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Hayden Capital on Applovin $APP US
Thesis: AppLovin's high-margin ad platform is driving massive revenue growth, with significant future potential in AI-driven advertising and a highly efficient data model.
Extract from their Q2 letter, [link here]
Analysis:
All of these tailwinds have led to some impressive numbers over the last few years. Revenues have grown from just $1.5BN in 2020 to an estimated $4.4BN in 2024. More importantly, it’s the high-margin advertising platform that’s driven this growth—going from just $207M in 2020 to an estimated ~$2.9BN in 2024 (a ~14x increase).
Meanwhile, the gaming studios segment has done its job of providing AppLovin first-party data to train its algorithms. The $1BN spent acquiring/partnering with these gaming studios jump-started AppLovin’s “data flywheel.” But now with the model’s effectiveness proven and more third-party advertisers joining the platform, AppLovin can obtain enough data from these other sources.
As such, first-party games will be less important to AppLovin’s future. They no longer need to own this relatively lower-margin, lower ROI business themselves, and plan to run them for cash flow and/or sell them at some point in the future.
Management believes the ads platform can organically grow 20 - 30% y/y for many years. And this is just from the algorithm naturally getting more efficient with more data. It doesn’t even include any step-function improvements, such as from Axon 3, or from new categories like e-commerce.
The share price has more than doubled since we first started buying in Q2 2022 (albeit with a -75% draw-down in between). Despite this, I believe shares remain attractive at just ~12x EV/EBITDA (2024E).
Management has already publicly indicated their desire to sell the gaming division eventually—and I think the ads platform is the better business as well. As such, it’s prudent to strip out gaming when looking at the valuation.
Doing so, I believe investors are buying the ads platform at ~$30BN, in return for ~$2.1BN 2024E EBITDA, or ~15x EV/EBITDA. This is in return for a business that should grow at least 20 - 30% y/y in the medium term, and possibly over +40 - 50% y/y if factoring in future Axon improvements and a successful ecommerce expansion.
I remain very excited about Applovin. It’s arguably one of the finer examples of how Artificial Intelligence/Machine Learning technology can significantly expand not just the company’s revenues, but also create value for an entire industry. While the world fawns over semiconductors at high valuations, I would prefer to own one of the first practical applications of AI technology with ~20 - 50% y/y growth, at a mid-teens multiple.
Check here for the latest results, quarterly call and analysts' estimates.
Patient Capital Management on Biogen $BIIB US
Thesis: Biogen, an underappreciated biopharma leader with a new CEO, is poised for long-term gains as its Alzheimer's treatment targets an underserved market.
Extract from their Q2 letter, [link here]
Analysis:
Biogen Inc. (BIIB) is another name that we believe is underappreciated. As a global biopharmaceutical business, the company is most well known for their products in multiple sclerosis, spinal muscular atrophy, and most recently Alzheimer’s disease. The new CEO, Christopher Viehbacher, is working to improve the company’s pipeline, most recently with their acquisition of Human Immunology Biosciences Inc. in May. Chris has a strong track record of successful M&A and we expect him to continue that tradition. More importantly, we think the market is currently giving the company no credit for success in their Alzheimer’s indication.
While the uptake in Leqembi, their Alzheimer’s product, has been slow, we still see strong long-term potential for a patient population that is dramatically underserved. We find the risk/reward extremely attractive.
Check here for the latest results, quarterly call and analysts' estimates.
Orbis on Cinemark $CNK US
Thesis: Cinemark is poised for a strong recovery as the film industry normalizes, with its prudent debt management positioning the company for significant upside.
Extract from their Q2 letter, [link here]
Analysis:
The next few years should see the consummation of Cinemark’s business model as the industry returns to a normal film production and annual release schedule. If the box office meets our expectations, we believe Cinemark can achieve record profitability. Furthermore, Cinemark should soon restore its dividend, as the recovery brings debt ratios down to the company’s targeted window. Lastly, much of that debt will soon be gone. Cinemark has paid down $250M of its Covid-era borrowing at this point, leaving one $460M convertible bond as the final remnant of emergency pandemic debt. If Cinemark returns to its pre-Covid capital structure, we believe the shares are worth some 50% more than their current price.
Theatrical exhibition is poorly understood and easy to dismiss. The best-known businesses in the space are beset with challenges that will endure long after the box office rebounds. Cinemark has managed its debt and investments more prudently. The broader sector is disdained as an outdated absurdity in the age of streaming video. But cinemas remain the best way to make money from movies. Movie theatres have survived over a century of disruptions including radio, television, broadcast, VHS, home rentals, cable, DVD, and internet piracy. We believe the pandemic and streaming will join this litany of challenges overcome by theatrical exhibitors, and we believe Cinemark will lead the charge in this recovery story.
Check here for the latest results, quarterly call and analysts' estimates.
Southernsun on Darling Ingredients $DAR US
Thesis: Darling Ingredients is set to benefit from growth in renewable energy and sustainable aviation fuel, with strong international market positions and a compelling valuation.
Extract from their Q2 letter, [link here]
Analysis:
Darling Ingredients Inc. (DAR) is the largest publicly traded company turning edible by-products and food waste into sustainable products and a leading producer of renewable energy. DAR was the top detractor in the SMID Cap strategy in the second quarter. The stock has struggled after a difficult reset period in the third quarter of last year, as fears regarding new industry supply of renewable diesel and the lack of government support have increased.
After a strong year of EBITDA growth in 2023, we expect 2024 to be an important year of transition before growth resumes over the next 2-3 years, as recent M&A and growth capex drive deleveraging and free cash flow. The company is currently constructing sustainable aviation fuel (SAF) capacity expected to come online in 4Q24 and is evaluating further SAF expansion for the future, as growth and incentives in that market provide significant margin expansion and return on investment. The valuation is compelling, in our opinion, based on multiple scenarios and valuation methodologies.
