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Ariel Investments on Allstate Corporation $ALL US
Thesis: Allstate is positioned to recover from macroeconomic challenges, with improved pricing and operational efficiency driving future profitability
Extract from their Q2 letter, link here
Analysis: We added property and casualty insurer, Allstate Corporation. A challenging macro-environment, inflation, and lower reserve development led to significant underwriting losses across key markets, presenting us with an attractive entry point. Looking ahead, we expect the strong pricing environment, coupled with lower inflationary pressure and future premium growth to yield upside for shares. Additionally, management is committed to improving its adjusted expense ratio and recently made upgrades to its claims handling processes to minimize loss development and lower claim severities.
Check here for the latest results, quarterly call and analysts' estimates.
Brown Advisory on Autozone $AZO US
Thesis: AutoZone’s strong market position in the growing used car parts market, combined with exceptional cash flow management and sustainability efforts, positions it for continued success
Extract from their Q2 letter, link here
Analysis: We also initiated a position in leading automotive parts retailer and distributor AutoZone. The company services both the Do it Yourself (DIY) and Do it for Me (DIFM) segments of the used car market. The market is structurally growing as the fleet expands, with a high degree of visibility into future demand of the 6+ year used car cohort which is AutoZone’s core target market. AutoZone further has the opportunity to expand into the faster-growing DIFM market as well as into Brazil and Mexico. The company’s superior customer outcome is the meaningful de-risking of the balance sheets of smaller garages which do not need to hold inventory themselves. It also offers a differentiated service level for customers based on availability of parts, turnaround speed and advice (including free specialty tool loans), which has historically proven difficult to replicate in an e-commerce setting. While there are a small number of large companies operating in this growing market, further consolidation of smaller competitors is expected as leading retailers’ scale (depth and breadth of inventory) and network effects (proximity to customers in immediate need of repair) constitute strong moats.
AutoZone has generated meaningful cash flow through its operations and delivered exceptional capital discipline, evidenced by substantial share buybacks. The company’s share count has reduced by about 85% since the year 2000. From a sustainability perspective keeping older fuel-efficient cars on the road longer reduces CO2 emissions significantly more than speeding up the global transition to green technology, due to high CO2 emissions for new car production. From a sustainable operations perspective AutoZone uses a hub and spoke model to put as much inventory as close to the consumer as possible. This form of local fulfillment is substantially cheaper per unit on average than upstream shipping. Additionally, AutoZone is working to implement several energy-savings programs across its U.S. stores and distribution centres. We had an opportunity to invest in AutoZone at a double-digit annualized 5-year base case IRR using funds from Safran based on a relatively more attractive IRR.
Check here for the latest results, quarterly call and analysts' estimates.
Brown Capital on Camtek $CAMT US
Thesis: Camtek is positioned to capitalize on the surging demand for chips, with its specialized inspection technology driving strong long-term revenue growth
Extract from their Q2 letter, link here
Analysis: Camtek is an Israel-headquartered maker of metrology and inspection equipment used in the production of integrated circuits (chips). The company’s products are used to measure, inspect and confirm that chips are functioning as they should before they are sold to customers. Camtek’s customers use its technology to test a variety of chips, including graphical processing units (GPUs) for AI applications. One of Camtek’s specialties is its high-performance 3-D inspection equipment. It uses white light to more accurately measure “bump heights,” the height of the contacts on the chip packages. Solid connections are essential to reliable chip performance.
The secular growth in demand for chips is being driven by AI, the Internet of Things, edge computing, cloud computing and EVs. Manufacturing chips for these uses requires a greater need for metrology and inspection equipment to confirm quality and to increase production yields. The potential market for Camtek’s equipment is estimated to be $1.3 billion and growing in the high single digits annually. We believe Camtek can grow revenue 15% to 20% a year long term while maintaining its 20% to 25% operating margins in the process.
Check here for the latest results, quarterly call and analysts' estimates.
