Dear readers,
thank you for being here and for your interest in my work! If you like this article and if you want to support my work, please feel free to subscribe! Please read the disclaimer at the end of this article. This is not an investment advice!
Happy Easter and welcome to the fourth update of the Stock Watchlist in 2024!
Updating company valuations involves a significant amount of effort. It necessitates a thorough review of the latest financial disclosures, followed by meticulous adjustments to the valuation models. Occasionally, I find myself underestimating the magnitude of this task, which results in less frequent updates to my list than I ideally aim for. My goal is to conduct these valuations for each company on an annual basis. This round, I've refreshed the list to include fair value estimations from my most recent analyses, in addition to updating the valuations of other stocks and introducing two new entries to the roster. This process ensures that my evaluations remain current and reflective of the latest financial data and market trends.
Stock Watchlist Download
Updated Valuations
For H&M, Ulta Beauty, SAP, Stellantis, Kraft Heinz and PayPal, valuations were updated during the preparation of the detailed analysis. Links to the articles are provided at the end of this post.
Republic Services
Republic Services, Inc. is a comprehensive environmental services provider based in the United States, offering a wide array of waste management and recycling services. The company's operations are extensive, focusing on the collection, processing, transportation, and disposal of various types of waste, including recyclable materials, solid waste, and both non-hazardous and hazardous industrial waste. It offers residential collection services that encompass curbside pickup of waste for transport to facilities such as transfer stations, landfills, recycling centers, and organics processing facilities. Additionally, Republic Services supplies recycling and waste containers and rents compactors to its customers.
The company also plays a significant role in recycling, processing, and selling recyclable materials like old corrugated containers, old newsprint, aluminum, and glass. Beyond waste collection and recycling, Republic Services offers landfill services, managing a substantial number of active landfills, landfill gas-to-energy projects, renewable energy projects, and facilities for the treatment, storage, and disposal of waste.
As of the end of 2023, Republic Services operated through a vast network that included 364 collection operations, 246 transfer stations, 207 active landfills, 74 recycling centers, and a range of disposal wells and treatment facilities across 41 states. The company also maintained involvement in energy projects, highlighting its commitment to environmental sustainability. Established in 1996, Republic Services is headquartered in Phoenix, Arizona, serving a diverse customer base that spans small-container, large-container, and residential segments.
Republic Services, Inc. has crafted a robust business model centered around providing indispensable environmental services, encompassing waste collection, recycling, and disposal, along with specific solutions for hazardous waste management. This model is bolstered by an expansive operational infrastructure, including landfills, recycling facilities, and various waste processing units, designed to cater to a broad spectrum of clients ranging from residential households to large industrial entities.
At the core of its business strategy, Republic Services offers a comprehensive suite of services that not only meet the essential needs of communities and businesses but also align with the growing demand for sustainable waste management solutions. The company's ability to serve a wide range of customers through long-term contracts ensures a diversified and stable revenue stream, underpinned by the essential nature of its services which remain in demand regardless of economic fluctuations.
Republic Services' significant investment in infrastructure and technology creates substantial barriers to entry, making it challenging for new competitors to enter the market. This is further reinforced by stringent regulatory requirements governing waste management operations, which necessitate extensive compliance measures and capital investment, particularly in landfill operations and recycling facilities. Such regulatory barriers, combined with the company's economies of scale, form a protective moat around its business, safeguarding its competitive position.
Moreover, the company's commitment to environmental sustainability and renewable energy projects not only enhances its compliance with evolving regulations but also positions it favorably in the eyes of environmentally conscious consumers and businesses. This strategic focus on sustainability is indicative of the company's adaptability and forward-thinking approach, enabling it to capture emerging opportunities in green energy and waste reduction initiatives.
In essence, Republic Services operates within a highly stable and resilient framework, characterized by its provision of essential services, a diversified customer base, and a strong commitment to environmental stewardship. The combination of regulatory barriers, economies of scale, and a focus on sustainability not only fortifies its competitive moat but also ensures the company's long-term viability in a world increasingly focused on sustainable living and waste management practices.
While Republic Services, Inc. boasts an impressive business model, its current stock valuation raises some concerns. Currently, the stock is trading near an all-time high, with an Enterprise Value to Earnings Before Interest and Taxes (EV/EBIT) ratio of 23.69x. This high valuation is particularly striking when contrasted with the results of my Discounted Cash Flow (DCF) analysis, which suggests a fair value per share of approximately $140. In comparison, the stock's recent trading price around $191 significantly exceeds this valuation, indicating that the stock may be considerably overvalued from my perspective.
This discrepancy between the stock's market price and its estimated fair value prompts a cautious approach. Although Republic Services presents a compelling investment opportunity based on its business fundamentals and the resilience of its operating model, the current stock price does not align with the intrinsic value derived from my financial analysis. As a result, the stock will remain on my watchlist for now, pending a more favorable valuation that better reflects its underlying financial health and growth prospects.