We spent time with local leadership in Brazil during the second quarter—reviewing significant investments that have been made over recent years as well as touring important production facilities. Brazil is the most important international market for Darling where they have consolidated the industry and enjoy very strong market share. While these investments have put some strain on the balance sheet in the near term, we believe the growth in cash flow and return on invested capital will deliver improved stock performance in the years ahead.
Check here for the latest results, quarterly call and analysts' estimates.
The London Company on DoubleVerify $DV US
Thesis: DoubleVerify, a leader in digital ad verification with high margins and minimal capital needs, is set to capitalize on growing demand for ad transparency in the digital space.
Extract from their Q2 letter, [link here]
Analysis:
DoubleVerify (DV) develops software platforms for digital media measurement, data, and analytics. DV sells a critical insurance-like product known as “ad verification,” designed to create transparency, eliminate fraud, and drive ad-spending optimization. Ad verification has reached a point of mass acceptance among digital ad buyers due to its measurable low cost/high reward value proposition.
DV operates in a duopoly where it commands the leading market position (>50% market share), by focusing on product innovation rather than sales expansion. DV’s business should continue to benefit from secular tailwinds in digital advertising. Incremental revenue growth should be accretive to returns on capital, given the high cash margins and minimal capex needs. We initiated our position following a pullback, allowing us to purchase an advantaged company growing at a double-digit rate, with high margins, at a market multiple.
Check here for the latest results, quarterly call and analysts' estimates.
Southernsun on Dycom Industries $DY US
Thesis: Dycom Industries is poised for growth in fiber construction with strong demand from federal programs, ongoing M&A opportunities, and effective leadership succession in place.
Extract from their Q2 letter, [link here]
Analysis:
Dycom Industries, Inc. (DY), a leading provider of engineering and construction services to the telecommunications and utility industries, was a top contributor in the SMID Cap strategy in the second quarter as the company returned to organic growth and delivered continued margin expansion. The demand outlook for fiber construction in urban areas remains strong as carriers continue to generate good returns on their fiber investments. Public funding for fiber through the ARPA, RDOF, and BEAD programs is an additional source of significant demand. Notably, the $40 billion BEAD program is the largest federal broadband program ever in the U.S., and deployment is expected to start in 2025.
According to management, the M&A environment has improved, and two small acquisitions were completed in the first half of 2024. With Net Debt/EBITDA at 1.6x, we believe DY has adequate financial flexibility to take advantage of additional opportunities. Steve Nielsen, CEO, will retire at the end of November, after 25 years leading the company. His successor, Dan Peyovich, was hired as COO in 2021 with succession in mind and has over 20 years of experience in engineering and construction. We plan to meet with Dan over the coming months to discuss his vision for the company. Overall, we believe DY is executing well and remains well-positioned to capitalize on the strong tailwinds in the industry while maintaining a shareholder-friendly capital allocation strategy.
Check here for the latest results, quarterly call and analysts' estimates.
River Oaks Capital on Fitlife Brands $FTLF US
Thesis: Fitlife Brands, led by a visionary CEO, is turning around acquisitions like MusclePharm and Mimi’s, generating strong cash flow and positioning itself for further growth.
Extract from their Q2 letter, [link here]
Analysis:
Fitlife Brands (FTLF) develops and markets nutritional supplements—protein powders, pre-workout, amino acids, weight loss products, fish oils, etc.—under 13 different brand names. It is our fifth-largest position in the fund and now has a market cap of $140m. Dayton Judd—CEO of Fitlife, who owns 55% of the company—continues his phenomenal turnaround.
I reconnected with Dayton Judd a few months ago, and as usual, his execution of the top-notch acquisition and cost-cutting strategy continues to accelerate.
First off, the Mimi’s brand acquisition in 2023 has turned into a homerun investment so far. Mimi’s was doing $1m or less of free cash flow to equity when they were acquired by Fitlife in late 2022—details about Mimi’s mentioned in the H2 2022 letter. Over the past year, Dayton and his team have almost completely cut the general and administrative costs of Mimi’s—board fees, employees, etc.—as well as a significant portion of the advertising costs.
This has raised the annual free cash flow to equity of Mimi’s to $5+m—they acquired Mimi’s for $17m, which turned out to be a 3.5 P/E valuation! In late 2023, Dayton used the increased free cash from Mimi’s alongside $10m of debt to acquire the distressed MusclePharm brand for $18.5m.
The story of MusclePharm was highlighted in the last letter. Although we are less than a year into the acquisition of MusclePharm, it appears Dayton’s flawless turnaround strategy is again underway.
Check here for the latest results, quarterly call and analysts' estimates.
RS Investments on Fortrea $FTRE US
Thesis: Fortrea's potential lies in its ability to stabilize and expand margins post-spin-off, with a strong leadership team and a clear path to deleveraging and growth.
Extract from their Q2 letter, [link here]
Analysis:
Fortrea (FTRE), a leading global contract research organization (CRO), underperformed during the second quarter relative to the health care sector and the market. Prior to Labcorp’s acquisition in 2014, Covance (former name) was a stand-alone CRO. Under Labcorp, the CRO business languished under half a dozen different business leaders. We saw the potential for improvement with the 2023 appointment of Tom Pike, former CEO of Quintiles, and became investors shortly after the spin-off.
Performance since then has been mixed, including challenging second-quarter performance, most notably book-to-bill of 1.1x and mid-single-digit EBITDA margins, alongside a delayed 10-Q filing and high debt levels. Since the quarterly results in May, Fortrea has announced asset sales and receivables factoring, yielding a total of $575 million, mostly used to reduce debt. Despite recent setbacks, we remain confident in Fortrea’s long-term value creation potential if they can stabilize growth, make more efficient use of their infrastructure, and exit costly transitional service agreements (TSAs) from the former parent. We anticipate mid-teens EBITDA margins within 12-24 months and high teens to 20% over a longer time horizon. Fortrea’s latent earnings power, path to deleveraging quickly, and the track record of senior leadership give us conviction in adding to the position during recent weakness.