THB AM on Daktronics $DAKT US
Thesis: Daktronics’ leadership in LED displays and recurring revenue model positions it for steady growth, supported by increasing demand in entertainment and transportation markets
Extract from their Q2 letter, link here
Analysis: Daktronics designs and manufactures electronic scoreboards and large-screen video boards for commercial purposes. The company has a leading market share of 50% in LED displays in the United States. Its ability to provide full-service design, manufacturing, and installation solutions later translates into recurring maintenance revenue and long-term customer relationships. Sales of newer optic technologies and back-end enhancements as older signage is replaced every 7-10 years are driving organic growth. Demand for its products is also supported by a strong investment cycle in live entertainment and sports as well as the transportation market and shift to electronic billboards. The business profitability has improved to a new baseline in FY 2024 and is expected to continue to increase from current levels, driven by improved manufacturing efficiencies and strong on-time delivery to customer sites resulting in higher gross and operating margins.
Check here for the latest results, quarterly call and analysts' estimates.
Loomis Sayles on Disney $DIS US
Thesis: Disney’s unparalleled brand portfolio and strategic DTC focus position it for significant long-term growth, with shares currently undervalued relative to intrinsic value
Extract from their Q2 letter, link here
Analysis: We believe Disney’s strong and sustainable competitive advantages include its iconic brands, content, and intellectual property (IP), its massive scale in the media, entertainment, and leisure industries, and a structural cost advantage that directly benefits its streaming business. We believe the company is pursuing a well-articulated strategy to optimize distribution for its high-quality, best-in-class brands and franchises through a multi-pronged DTC strategy, which we believe will be central to the company’s media strategy over the next decade. Over our long-term investment horizon, we believe the company’s portfolio of iconic brands and IP that reaches a broad swath of demographic groups globally, its massive scale, and nearly impossible-to-replicate guest experiences leave the company well-positioned to benefit from secular growth in global entertainment spending. We believe current market expectations substantially underestimate the uniqueness of the company’s IP, the opportunity to monetize that IP across several global business segments, and the company’s ability to generate sustainable growth in free cash flow over our long-term investment horizon. As a result, we believe the shares trade at a substantial discount to our estimate of intrinsic value and offer a compelling reward-to-risk opportunity.
Check here for the latest results, quarterly call and analysts' estimates.
THB AM on Globe Life $GL US
Thesis: Globe Life's stable cash flows, driven by increasing demand for life insurance and higher reinvestment yields, support its long-term investment appeal, despite recent market concerns
Extract from their Q2 letter, link here
Analysis: Globe Life Inc. (GL) is an underwriter and distributor of life, accident, and supplemental insurance to middle-income families and individuals. The long duration nature of life insurance products provides a very consistent and long duration cash flow stream for the company. With an aging population in the United States, the company is benefiting from growing demand for life insurance products as well as the need for Medicare supplemental plans, which provide additional coverage beyond what Medicare provides. In addition to the secular drivers, the company is benefiting from a normalization in margins after elevated trends during the COVID pandemic. GL also benefits from higher interest rates, as its investment portfolio is now able to reinvest at higher yields, improving the returns on the business. This past quarter, shares underperformed after some investor concerns arose regarding sales practices with a limited number of agents in the company's independent distribution channel. Despite the recent underperformance in the shares, there has been no change to our thesis and we continue to hold the security.
Check here for the latest results, quarterly call and analysts' estimates.
Arar Funds on Gravity $GRVY US
Thesis: Gravity’s extremely low valuation and strong cash position offer a unique opportunity, with potential catalysts for unlocking value through dividends or strategic actions
Extract from their Q2 letter, link here
Analysis: Which brings us back to the multiples Gravity is trading at. While a P/E of 5 is low and it is nice that Gravity is a growing company in a growth industry, after reading my introduction you might feel like it needs a little more to be a clear bargain. So here’s why I love this investment: Gravity is not just a stock with 20% earnings yield, it also has a (net) cash position that will soon be larger than the market cap of the entire company! So technically, if they were to decide to pay out all their cash as dividend, you would get your money back, and then be left with a money-printing machine for free. Which begs the question: why are they not doing anything with their cash?