Starbucks
Starbucks Corporation is a global leader in the coffee industry, engaging in the roasting, marketing, and retailing of coffee through a network of subsidiaries. The company's operations are segmented into three main areas: North America, International, and Channel Development. Starbucks stores offer a wide range of products, including coffee and tea beverages, whole bean and ground coffees, single-serve products, ready-to-drink beverages, and an assortment of food items like pastries, breakfast sandwiches, and lunch offerings.
Beyond its retail stores, Starbucks also licenses its trademarks for use in licensed stores and through grocery and foodservice accounts. The company's product portfolio is marketed under several brands, including Starbucks Coffee, Teavana, Seattle’s Best Coffee, Ethos, Starbucks Reserve, and Princi. Founded in 1971, Starbucks Corporation is headquartered in Seattle, Washington, emphasizing its long-standing heritage and commitment to coffee culture and innovation.
Starbucks Corporation has meticulously crafted a business model that intricately weaves together direct retail operations, product diversification, and strategic global expansion, all while nurturing a robust brand identity deeply rooted in the coffee experience. This multifaceted strategy has propelled Starbucks to the forefront of the global coffee industry, cementing its status as a household name synonymous with quality and innovation in coffee.
At the heart of Starbucks' operations are its retail outlets, which serve as the primary interface with consumers. These cafes are not just places to grab a coffee; they represent a consistent and high-quality experience that includes a wide range of beverages, food items, and a welcoming atmosphere. The company's foray into product diversification, offering teas, baked goods, and ready-to-drink products, further broadens its appeal and captures a more extensive customer base with varied tastes and preferences.
Starbucks’ global presence is another pillar of its business model, with stores spanning North America, Asia, Europe, and beyond. This international footprint not only diversifies its revenue but also reduces reliance on any single market, spreading its risk and potential for growth across the globe.
The essence of Starbucks' competitive advantage, or its moat, lies in its unparalleled brand equity. Starbucks is not just a coffee shop; it's a symbol of premium quality and a superior customer experience. This reputation is a formidable barrier to competitors and is complemented by the company's scale and market presence, which further discourage new entrants. The loyalty of Starbucks' customers is another cornerstone of its success, fueled by effective loyalty programs and mobile app engagement that encourage repeat business.
Starbucks has also shown exceptional adaptability to changing market dynamics and consumer preferences, such as embracing plant-based options and innovating its store formats for greater convenience. Its control over the supply chain ensures the consistent quality of its products, reinforcing its brand reputation. Financially, Starbucks stands on solid ground, with strong revenue growth, operational efficiency, and robust cash flows that support its strategic initiatives and shareholder returns.
In conclusion, Starbucks' business model is not just about selling coffee; it's about creating an experience and a community around its brand. This approach has endowed Starbucks with a significant competitive moat, marked by brand equity, market presence, and customer loyalty. Moreover, the company's stability and resilience are underscored by its adaptability, supply chain mastery, and financial health, ensuring its continued leadership in the global coffee industry.
For Starbucks, my fair value estimation per share stands at approximately $93, which, given the current stock price of $91, indicates that the stock is fairly valued at present. However, it's important to highlight that the margin of safety is notably slim at this level. Regarding the Enterprise Value to Earnings Before Interest and Taxes (EV/EBIT) ratio, Starbucks is currently trading at 19.95x, which is lower than its 3-year average of 24.80x. This suggests a potentially more attractive valuation compared to recent historical averages. Despite this, shareholders might feel discontent with Starbucks' stock performance over the last three years, as it has seen a decline of about 17% in its value. This underscores the importance of considering both current valuation metrics and historical performance trends when evaluating the stock's investment potential. I am invested in Starbucks.
Salesforce
Salesforce, Inc. is a global leader in Customer Relationship Management (CRM) technology, designed to bridge the gap between companies and their customers. The company offers a comprehensive suite of services that facilitate various aspects of customer engagement and management for businesses worldwide. Key offerings include:
Sales Solutions: These services allow organizations to store data, track leads and progress, forecast opportunities, and generate insights through analytics and relationship intelligence. They also include tools for creating quotes, contracts, and invoices.
Customer Service and Support: Salesforce enables companies to provide personalized and scalable customer service and support, fostering trust and satisfaction.
Platform Services: A versatile platform supports the development of business apps through user-friendly drag-and-drop tools, catering to companies of all sizes, industries, and geographies. Salesforce also offers an online learning platform for acquiring Salesforce skills and integrates Slack for enhanced communication and engagement.
Marketing Services: These tools help companies plan, personalize, and optimize the customer journey through real-time personalization and optimization.
Commerce Services: Salesforce empowers businesses to create seamless shopping experiences across multiple channels, including mobile, web, social media, and physical stores, with both click-to-code and drag-and-drop functionalities.