Check here for the latest results, quarterly call and analysts' estimates.
The London Company on Gates Industrial $GTES US
Thesis: Gates Industrial, with strong free cash flow and a leading market position, offers a solid investment opportunity with limited downside at an attractive valuation.
Extract from their Q2 letter, [link here]
Analysis:
Gates Industrial (GTES) is a leading global manufacturer of power transmission belts, fluid power products, and other critical components used in a variety of heavy industrial and automotive applications. Its industry-leading position is supported by its quality reputation, established client relationships, product breadth, and history of successful innovation. Nearly 2/3 of revenues are generated from replacement demand, providing greater earnings stability through the cycle and a good source of downside protection.
GTES’s favorable margin profile and limited capital needs enable strong free cash flow generation and high returns on capital. End-market weakness has weighed on sentiment, but these headwinds are abating. At roughly 9x EV/EBITDA, we feel the risks are largely priced in, and downside is limited.
Check here for the latest results, quarterly call and analysts' estimates.
Patient Capital Management on Illumina $ILMN US
Thesis: Illumina, the leader in genomic sequencing with 80% market share, is positioned for a strong comeback after shedding an unprofitable division, offering an attractive entry point.
Extract from their Q2 letter, [link here]
Analysis:
Illumina Inc. (ILMN) is a good example. We entered the name late last year as the company began to trade at a 5-yr low. The company is a leader in the genomic sequencing space but made an ill-advised acquisition of Grail, a blood-based multi-cancer early detection product, in 2021 for $8B dollars. Grail was an annual ~$600m drag on profitability hitting the financials at the same time that competition began to pick up and the overall demand environment began to weaken. Despite increased competition in the genome sequencing space, Illumina continues to be a leader with ~80% market share today.
With the successful separation of Grail Inc. (GRAL) in June, Illumina has now returned to a pure-play sequencing company. As the company returns to historical profitability post-Grail spin-off and as the demand environment normalizes post-COVID, we believe you can buy a market leader in a secularly growing industry for less than a market multiple.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Kerry $KYGA ID
Thesis: Kerry Group, a global leader in food and beverage ingredients, offers significant value at 13x earnings as it navigates margin pressures and market overreaction to weight-loss drug trends.
Extract from their Q2 letter, [link here]
Analysis:
Kerry is the largest food and beverage ingredients company globally. Kerry is primarily a B2B (business-to-business) company that helps consumer goods companies go from an idea to a product rapidly, with taste, nutrition, and formulation assistance on-site or at Kerry’s innovation centers. The COVID supply chain whipsaw and the post-COVID/Ukraine war inflationary environment have impacted margins. Profitability is also temporarily depressed due to a few recent M&A deals that were not immediately accretive. Finally, shares are caught up in the GLP-1 weight-loss drug stock market trade that hit many consumer staples stocks.
The first set of factors is fair, but the perceived disruption by GLP-1 drugs seems overdone to us. Not only are we skeptical that Americans will make wholesale permanent changes to their diets, but Kerry’s ingredient solutions lean toward increasing health profiles while retaining flavors. The stock sells for 13X our estimate of normalized earnings, which is the cheapest in more than a decade.
Check here for the latest results, quarterly call and analysts' estimates.
Horizon Kinetics on LandBridge Company $LB US
Thesis: Strategic position in the Permian Basin offers a compelling opportunity for IT and AI infrastructure development, with significant royalty-type revenue potential.
Extract from their Q2 letter, [link here]
Analysis:
As to the glamorous side of the Surface Sales & Royalty segment, this is where IT and AI meet the Permian Basin. This locale has unique and cheap land, plentiful and cheap gas, the possibility of cheap liquid cooling (via water treatment, like desalination, which can turn excess well water from a liability into an asset), and an unregulated power grid for connection with wind and solar power installations.
Each of these developments—the data center itself, related roads, power lines, wind and solar, carbon capture, water cooling—has a potential recurring, royalty-type revenue stream back to LandBridge. To this end, LandBridge has delineated a half-dozen suitable locations for a future hyperscale data center. If you build it, will they come? A favorable experience by early data center projects could, in the most positive scenario, make this central portion of Section 8 the growth platform that the AI/Big Data Set/Data Center industry desires and requires.
Check here for the latest results, quarterly call and analysts' estimates.
Perritt Capital on Natural Gas Services Group $NGS US
Thesis: Natural Gas Services Group provides essential oil and gas compression equipment, offering steady cash flow from long-term contracts in a booming U.S. oil market where equipment scarcity creates high demand.
Extract from their Q2 letter, [link here]
Analysis:
We were attracted to Natural Gas Services Group due to their service-oriented approach to serving the oil and gas industry. The advent of shale oil production necessitated the use of gas compression as an integral part of enhancing the production of oil wells through gas-lift operations. Essentially, pumping gas into an oil well to increase pressure and enhance the production profile of the well. In fact, compression equipment is often required to boost a well’s production profile to economically viable levels. Natural Gas Services Group is positioned well to meet the demand in the industry for these services by leasing out compression equipment.
Oil production is growing in the U.S. and is slated to continue to grow. It has increased dramatically in the past 10 years growing from roughly 8.5 million barrels per day to 13.2 million barrels per day. Most of these new wells require some form of artificial lift to enhance their production profiles and make them economically viable.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Paypal $PYPL US
Thesis: PayPal, with dominant payment networks and strong assets, offers an attractive entry point amid competitive pressures, backed by strong management and cash flow potential.