And that’s where it becomes interesting. Because the reason why Gravity is cheap, in my view, has got to be because investors think the company will a) never part with any of its cash, or b) it’s a fraud. Let’s consider both options:
In the first situation, it would continue to live on, invest into new ventures, increase pay to management, etc.. Until one day the company is no longer making money and it eats up their cash position trying to reinvent itself, ending in failure and disgust. I consider this a bit of reasoning-towards-the-current-valuation, rather than looking at it level-headed. It certainly happens occasionally, but (as you might expect) I don’t think that’s what is most likely the future for Gravity. There are several reasons. First of all, Gravity has not been sitting on this pile of cash forever. It has been built up in the last 4 years, after the launch of their second successful game: ‘Ragnarok: Eternal Love’. Given such infrequent success, it’s not weird that they didn’t immediately start handing out cash. Second: Gravity is 60% owned by GungHo Online Entertainment. They are substantially leaning on Gravity for profits, they have a bit of cash themselves and are buying back their own stock. Given their influence over Gravity, and Gravity’s bargain valuation, it is reasonable that at some point GungHo wants to get a hold of the whole company, or (substantial parts of) that cash pile. This would have to be either a bid on the company, or forcing Gravity into substantial dividends. I don’t really see a third way in this (though I do see risks in the ways GungHo might force a good price to acquire Gravity).
The other reason Gravity is trading at such a discount is fear of fraud. When companies are piling up so much cash on paper, sometimes the money isn’t there to begin with. I have little fear in that regard. The IP is real, the games are real, the people complaining about spending too much money on magic boots etc., it all seems real. That being said, for an opportunity that seems too good to be true, I want to delve deeper, which I did, and nothing popped up really. But this contrast with many other cases, I would like to add). At the very least it makes me confident that there are very few other participants that know more than me.
So there you have it: an extremely attractively priced company, that is just one dividend away from convincing everyone it is not a wolf in sheep’s clothing.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Insmed $INSM US
Thesis: Insmed's promising pipeline, led by Brensocatib, targets huge unmet needs in respiratory disease, offering significant multi-billion-dollar growth potential
Extract from their Q2 letter, link here
Analysis: Insmed is a commercial-stage biotech company focused on serious pulmonary diseases. Its first commercial product, Arikayce, is an inhaled antibiotic for the treatment of lung disease in patients who haven't responded to conventional treatment. But the company also has a late-stage pipeline asset, Brensocatib, which treats bronchiectasis (a chronic, progressive inflammatory disease that causes permanent lung damage) and other neutrophil-mediated diseases. Over one million patients in the US, Europe, and Japan have been diagnosed with bronchiectasis, and limited treatment options make this one of the biggest unmet medical needs within respiratory disease. Our research suggests that Brensocatib has multi-billion-dollar sales potential and may even be able to treat other serious respiratory illnesses. We decided to initiate a position following positive phase 3 clinical trial results.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Liberty Formula One $FWONK US
Thesis: Liberty Formula One’s strategic expansion and increased monetization efforts are set to drive significant profitability, making it a core portfolio holding
Extract from their Q2 letter, link here
Analysis: Since acquiring F1 in 2017, Liberty Formula One has expanded the fan base to newer markets (like the US and China) and a younger demographic through efforts like the “Drive to Survive” series on Netflix, recasting broadcast agreements and making the sport more competitive (through adding cost caps, instituting standardized parts and changing prize money distribution). As its audience continues to grow, we believe F1 will be able to increase future monetization and profitability through higher broadcasting fees, better sponsorship and hospitality opportunities, and extracting more value out of races from promoters. Recent earnings results were thesis affirming. Sports rights continue to grow in value as streaming services compete for proprietary content, and the one-off costs incurred to launch its Las Vegas race in 2023 should support margin expansion in 2024.
Check here for the latest results, quarterly call and analysts' estimates.
Mar Vista on Linde $LIN US
Thesis: Linde’s leadership in the industrial gas market and strong growth potential in decarbonization and hydrogen projects position it for long-term success, especially at current attractive valuations
Extract from their Q2 letter, link here
Analysis: Linde PLC is the world’s largest, global industrial gas producer. The company enjoys the highest profit margins and returns on capital in the industry. Linde’s primary products are atmospheric gases and process gases. Industrial gases have benefited from secular growth trends in decarbonization and carbon sequestration. Moreover, the opportunity in blue and green ammonia and hydrogen are substantial. Projects in these areas are quickly being added to its backlog for future growth. We see these secular trends as long-term positives for Linde and the entire industrial gas industry.
