BEST Of The Best: Stifel's New Top Growth Idea

If you like Alibaba Group Holdings Ltd BABA, maybe you’ll like what BABA likes. The firm has a 28-percent stake in BEST Inc (ADR) BSTI, a derivative play Stifel Nicolaus advocates.

“We believe its significant market share gains, unique asset-light business model, and attractive valuation provide a special opportunity for investors to take part in the growth of ‘new retail’ in China,” analysts David Ross, J. Bruce Chan and Austin Remey wrote in a Monday note. “In our view, this stock should be in every transportation growth investor's portfolio.”

Anticipating double-digit growth in every segment, Stifel introduced earnings per share estimates of (10) cents in 2018, 46 cents in 2019 and $1.12 in 2020. It initiated coverage on the stock with a Buy rating and $16 price target.

BEST Will Get Better

The 10-year-old BEST, which went public in September, leverages proprietary technology to connect and manage Chinese warehouse and supply chain activities.

“One can think about the company like Alibaba's outsourced version of Amazon.com, Inc. AMZN Logistics, but rather than building capabilities in-house, like Amazon has with package delivery and fulfillment, Alibaba uses BEST (among others) to support its merchants' efforts and supply chain needs,” Ross, Chan and Remey wrote.

BEST Freight, its less-than-truckload division, is one of the top LTL services in China, while BEST Express, the firm’s greatest revenue source, ranks top six with the potential to rise amid competitor price hikes.

Its newest segment, BEST Store, consolidates Chinese convenience store supply chains and, just two years in, already contracts more than 314,000 shops. The goal is 1 million.

“BEST Inc. is a hyper-growth play on the expanding e-commerce market in China and, we believe, a derivative play on Alibaba Group (BABA),” Stifel analysts wrote. “As revenue and volume growth continues, operating leverage should mean profits follow. The unique asset-light business model should lead to significant cash generation and keep the balance sheet healthy and financial leverage to a minimum.”

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