Extract from their Q2 letter, [link here]
Analysis:
We made one new purchase in Q2, adding PayPal Holdings, a financial technology company that enables digital and mobile payments between consumers and merchants. PayPal has world-class assets. It operates the largest two-sided payment network (ex-China); owns Venmo, the largest peer-to-peer payment network (ex-China); and owns Braintree, the third-largest modern payment service provider (PSP), which is growing at a similar pace to peers, such as Stripe and Adyen. Each of the PSPs are taking share from legacy competitors such as Worldpay, with significant runway left on remaining share gains.
As the original e-commerce payment processor with years of history in the marketplace, PayPal has access to a large trove of customer data, a first-class risk engine, and embedded consumer and merchant trust. This is difficult for newer peers to replicate without time and investment. Post-COVID, PayPal’s shares have been pressured by intensifying competition, the threat of which has seemingly been exacerbated by prior management missteps.
Check here for the latest results, quarterly call and analysts' estimates.
Hayden Capital on Pinduoduo $PDD US
Thesis: Temu's US profitability shows potential, though external risks remain; it's viewed as a call-option investment, with confidence in the team's track record for success.
Extract from their Q2 letter, [link here]
Analysis:
Assuming these numbers are approximately correct, Temu’s “start-up cost” isn’t as high as investors originally feared. With the US business now run-rating at almost ~$500M annual profits vs. a several billion dollar original investment, the returns on the division seem attractive, even without underwriting additional growth.
There’s still external risk here though—largely from regions implementing higher tariffs and increased competition. But it does feel like the debate has moved from “can selling items this cheap, be a profitable business?” to “how durable and reliable are these profits, given the potential political & merchant-side risks?”
It’s for the above reasons, that Temu is still a “call-option” in our view. We’ve been shareholders since before Temu was announced, and it’s still not a material part of our thesis/necessary for our investment to be a success. But given this team’s track record, I suspect the odds of them pulling it off a third time is higher than the market thinks.
Check here for the latest results, quarterly call and analysts' estimates.
Patient Capital Management on Royalty Pharma $RPRX US
Thesis: Royalty Pharma, a dominant player in healthcare royalties, offers solid long-term returns with disciplined deal-making and is poised to shine as public market recognition grows.
Extract from their Q2 letter, [link here]
Analysis:
While Royalty Pharma plc (RPRX) is in the health care space, it is more like an investment firm that buys royalty assets in the healthcare space. The company has an extremely strong track record, running the business for over 20 years as a private fund before bringing it public. The market opportunity for external royalty funding has only grown as early-stage start-ups need funding and legacy players are looking to lower their debt levels. We think Royalty Pharma is perfectly positioned as the partner of choice.
The company is disciplined, maintaining deal internal rate of returns (IRRs) in the low-teens despite the higher interest rate environment. We think as the company continues to deliver as a public company, the market will start paying attention.
Check here for the latest results, quarterly call and analysts' estimates.
Madison Funds on Teledyne Technologies $TDY US
Thesis: Teledyne Technologies, with leadership in digital imaging and strong relationships, offers a unique value opportunity, positioned to benefit from a temporary slowdown in sales.
Extract from their Q2 letter, [link here]
Analysis:
During the quarter we added one new holding, Teledyne Technologies. Teledyne is a very well-managed sensor and instrumentation manufacturer. It is especially strong in digital imaging technology, across various light spectrums. Its products are used in a wide variety of applications, including aerospace and defense, environmental monitoring, telecommunications, and energy markets. We believe the company derives a competitive advantage from its technical know-how and deep customer relationships.
Further, the segments that it participates in tend to be oligopolistic in nature. It has a unique management culture developed over decades, with an emphasis on rational, shareholder-oriented decision-making. Its stock price has been weak for a few years due to what we believe will prove to be a temporary slowdown in sales.
Check here for the latest results, quarterly call and analysts' estimates.
The London Company on Tempur Sealy $TPX US
Thesis: Tempur Sealy's market leadership, pricing power, and growth initiatives, including the potential Mattress Firm acquisition, provide a solid foundation for long-term success despite short-term market skepticism.
Extract from their Q2 letter, [link here]
Analysis:
Despite the challenging backdrop, TPX’s strong pricing power and significant share gains have helped dampen the negative volume impact. Recent investments in distribution, advertising, and product innovation lay the groundwork for future growth, while visibility into margin recovery is improving on the back of lower input costs and operational efficiencies. The planned acquisition of Mattress Firm has the potential to be materially accretive and strengthen TPX’s overall competitive position. However, the market appears to be pricing in skepticism that the deal will ultimately receive regulatory approval. Robust free cash flow generation, strong brand equity, and solid management execution support our investment thesis.
Check here for the latest results, quarterly call and analysts' estimates.
Impact AM on Vertiv $VRT US
Thesis: Vertiv Holdings, a leader in data center infrastructure, is poised to grow with rising demand for energy-efficient digital and AI-driven solutions.
Extract from their Q2 letter, [link here]
Analysis:
Vertiv Holdings is a global company specializing in providing solutions for data center infrastructure, telecommunications networks, and industrial applications. Examples of products include uninterruptible power supply (UPS) systems, cooling solutions, management software, and maintenance services.
The increasing use of artificial intelligence (AI) and big data is leading to an increased need for high-performance and reliable infrastructure. By integrating AI into products and services, Vertiv can not only increase its efficiency and productivity, but also provide innovative solutions that meet the demands of an increasingly digitized and connected world. The focus on sustainability and the reduction of energy consumption in data centers is an important part of this. Vertiv develops energy-efficient solutions that minimize data center energy consumption while reducing operating costs. These include advanced cooling systems and energy management solutions that aim to minimize the environmental footprint.
Check here for the latest results, quarterly call and analysts' estimates.
Bilbel Capital on Intellego Technologies $INT SS
Thesis: Intellego Technologies offers significant value with its long-term contracts and rapid growth, presenting an opportunity for strong returns at a low valuation multiple.
Extract from their Q2 letter, [link here]
Analysis:
Intellego’s shares are selling at around 5 times the estimated annual earnings based on the first quarter. The assumptions behind this valuation are:
Intellego’s business will not grow, ever.