Linde believes it can grow its volumes with new applications; the buildout of small, on-site plants using its technologies; and focusing on growing geographies such as India, Malaysia, Vietnam, China, and Brazil. Despite the long-term growth opportunities, recent demand trends have slowed due to weak global industrial production. Among the regions, the U.S. remains resilient, with volumes flat to slightly negative. Europe, Latin America, the Middle East, and China are all sending mixed economic signals. We believe these slower trends are transitory in nature, providing an opportunity to purchase shares in Linde at attractive prices.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on MACOM Technology Solutions $MTSI US
Thesis: MACOM’s strategic focus on niche semiconductor markets, along with its defense ties, positions it for significant growth and earnings upside as industrial cycles recover
Extract from their Q2 letter, link here
Analysis: MACOM Technology Solutions designs and manufactures high-performance semiconductor products in the aerospace and defense, industrial, telecommunications, and data center end markets. The company’s relatively new management team is taking steps to accelerate top-line growth and expand margins by addressing smaller, long-duration product cycle markets in which it can provide a differentiated offering, especially in compound semis (those made from two or more elements). The data center and defense end markets are providing steady growth. As a member of the US Department of Defense’s trusted foundry program, MACOM is a trusted manufacturer for US military and aerospace applications and offers a comprehensive portfolio of products that support the demanding performance requirements of today’s aerospace and defense systems. Meanwhile, we believe the more cyclical areas of the business within industrial and telecommunications are not far from a recovery phase that will provide meaningful earnings upside in the years to come. The quarterly results were thesis affirming, and we decided to add to the position.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Marvell Technology $MRVL US
Thesis: Marvell is well-positioned to capitalize on AI data center growth and the shift toward custom silicon solutions, setting the stage for a potential cyclical recovery
Extract from their Q2 letter, link here
Analysis: Marvell Technology is a semiconductor company offering networking, secure data processing, and storage solutions to customers worldwide. We believe Marvell has among the broadest range of intellectual property in technological areas (e.g., high-bandwidth data switching and storage applications) that position it well for the growing requirements of data centers, wireless networks, and autos. Several of the company's product lines (e.g., custom silicon, optical connectivity and switching) are benefiting from the growth of AI data centers. And we believe a significant opportunity exists for the company to help design and manufacture cost-effective custom data center chips that would help cloud providers reduce their reliance on expensive graphics processing units (GPUs). Furthermore, like many other semiconductor companies, a portion of its business may be poised for a cyclical recovery after the industry’s recent inventory correction.
Check here for the latest results, quarterly call and analysts' estimates.
Loomis Sayles on Monster Beverage $MNST US
Thesis: Monster’s global expansion and strategic partnership with Coca-Cola set it up for sustained growth and market share gains, with shares currently trading at an attractive discount
Extract from their Q2 letter, link here
Analysis: We believe energy drinks are here to stay and their continued penetration around the world is the primary long-term business driver for the company. We believe Monster’s large presence in North America and its expansion into international markets leave it well positioned to benefit from this long-term secular growth driver. The transition to Coca-Cola’s global distribution network has enabled Monster to enter new countries and access immediate distribution scale, which we believe will drive long-term market share gains. Monster remains in investment mode as it enters new countries such as China and India, investing in advance of product launches much as it did when it first entered Europe, Japan, and other markets. We believe the company’s new product innovations will allow it to address larger demographics. We estimate Monster can grow in the mid-teens in international markets and at a mid-to-high single-digit rate in the US market over our long-term investment horizon. As the company continues to scale its business in international markets, we expect it will be able to increase cash flow growth, expand margins, and improve its return on invested capital. With its shares selling at a significant discount to our estimate of intrinsic value, we believe Monster offers a compelling reward-to-risk opportunity.
Check here for the latest results, quarterly call and analysts' estimates.
Brown Capital on Natera $NTRA US
Thesis: Natera’s cutting-edge DNA testing technology positions it for substantial growth, with a clear path to profitability and dominance in high-demand markets like cancer recurrence and prenatal testing
Extract from their Q2 letter, link here
Analysis: Natera is a diagnostic-testing company that uses advanced technology to detect small amounts of DNA in a simple blood test. The company offers everything from prenatal tests for common genetic disorders to cancer-recurrence tests to transplant-organ-rejection tests. Natera’s products save time, lives, money, and headaches by apprising expecting parents, cancer patients, and transplant patients earlier and easier. The company invests 25% of its revenue in R&D and is often first to market with the best clinical validation. This allows Natera to establish strong mindshare among the medical community early on, making it difficult for others to compete. While most of the company’s revenue comes from its prenatal tests, cancer-recurrence testing is the future of the company with a $15 billion to $20 billion market opportunity. Natera is unprofitable but we see a path to profitability in the coming years as the business scales and it dramatically improves its reimbursement cadence, which is in process. Based on the company’s large markets, strong innovation, defensible positions, and impressive clinical data, Natera has a long runway for topline growth that should average 20% over the next five years.
