proprietary technology, search algorithms and high-end data analytics to build this transparent automotive marketplace. The company derives its revenue from two segments- Marketplace subscription revenue from listing of dealer display subscription & advertising and other revenue by displaying promotions of auto manufacturers and other auto related brand advertisers. Apart from United States, the company also operates in online marketplace under the CarGurus brand in Canada and United Kingdom. As of April 22^nd 2021, the company’s market capitalization stood at USD 2.95 billion.

Strengthen dealerships’ digital retail capabilities: As of March 22^nd, 2021, the company has announced early access for dealerships to preview CarGurus Convert, the latest digital retail product that will help dealers to provide their customers to conduct most of their car purchasing journey online. Shoppers who use CarGurus Convert can build their personalized, penny-perfect deal that incorporates trade-in details, and dealership-specific finance and insurance products. By using this information, dealerships using CarGurus Convert can finalize the deals with highly qualified shoppers, who have a higher intent to purchase a vehicle.

FY20 Results: The company reported a 5.68% decline in total revenue to USD 555.45 million in FY20 as compared to USD 588.91 million in FY19. The company’s 88% of the total revenue in the FY20 comes from Marketplace subscription and only 12% of it comes from Advertising and other revenue. CARG reported the revenue from the Marketplace subscription is USD 484.97 million in the FY20 as compared to that of USD 526.04 million in the FY19. The decrease in marketplace subscription revenue was attributable primarily to the USD 50 million impact from fee reduction that CARG provided to its dealers in response to the Covid-19 pandemic during the second quarter of FY20. The company reported an increase in net income to USD 77.55 million in FY20 as compared to that of USD 42.14 million in FY19.

Revenue Scale (Source: Company Presentation, Q4FY20)

 

Key Risks: The operations of the company were severely impacted by the Covid-19 pandemic. In March 2020, the company had closed all its offices. Since the dealerships were also facing significant financial challenges, CARG had to reduce subscription fee for paying dealers across geographies for a few months. However, the company is making significant advancements in its digital abilities to offset the risk imposed by the Covid-19 pandemic.

The company’s main source of revenue consists of subscription fees paid by the dealers. If a significant number of dealers terminate their subscription with the company, then it would adversely affect the business of the company.

Outlook:

CARG first quarter outlook 2021 (Source: Company Presentation, Q4FY20)

Valuation Methodology: EV/Sales Multiple Based

Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

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

CARG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

 

Stock Recommendation: CARG has declined by 20% in the past three months and is currently leaning toward the mid-point of the 52-week range of USD 36.54 to USD 18.94. We have valued the stock using the EV/Sales based relative valuation methodology and arrived at a target price of USD 28.68. Considering the correction in the stock price in the past three months, current attractive trading levels, technological advancement and decent fundamental growth, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 25.29, up by 2.14% as of 22^nd April 2021.

 

Cactus Inc

WHD Details

 

Cactus Inc. (NASDAQ: WHD) is engaged in manufacturing, designing, and selling of wellhead and pressure controlling equipment. The company also provides short-term renting of frac valves and ancillary equipment and is involved in repair and maintenance services. The company has 15 service centers established in the US, 1 service center in Eastern Australia, and 1 production facility in China. The company operates in three segments namely 1) Product revenue, primarily derived from the sale of wellhead and production tress, 2) Rental Revenue, derived from the rental of drilling tools and associated repair of equipment used for well control process, 3) Field service and other revenue, primarily earned when the company provides installation and other field services such as product sales and equipment rentals. As of April 22^nd, 2021, the company’s market capitalization stood at USD 2.12 billion.

FY20 Result highlights: The company reported 44.50% decline in total revenue to USD 348.56 million in FY20 as compared to USD 628.41 million in FY19. The company’s 59.32% of the total revenue in the FY20 comes from product segment, 18.98% of it comes from the rental segment and the rest comes from the field service and other revenue segment. WHD reported the revenue from the product segment is USD 206.80 million in the FY20 as compared to that of USD 357.08 million in the FY19. WHD reported the revenue from the rental segment is USD 66.17 million in the FY20 as compared to that of USD 141.81 million in the FY19. This is primarily due to customers of WHD having reduced their drilling and complexion activity in direct response to the overall decline in the industry resulting from compressed commodity prices, worsened by the COVID-19 pandemic.

Margins of Cactus Inc. (Source:  Investor Presentation, March 03, 2021)

Key Risks: The demand for the company’s product is dependent on the general level of activity in the oil and gas industry. Decline as well as the anticipated decline in the oil and gas prices could negatively affect the activity in the oil and gas industry. It could adversely affect the demand of the company’s products and services, in certain instances, results in the cancellation or rescheduling of existing and expected orders. These factors could have a material impact on the financial conditions and expected cash flows of the company.

Outlook: The company has provided the capital expenditure guidance for the FY21 to be in the range of USD 10 million to USD 15 million. Full year FY21 capital expenditure would be driven by environmental enhancements of tools, expansion in the manufacturing facility at Bossier City and for general maintenance.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

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

WHD Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Stock Recommendation: WHD has increased by 25.35% in the past 9 months and is currently leaning toward the mid-point of the 52-week range of USD 13.25 to USD 39.07. We have valued the stock using the EV/EBITDA based relative valuation methodology and arrived at a target price of USD 31.66. Considering the upside in the stock price in the past nine months, current trading levels, best margins in the industry, and decent fundamentals we recommend a "Speculative Buy" rating on the stock at the closing price of USD 28.08, down by 0.18% as of 22^nd April 2021.