Intellego’s business will vanish after 6 years.
If the future exceeds any of these assumptions, we’ll make money from our investment in Intellego Technologies.
We already have some margin of safety from 2 of their long-term contracts:
Partnership with a leading German company: $50M over 3 years.
Partnership with Zhongyou Medical in China: $16M over 3 years.
A total of 66M revenue, $50-60M yet to be earned. This will produce around $25-30M in cash flow over the next 3 years.
If we assume the cash flow won’t be destroyed: at a $70M market cap, our risk of losing money depends on the probability of Intellego not producing another $30-40M of cash flow during the businesses’ lifetime. We think that probability is low.
For some context: Intellego’s growth has been exceptional. Comparing Q1 2024 to Q1 2023, revenue grew by 85% and profits by 150%. More recently, from Q4 2023 to Q1 2024 (most recent quarter), revenue grew by 37% and profits by 65%.
Check here for the latest results, quarterly call and analysts' estimates.
Harris Associates on Ahold Delhaize $AD NA
Thesis: Ahold Delhaize, a global grocery giant, offers defensive growth through economies of scale, with short-term headwinds creating a compelling entry point.
Extract from their Q2 letter, [link here]
Analysis:
Ahold Delhaize is one of the world’s largest grocery retailers. The company operates a portfolio of grocery store brands, including Food Lion, Albert Heijn, Hannaford, and Stop & Shop, that boast high local market share in attractive geographies within the U.S. (70% of group profitability) and Europe (30% of group profitability).
Although the grocery industry is competitive, we like that large grocery retailers like Ahold Delhaize benefit from economies of scale and are defensive in nature, which has resulted in attractive returns on capital and steady cash generation over time. Short-term headwinds related to food disinflation and market share losses for Ahold’s U.S. Stop & Shop banner have weighed on recent sentiment and created an attractive entry point into the stock. We believe these are manageable issues and have confidence that the company’s experienced management team is capable of executing a strategy to realize the value of its assets.
Check here for the latest results, quarterly call and analysts' estimates.
Silver Beech on Burford Capital $BUR LN
Thesis: Burford Capital’s involvement in the YPF case provides significant asymmetric upside, while the core business remains highly profitable with strong returns on equity.
Extract from their Q2 letter, [link here]
Analysis:
Asymmetric upside: In addition to its high-quality business, Burford Capital’s largest, most profitable holding is a $16 billion judgement in U.S. courts against Argentina named the “YPF case.” Burford’s pro-rata share of the YPF case is $6 billion and accrues post-judgement interest at ~5% per year. The precise outcome of this highly litigated and extraordinary case is unknown given the difficulty of enforcing a judgement against Argentina. Burford will likely settle for a lower amount rather than collect the full judgement. How much lower? In our view, even a nominal settlement would be met favorably as we believe the current stock price gives the company close to zero credit for the YPF case.
Attractive valuation: We have argued that Burford is a high-quality company that generates 25% returns on equity in a normalized environment with a long runway of investment opportunities. Excluding the YPF case, we believe Burford is worth $14+ per share. The YPF case introduces uncertainty into the overall fair value estimate, so we’ve created a table that sensitizes the YPF case judgement recovery against investment upside. In our view, the significant YPF case uncertainty presents a massive opportunity for long-term-oriented Burford investors. Burford investors are getting paid to wait for the ultimate YPF recovery outcome and stand to benefit from the significant interim compounding of the company’s balance sheet legal finance portfolio.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Diageo $DGE LN
Thesis: Diageo, the world’s largest spirits company, offers long-term growth and cash generation despite near-term headwinds and market concerns over changing consumer habits.
Extract from their Q2 letter, [link here]
Analysis:
Diageo is the largest spirits company in the world by revenue, with over 200 brands to choose from. Shares have remained under pressure since our initial purchase in December 2023, when the stock was already trading at multi-year trough multiples. More than half of its operating profits come from North America where sales have been sluggish, while sales have been especially weak in Latin America and the Caribbean.
Growth is normalizing after a COVID-induced bounce, and consumers have been trading down to cheaper value alternatives, which is a headwind for Diageo’s premium brands. Although spirits are more cyclical than other staples, the company’s growth prospects are better long term, and we believe the current situation has provided us an attractive investment opportunity.
Check here for the latest results, quarterly call and analysts' estimates.
Artemis on National Grid $NG/ LN
Thesis: National Grid's strategic investments in the energy transition make it a solid long-term play, with regulatory support driving its expansion in electricity infrastructure.
Extract from their Q2 letter, [link here]
Analysis:
We used a period of weakness in National Grid’s share price around a rights issue as an opportunity to establish a holding. The money raised by the placing will enable it to double the pace of investment in its electricity transmission networks in the UK and US. Both countries are looking to upgrade their grids to enable the increased use of renewables and to support the electrification of their economies.
At present, the focus in the UK and the US has moved away from keeping customer bills down to enabling investment needed to support the energy transition. In our experience, the best time to own a regulated business is when the regulator is looking favorably on investment.
Check here for the latest results, quarterly call and analysts' estimates.
Artemis on Plus 500 $PLUS LN
Thesis: Plus 500’s cash-generative CFD business and growing presence in the US futures market offer significant growth potential, especially as a hedge in volatile markets.
Extract from their Q2 letter, [link here]
Analysis:
Plus 500 is a business we have followed for a long time and one that our colleagues who manage the Artemis Alpha Trust know well. We believe the global expansion of its cash-generative CFD business represents a significant growth opportunity. This part of its business makes circa $200-250 million per annum in years when volatility is low; that has the potential to double in years when volatility is high (typically at times of market stress).
This makes Plus 500 a useful portfolio hedge against volatility in financial markets. It has around $1 billion of net cash on its balance sheet and a strong record of growing dividends and returning cash to its shareholders through share buybacks. Its US futures business appears to be making strong progress and, given the popularity of self-trading in the US, this would appear to be a huge market for it to tap.