Check here for the latest results, quarterly call and analysts' estimates.
AVI on News Corp $NWSA US
Thesis: News Corp’s undervalued assets, particularly Dow Jones and REA Group, present a compelling opportunity for significant upside as management explores unlocking hidden value
Extract from their Q2 letter, link here
Analysis: Whilst the current structure was established in 2013, News Corp’s relevant history dates back to 1952, when a 21-year-old Rupert Murdoch returned to Australia to take over what was left of his father’s newspaper business, which had been much diminished by death duties and taxes. From this he built one of the most dominant media empires of the 20th – and indeed 21st – century, amassing vast wealth and notoriety in the process.
Today we believe that News Corp is one of the most misvalued and misunderstood companies in our investment universe, trading at a 40% discount to our estimated NAV. The NAV is principally comprised of the following assets: a 62% listed stake in REA Group (41% of NAV), the Australian real estate classified marketplace, and unlisted assets Dow Jones and HarperCollins accounting for 39% and 9%, respectively.
In particular, Dow Jones is a crown jewel asset that has successfully evolved the Wall Street Journal into a thriving digital consumer business, whilst both organically and inorganically building a high-quality Professional Information business that warrants a premium multiple, reflective of its sticky growing revenues, high margins, and minimal capex requirements. The 2021 acquisition of OPIS for $1.1bn marks a step-change in the importance and materiality of Dow Jones’ Professional Information business. Despite improved disclosure and impressive margin expansion, the value and quality of this business is misunderstood by the sell side and ignored by the market.
Indeed, we certainly do not believe these attractions are captured in News Corp’s current valuation, with the company trading at a 40% discount to our estimated NAV. After adjusting for the stake in REA, the stub trades at an implied value of $5.1bn, or approximately 4.7x next year’s EBITDA. We estimate that Dow Jones alone is worth ~16x the implied stub value and note that the New York Times as 18x and Info Services peers which trade between 19-28x.
Management have become increasingly vocal about the undervaluation and dissatisfaction with the sum-of-the-parts discount at which it trades. As CEO Robert Thomson described on the last earnings call, the company is engaged in “serious introspection about structure...[and] how to fully monetize a precious, prestigious portfolio that has an obvious growth trajectory. That is indeed not an evolution, but a revolution.” There are numerous potential forms this could take, but the most obvious and tantalising relates to the stake in REA Group, which accounts for a whopping 68% of News Corp’s market cap.
At current prices, the market is seemingly assigning a low probability to “a revolution”, with significant upside if management do indeed take concrete and tangible steps to unlock value. Combined with strong operating and earnings momentum, prospective returns appear attractive. Moreover – and this is key – the attractive underlying nature of the NAV means that we can afford to be patient and makes time our friend. All told returns from NAV growth and discount narrowing appear attractive.
Check here for the latest results, quarterly call and analysts' estimates.
Andvari Associates on Pool Corp $POOL US
Thesis: Pool Corp’s dominant market position and steady growth in the fragmented swimming pool industry make it a solid bet for long-term, non-discretionary sales growth
Extract from their Q2 letter, link here
Analysis: Pool is the largest player in a niche market. They are a value-added distributor of all materials and equipment related to the maintenance, remodeling, and construction of swimming pools. Although they have an estimated 40% market share, the market remains highly fragmented, which means they can grow at an above-average rate organically and via further acquisitions.
In general, Pool operates in an industry with good tailwinds. Population migration from the north to the south, primarily by retirees, means more new pools and more remodeling of old pools. As the CEO of Pool recently said, the industry joke is that trucks move north with oranges and move south with furniture. Furthermore, once a home has a pool, this ensures a long-term annuity stream of products used to maintain that pool. These are non-discretionary purchases, because if an owner allows a pool to fall into disrepair, this negatively impacts the value of their home. Thus, Pool can easily pass on price increases to their customers.