Analytics: The Tableau analytics solution provides comprehensive enterprise use case analytics, featuring AI models for trend spotting, outcome prediction, and actionable recommendations, accessible from any device.
Integration Services: MuleSoft facilitates the easy integration of data from any system to deliver connected customer experiences.
Data Platform: Genie Customer Data Cloud is a real-time data platform that supports Salesforce's Customer 360 platform, enabling businesses to have a holistic view of customer interactions.
Industry-specific Services: Salesforce offers tailored solutions for various industries, including financial services, healthcare, manufacturing, among others, addressing unique sectoral needs.
SMB Solutions: Salesforce Easy caters specifically to the needs of small and medium-sized businesses, simplifying CRM adoption and usage.
Incorporated in 1999 and headquartered in San Francisco, California, Salesforce has established itself as a pivotal entity in the CRM space, continually evolving its offerings to meet the dynamic needs of businesses aiming to enhance their customer relationships.
Salesforce, Inc. has developed a business model that leverages cloud-based Customer Relationship Management (CRM) solutions and a broad array of enterprise applications to cement its position as a leader in the CRM domain. This strategy is deeply rooted in innovation, customer-centric services, and a commitment to driving digital transformation across industries.
At the core of Salesforce's operations is a subscription-based revenue model, ensuring a consistent and predictable financial inflow. This model is complemented by a diverse product ecosystem that spans Salesforce Cloud, Service Cloud, Marketing and Commerce Cloud, and more, including the recent integration of Slack. Such diversity allows Salesforce to meet a wide spectrum of business needs, from small startups to global enterprises.
Salesforce's strength lies in its robust ecosystem, highlighted by a vast marketplace of third-party applications through AppExchange and seamless integration capabilities, particularly with MuleSoft. This ecosystem fosters a network effect, enhancing the platform's value as more users, developers, and partners join and contribute to its evolution.
Innovation is a hallmark of Salesforce, with significant investments in artificial intelligence via Einstein and advanced analytics through Tableau. These technologies not only enrich the platform's offerings but also ensure Salesforce remains at the forefront of CRM and enterprise application trends.
The company's competitive moat is distinguished by its brand recognition and leadership in the CRM market, a direct result of being one of the industry's first movers. The network effects of its expanding user base and the high switching costs associated with migrating from its integrated solutions contribute to strong customer retention and loyalty.
Salesforce's business model exhibits remarkable stability and resilience, underscored by its adaptability to market shifts and a diversified customer base that mitigates the risk of sector-specific downturns. The company's robust financial performance, marked by steady revenue growth and substantial R&D investment, further solidifies its position and prospects for sustained growth.
In essence, Salesforce's strategic approach, focusing on subscription-based services, product diversification, ecosystem development, and continuous innovation, not only creates a significant competitive advantage but also ensures the company's long-term stability and resilience in the dynamic CRM landscape.
My Discounted Cash Flow (DCF) model for Salesforce projects a Net Sales Compound Annual Growth Rate (CAGR) of approximately 9.2% and an Operating Income CAGR of 16.2% over the next five years. Based on these growth estimates, the model calculates a fair value of $270 per share, indicating an overvaluation when compared to the current stock price of $301. Looking further ahead, my long-term forecast suggests a potential fair value per share of about $315 in two years. However, it's crucial to acknowledge the inherent uncertainties in such predictions, as they are fundamentally based on assumptions and forward-looking projections. This emphasizes the speculative nature of long-term forecasts and the importance of considering them as part of a broader investment analysis framework. I am not invested and do not intend to.
New Valuations
I've recently included Bank of America and JPMorgan Chase in my stock watchlist, recognizing their significance as leading financial institutions both in the U.S. and globally. These banks are integral components of my portfolio due to their major roles in the financial sector. For the purpose of fair value estimation, I opted for the excess returns method. This approach is particularly suited to banks and financial institutions where deriving free cash flow is not straightforward or particularly insightful, given the unique nature of their operations compared to companies in the tech or consumer sectors.
It's my observation that stocks in the banking sector sometimes don't get the appreciation they deserve from investors, possibly due to the distinct differences in their business models when compared to those of tech companies or consumer industries.
While I plan to delve into more detailed analysis in future articles specifically focused on bank stocks, I want to share my current fair value estimates: approximately $44 per share for Bank of America and $180 for JPMorgan Chase. These valuations are indicative and part of a broader investment thesis that considers the unique value propositions and challenges faced by major banks.
My recent articles:
Disclaimer: The information provided in this publication is for educational and informational purposes only and does not constitute financial advice. The content is solely reflective of my personal views and opinions based on my research and is not intended to be used as a basis for investment decisions. While every effort is made to ensure that the information is accurate and up-to-date, the writer makes no representations as to the accuracy, completeness, suitability, or validity of any information in this post and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All readers are advised to conduct their own independent research or consult a professional financial advisor before making any investment decisions. The author is invested in Starbucks, JP Morgan Chase and Bank of America.