Check here for the latest results, quarterly call and analysts' estimates.
Orbis on Koito $7276 JP
Thesis: Koito, a global leader in automotive lighting, offers long-term growth potential through technological leadership and strong market share, despite short-term headwinds in auto production.
Extract from their Q2 letter, [link here]
Analysis:
In early May, the company went a step further, clarifying that it actually expected to return approximately ¥350bn to shareholders over five years. At the current share price, this means Koito intends to return 50% of its market cap to shareholders in just half a decade.
Given this positive news, you would be forgiven for thinking that Koito’s valuation would now be buoyant, and the stock would rank among our biggest winners. Not so. In 2024, Koito’s shares have lagged the rising Topix by 15%. Today the stock trades roughly at book value, and for less than 16 times estimates of this year’s earnings. That is despite the fact that Koito’s balance sheet is stuffed with cash worth 40% of its market value, and investment securities worth a further 20%.
Such a low valuation might ordinarily suggest a company whose future prospects look bleak. While we think that’s far from the truth, there may be some headwinds for Koito in the short term. Auto production in Japan has recently turned sluggish, and China—a key market for Koito—has been persistently weak. In the US, Koito has been struggling to boost margins amid higher costs, and productivity has been low amid a tight labor market. As a result, the company’s operating profit margin today is less than half what it achieved in 2018-19.
But as value-oriented investors with a long-term outlook, we try to see through the short-term fog. Over the long term, we think Koito’s future is bright.
While other car parts have become cheap and commoditised, lighting has been an attractive industry. Cars only need two headlamps, but headlamps alone account for around 60% of the value of all lights in the car. And as technology has progressed from halogen to LEDs to adaptive driving beams that adjust automatically as you drive, companies like Koito have been able to differentiate and add value. Better performance requires better technology and designs, increasing the expertise required to make Koito’s headlamps—and the prices Koito gets for them.
As a global leader in headlamps, Koito is a trusted long-term partner for carmakers seeking to stand out in design and functionality. Thanks to its advanced technology and cost competitiveness, Koito is successfully expanding beyond its core Japanese customer base, winning market share with American, Indian, and even Chinese manufacturers, including BYD. And while margins have fallen from the highs of recent years, we see ample room for them to recover. Upfront expenses tied to new customers will fade, and Koito has scope to rationalise its overseas cost structure and invest more in automation. There’s also potential for further capital efficiency enhancements down the road. While Koito has begun to address its huge cash pile, management did not address the company’s large holdings of investment securities in their mid-term plan. As management embarks on the first few steps to optimising the company’s capital structure, we see a long path ahead.
Check here for the latest results, quarterly call and analysts' estimates.
Bilbel Capital on Dream International $1126 HK
Thesis: Dream International, with long-standing ties to Disney, offers steady growth, high margins, and a 12% dividend, making it a value play at only 3.5x earnings.
Extract from their Q2 letter, [link here]
Analysis:
Dream International makes toys. The company is listed in Hong Kong, but most of its factories are in Vietnam. Manufacturers reduce costs by producing large quantities of the same item. But most toy makers have small customers that place small orders. This is why the industry is fragmented.
To make more money than their competitors, companies must receive larger orders for the same type of toy. But they can only get that from having larger customers.
What is a challenge for most companies is an advantage for Dream International. They have been working with Disney for over 20 years (and other large companies), allowing them to get recurring orders of large volumes. This explains why Dream has had very high and consistent margins, despite being in a cyclical industry.
The management team is great at running the business and making good decisions. Over the past 10 years, the company has tripled its sales and increased its profits nearly sevenfold.
At $385M, Dream International trades at just 3.5 times earnings, and gives a 12% dividend yield. The value of its cash and property is worth as much as the company’s market cap.
Check here for the latest results, quarterly call and analysts' estimates.
Bilbel Capital on Tianjin Development $882 HK
Thesis: Tianjin Development, backed by valuable Otis China shares and massive cash reserves, offers a deeply undervalued entry point with a 7% dividend and the potential to double in value.
Extract from their Q2 letter, [link here]
Analysis:
Tianjin Development Holdings Limited is a company that invests in other companies. Most importantly, it owns 16.5% of Otis China.
The elevator business is great. They make little money from selling the elevator but a lot of money from maintaining them.
A few big companies rule the elevator industry. That's because companies have to spend a lot of money to start; must follow strict safety rules; need a wide service network; and must buy in large quantities to save money.
As a result, Otis earns high returns on capital and earns predictable profits from recurring maintenance services. This is why Otis Worldwide is valued at 28 times earnings on the New York Stock Exchange.
In the USA, most Otis customers purchase long-term elevator maintenance, while in China, most don’t. Otis is succeeding at changing this which is making their business more valuable.
Half of Tianjin Development’s profits come from Otis China. Around $40M a year. This business is probably worth more than $500M.
Add to that $500M in net cash and $300M of shares in other companies. We’re getting all this for $250M.
People don’t seem to trust the Chinese government. But when we look at the facts, we think this distrust is too high compared to the price we’re paying.
It’s currently selling for 3 times earnings, and at 1/6th of its tangible book value. If Tianjin’s discount to tangible book value narrows down to 60% (which is still cheap!), we double our money. While we wait, we’re earning a 7% yearly return from its dividends.
Check here for the latest results, quarterly call and analysts' estimates.
Harding Loevner on Bechtle $BC8 GR
Thesis: Bechtle, Germany’s largest provider of IT solutions, offers resilient growth by delivering value-added services in a highly competitive market.