As a value-added distributor, Pool is a conduit between over 2,200 manufacturers and over 120,000 customers that maintain and build swimming pools. They have taken on the role of trusted partner to manufacturers and end users. They ensure quick, efficient delivery of products while also minimizing the chances of products being out of stock. They have the largest and widest selection of products. They strive for the best customer service. They can advise customers on the best products to meet maintenance or construction needs. They’ve developed software and apps that make owning and maintaining pools easier. For all this, suppliers and customers have rewarded Pool with their long-term business. And the great part about the business is that pools remain a desirable addition to homes. This ensures a slow yet steady growth in their installed base, which drives non-discretionary, recurring sales.
Check here for the latest results, quarterly call and analysts' estimates.
Bell AM on Qualcomm $QCOM US
Thesis: Qualcomm’s expansion into high-margin personal computing, coupled with its SoC dominance, is set to drive double-digit growth and potential valuation expansion
Extract from their Q2 letter, link here
Analysis: Qualcomm, short for "Quality Communications", is the leading supplier and intellectual property owner of integrated circuits used in consumer electronics, IoT devices, and automotive telematics and infotainment systems. Holding approximately 35% of the global smartphone processor (System-on-Chip, SoC) market, this segment accounts for over 60% of Qualcomm's revenue, while licensing its wireless technology IP (3G/4G/5G) to handset makers such as Apple contributes 15% of revenue. Qualcomm’s SoC solutions have seen increased applications in personal computers due to their superior power efficiency since late 2023. More recently, Microsoft selected the Qualcomm Snapdragon X series SoCs to power the next generation Windows Copilot™ PCs. Personal computing presents a new and much higher average selling price addressable market opportunity for Qualcomm. Our analysis suggests this development may lead to double-digit revenue and EPS accretion above the current market consensus for the medium term. The company also has very good sustainability characteristics, with very low carbon intensity and strong alignment to the UN Sustainable Development goals. From a valuation perspective, we expect the revised growth profile (15%+ 3-yr EPS CAGR) to support the valuation at current levels (18x forward P/E) and potentially lead to further valuation expansion over time.
Check here for the latest results, quarterly call and analysts' estimates.
Alger on Taiwan Semiconductor $TSM US
Thesis: TSMC is set to lead the semiconductor industry’s next wave of growth, leveraging its cutting-edge technology and dominant market position to capture the rising demand in AI and IoT
Extract from their Q2 letter, link here
Analysis: Taiwan Semiconductor (TSMC) is the global leader in integrated circuit (IC) manufacturing. Operating as a built-to-order foundry, TSMC provides comprehensive services including IC manufacturing, mask-making, design, turn-key solutions, and process development. We believe the company’s success is attributed to its proven business model, significant economic scale, and deep technological expertise. Given the rising demand for semiconductors in mobile devices, AI, and the Internet of Things (IoT), TSMC is well-positioned to capitalize on the increasing need for computing power, in our view. Further, the company’s leadership in advanced technology nodes (3nm/5nm) and packaging gives it high revenue visibility and pricing power. We believe the company’s significant capital investments, driven by AI computing demands and shortened product cycles, could potentially suggest rapid growth in edge computing.
Check here for the latest results, quarterly call and analysts' estimates.
Loomis Sayles on Tesla $TSLA US
Thesis: Tesla’s leadership in the accelerating EV market, along with its high-margin software potential, provides a compelling long-term growth opportunity at a discounted valuation
Extract from their Q2 letter, link here
Analysis: We believe the secular growth driver for Tesla is increasing penetration of electric vehicles as a share of global automotive sales. Around the world, EVs accounted for a low double-digit percentage of new light vehicle sales in 2023, with penetration rates ranging from high-single digits in North America to low double-digits in Western Europe and almost 30% in China. We believe the pace of EV adoption will accelerate, driven by advances in battery technology that will drive cost parity, lower ongoing cost of ownership for consumers, government incentives, and numerous global initiatives to phase out internal combustion engine sales over the next two decades. Tesla is the global leader in battery EV sales, with over 20% unit share, around 25% revenue share, and a much higher share of industry profitability. While we expect competition to increase substantially, we believe Tesla’s superior brand, focus, technology leadership, and strong ongoing consumer demand will help enable the company to maintain a leading global market position.