Extract from their Q2 letter, [link here]
Analysis:
IT services is an industry in which many local small companies have been resilient in the face of competition from larger rivals. One that stands out is Bechtle, which has a strong position in Germany as the country’s largest provider of turnkey IT solutions—called a systems house—despite the presence of global competitors such as Accenture. Bechtle differentiates itself by focusing on the entire lifecycle of IT systems, including the purchase of new products as well as managing or retiring older tools. This makes it a one-stop shop for customers to manage technological change in a cost-efficient manner.
Even as the largest tech companies in the world post robust growth, Bechtle has demonstrated that there remains a need for third-party value-added services that help customers solve unique challenges.
Through a partnership that began with IBM four decades ago, Bechtle has cultivated long-term trusted relationships with local customers, including many in the public sector. It now boasts about 100 offices of consultants and IT professionals across Germany and the nearby German-speaking countries of Switzerland and Austria, enabling Bechtle to provide better customer service than larger competitors, building a strong barrier to entry. It also has partnerships with other tech leaders, such as Microsoft and Amazon Web Services, as a reseller of their products and solutions.
It is reasonable for the market to be worried about the fate of smaller companies in a world where it seems that the bigger will continue to get even bigger and stronger. But not all small companies are alike. Our portfolio is characterized by high-quality businesses with competitive advantages in growing, profitable niches that can withstand attacks by large, well-funded competitors.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Airbus $AIR FP
Thesis: Airbus, with its leading market share and strong A320 platform, is poised to continue taking market share in the global aerospace duopoly, offering value at a mid-teens P/E.
Extract from their Q2 letter, [link here]
Analysis:
Despite these setbacks, we believe Airbus remains in a strong strategic position in the global commercial aerospace duopoly. Airbus has steadily taken market share in the global installed fleet over the past 20 years, largely driven by its A320 family, and Airbus remains well positioned over the next decade to continue capturing share given the A320’s clear performance edge over Boeing’s 737 MAX, even aside from the MAX’s well-publicized quality issues.
Airbus remains a well-run company, with a leading market share, a higher quality product, and a net cash balance sheet, and shares are reasonably valued at a mid-teens P/E.
Check here for the latest results, quarterly call and analysts' estimates.
Harris Associates on Airbus $AIR FP
Thesis: Airbus, benefiting from strong market share growth and a full order book through 2030, offers an attractive investment with potential for enhanced profitability.
Extract from their Q2 letter, [link here]
Analysis:
Airbus is a global aircraft manufacturer that operates in a competitive duopoly market structure with Boeing. In our view, management’s commitment to quality, product reliability, sound design, and sensible projects has resulted in decades of steady market share gains for Airbus. With a full order book into the year 2030, we expect Airbus to continue to grow market share and believe this volume growth will allow the company to structurally increase profitability by better absorbing fixed costs and scaling several recent lucrative projects.
We believe the current valuation does not reflect the company’s attractive fundamental outlook and were able to purchase shares in the company at a discount to our estimate of intrinsic value.
Check here for the latest results, quarterly call and analysts' estimates.
Marlton Partners on Bolloré $BOL FP
Thesis: Bolloré SE’s strategic stake in Vivendi and a substantial cash position present a compelling opportunity, with potential value accretion as market developments unfold.
Extract from their Q2 letter, [link here]
Analysis:
July brought material thesis constructive developments in the Bolloré universe.
Media HoldCo Vivendi (VIV.P), in which BOL.P holds a ~29% stake, provided updates on the four-way split of its assets and operating businesses, including listing venues in London, Amsterdam and Paris. In our view VIV.P itself trades at a significant discount to its SOTP value, realized on a break-up to be voted on by shareholders in December. In the interim, subtle but significant developments across the Bolloré complex portend further ‘horse trading’ in service of accreting value higher up the tree. Such, it remains our view that BOL.P is the better seat in the theater from which to watch the show.
VIV.P also posted sound first half operating results led by Lagardère (MMB.P), itself publicly traded, and in which VIV.P then held an ~61% stake. VIV.P’s results flowed through to BOL.P, however attention is better focused on BOL.P’s substantial period end net cash position of > EUR 6bn.
At the end of the month, Universal Music Group (UMG.AMS) retraced on disappointing reported growth in streaming revenues. In response, BOL.P utilized a modest portion of the net cash position to increase their ownership in UMG.AMS. By the close of the month, the UMG.AMS stake stood at > EUR 6.30 on a per share basis, with pro-forma net cash per share ~ EUR 5.00. Readers are reminded, BOL.P closed the month on traded prices ~ EUR 5.76.
Despite the significant discount to its SOTP, perhaps nearing 60% on a fully unwound basis, BOL.P drew sharply in July and then again in early August. We used both occasions to add to our BOL.P position.
Check here for the latest results, quarterly call and analysts' estimates.
Langdon on Boyd Group $BYD CN
Thesis: Boyd Group’s disciplined acquisition strategy and long-term focus on returns make it a standout in the auto body and collision repair industry, with management highly aligned with shareholder value.
Extract from their Q2 letter, [link here]
Analysis:
Boyd Group was founded in Winnipeg, MB in 1990 and operates auto body/collision repair and auto glass services shops across North America. The business services their customers effectively and efficiently, making them a great partner to insurance companies. Historically, the business has grown and achieved density through acquisitions of multi-shop operators (MSOs) which would typically operate anywhere from 10-50 stores in a region. The industry has seen upward pressure on acquisition multiples over time, in part because private equity has deployed capital into the collision repair sector. We have been pleased to see Boyd remaining disciplined on the price they are willing to pay for the shops, choosing to prioritize returns on invested capital instead of growing at any cost. We see this to be a function of management alignment and incentive structure, with the management team and Board collectively owning ~$32M of equity in the business. Like Langdon’s structure, management are shareholders of the business and seek to optimize returns on capital.
Recently, Boyd has started to open its own stores instead of acquiring these MSOs, which has led to short-term erosion in profitability as the stores take longer to mature when opened organically. As these greenfield stores mature, returns on capital are similar, if not better, than returns that would be expected from acquired stores. Our investment team has followed Boyd for the better part of a decade and the management team is one which we hold in extremely high regard.
Check here for the latest results, quarterly call and analysts' estimates.
Pender Fund on D2L $DTOL CN
Thesis: D2L Inc. is positioned for strong growth in the education technology space, with a competitive advantage in its Brightspace platform and potential for significant share price appreciation.
Extract from their Q2 letter, [link here]
Analysis:
During the quarter, we took the opportunity to increase our weight in D2L Inc. (TSX: DTOL) (Desire2Learn) and make it a top ten holding. D2L provides cloud-based learning management system (LMS) software to higher education, K-12, and corporate customers. Annual recurring revenue has grown from US$112 million revenue exiting FY 2020 to US$188 million at the end of FY 2024, representing a CAGR of approximately 14%. Despite modest market share across its current geographies, D2L has a win rate of approximately 50% for new implementations in higher education. More recently in the quarter, D2L announced the spinoff of SkillsWave to prioritize its core Brightspace platform, which also heightens D2L’s focus on balancing growth and profitability. The spinoff is partly owned by the CEO as well as D2L, and D2L is providing a shareholder loan to help finance the company. This transaction was initially frowned upon by shareholders given the non-arms-length nature of the transaction. After digging in, we gained confidence this was in the best interest of all shareholders. We think D2L is well suited to win a notable share of contracts that are upcoming for renewal given Brightspace’s differentiated LMS platform.
On July 25, it was announced that KKR & Co Inc and Dragoneer Investment Group are acquiring D2L’s key competitor, Instructure Inc, for US$23.60 per share (US$4.8 billion enterprise value). This works out to an EV/Revenue multiple of 6.6x (2025E) whereas D2L currently trades with an EV/Revenue multiple of 1.9x (2025E), which illustrates the discrepancy in public and private market valuations in the Education Technology space. As D2L continues to grow and increase profit margins, we see significant room for share price growth.
Check here for the latest results, quarterly call and analysts' estimates.
Langdon on TerraVest Industries $TVK CN
Thesis: TerraVest Industries, a consolidator of businesses in fragmented industries, is positioned for continued growth through strategic acquisitions, supported by strong management and increasing cash flow.
Extract from their Q2 letter, [link here]
Analysis:
TerraVest Industries is a consolidator of businesses that manufacture products that transport and store various fuels, chemicals, agricultural products, and food & beverage products. We added the company to our Portfolio earlier this year after spending time with senior management across Canada. We built an understanding of the business’s operating structure and an appreciation of the improvements made when integrating an acquisition. We see a business with a capable management team that is aligned with shareholders, with insiders owning over 30%.
In late-2023, TerraVest announced their largest acquisition to-date, replicating their strategy used to integrate and add-value to a larger business called Highland Tank, which operates in new end markets (chemical, fuel, and water storage, and grease separation). Similarly, another acquisition called Advanced Engineering Products (AEP) operates in the transportation of liquid consumables. We believe these two acquisitions provide a new growth avenue for TerraVest to consolidate. The business has begun to show its true potential this year, with operating margins and free cash flow generation improving as these larger acquisitions have been integrated. We believe the company is still in the early innings of its inorganic growth story and is in a strong position to continue consolidating operations in highly fragmented industries. We attended several trade shows this year to understand TerraVest’s customers, acquisition targets, and its competitors, providing additional context to the strong reputation that TerraVest has built as a consolidator in the industry.
Check here for the latest results, quarterly call and analysts' estimates.
Harding Loevner on Proya $603605 CH
Thesis: Proya’s dominance in China’s e-commerce beauty sector, driven by social commerce and influencer marketing, positions it as a fast-growing leader in the cosmetics industry.
Extract from their Q2 letter, [link here]
Analysis:
One such area is the domestic cosmetics industry. Cosmetics manufacturer Proya has become the leading brand in major online shopping festivals in China, unseating global cosmetics manufacturers such as L’Oréal and Estée Lauder. For example, during the recent "618" online shopping festival (which lasts about one month, from late May to around June 18), Proya was the top-selling cosmetics brand on Tmall, posting nearly 31% year-over-year sales growth over last year’s festival, becoming the only brand to surpass RMB 1 billion in sales on Tmall during this event. Other domestic Chinese cosmetics manufacturers posted similar gains. Meanwhile, L’Oréal Paris, and Estée Lauder, the first and third bestselling brands last year, saw year-over-year sales declines of nearly 11% and 16% respectively. L’Oréal’s management cited weak consumption and channel shifts as the reason for its lackluster numbers.
A key reason why Chinese cosmetics brands have fared much better than global peers in the weak consumer environment has been the shift from offline to online retail channels. When offline channels were dominant before the COVID-19 pandemic, Western, Korean, and Japanese brands thrived, greatly aided by extensive sales networks—brick-and-mortar beauty counters in every shopping mall across China.
But Chinese brands such as Proya have led the transition to e-commerce, helped by their smaller size, and willingness to adapt to new consumer preferences. An important feature of Proya’s success has been its recognition of the importance of social commerce. China is the global leader in social commerce, with penetration rates more than twice those of the US, three times more than Korea, and seven times more than Japan. The social commerce landscape involves partnering with influencers to market products through short videos or livestreaming sessions, with companies offering discounts or free gifts to encourage consumers to purchase directly through social media or content creation platforms.
Proya, for example, has optimized its operations on Douyin (the Chinese version of TikTok) by establishing different official accounts for various product lines, allowing precise targeting of different demographic segments. The company closely monitors emerging influencers and tailors products and marketing messages to align with their followers’ preferences, maximizing exposure and sales turnover. The younger user profile of social commerce is also a perfect match for the younger consumers of Proya. In 2023, the company generated 93% of its sales online.
Check here for the latest results, quarterly call and analysts' estimates.
Here are some additional Q2 letters :
Everything you read here is for information purposes only and is not an investment recommendation.