In 2022, Tesla launched an enhanced autopilot feature for customers who only want self-driving functionality on highways. While we believe most consumers will ultimately adopt FSD functionality over the long term, at 50% of the cost of FSD, we believe the enhanced autopilot option will accelerate uptake of its software offerings. Over the past few months, the company has begun to further sharpen its FSD strategy. First, the company rolled out a free trial to all US car owners with hardware 3 and higher, which represented 1.8 million cars, for which the company saw 50% usage. The company also created a lower pricing tier for “supervised” FSD, which provides access to a scaled-down version of FSD that is allowed by current regulations, but at half the price of FSD. Tesla’s software offerings carry profit margins that are significantly greater than the current company average and we believe they will drive strong profit growth. Over time, we believe uptake of high-margin software capabilities, which we believe can increase from 0% of profits today to approximately 25%, will contribute to expanding the company’s operating margins. We believe the assumptions embedded in Tesla’s share price underestimate the company’s significant long-term growth opportunities and the sustainability of its global market share. We believe the company’s shares currently sell at a significant discount to our estimate of intrinsic value and thereby offer a compelling reward-to-risk opportunity. We took advantage of near-term price weakness to add to our position early in the quarter.
Check here for the latest results, quarterly call and analysts' estimates.
Brown Capital on UFP Technologies $UFPT US
Thesis: UFP Technologies is positioned for significant long-term growth, driven by its leadership in the MedTech sector and strategic focus on recurring revenue streams
Extract from their Q2 letter, link here
Analysis: UFP Technologies is a designer and custom manufacturer of components, products, and packaging for the medical-device industry and for various industrial and consumer markets. The company has expertise in design engineering, specialty materials and manufacturing capabilities for custom parts using specialized foams, films, and plastics. The company’s clients include 26 of the 30 largest medical-device manufacturers in the world. Products in UFP’s MedTech division (87% of revenue) are used in robotic surgery, interventional and surgical devices, orthopedics, infection prevention, wound care, diagnostics, and other medical areas. The company’s Advanced Components division (13% of revenue) develops and manufactures products primarily for the automotive, aerospace & defense, and other industrial markets. The company has manufacturing facilities in the U.S. and in lower-cost foreign countries.
UFP Technologies has been profitable for many years. The company’s focus over the last several years on the MedTech division has resulted in accelerated revenue growth and increased profitability. Operating margins in 2023 were 14%, up from 10% in 2018. UFP works on multiple projects for each customer and is frequently involved in co-developing these products, which often leads to manufacturing programs that provide multi-year, multi-million-dollar recurring-revenue streams. As the company continues to focus on adding value to device manufacturers in growing medical market segments, we see a long runway for organic growth and strategic acquisitions. UFP had revenue of $400 million in 2023 and is selling into an addressable market which we estimate to total at least $6 billion.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on West Pharmaceutical $WST US
Thesis: West Pharmaceutical’s growth is set to reaccelerate as demand for high-value packaging components, driven by new biologics and GLP-1 drugs, continues to rise
Extract from their Q2 letter, link here
Analysis: West Pharmaceutical is a leading packaging components supplier for injectable pharmaceuticals, including rubber stoppers, seals, and plungers. We are attracted to the company’s long-term growth drivers, which are fueled by its nearly 100% participation in new biologic drug approvals and a steady shift in demand toward the company’s higher value-add components. However, those tailwinds have been masked in recent years by the rapid growth and decline of COVID-19 vaccines and then by elevated customer inventories of packaging components that were purchased to de-risk COVID-related supply chain constraints. Inventory destocking continued to weigh on West’s growth in the quarter, but we believe customer orders support a reacceleration of growth in the second half of 2024. This is in part supported by the company’s capacity expansions in order to support the rapid growth of GLP-1 drugs to treat diabetes and obesity, a category we expect to materially drive growth in the coming years. With the valuation having reached attractive levels, and with profit acceleration likely near, we added to our position.
Check here for the latest results, quarterly call and analysts' estimates.
Brown Advisory on Zoetis $ZTS US
Thesis: Zoetis’s leadership in the animal health industry, with a strong focus on innovation and high-quality products, ensures sustained growth and profitability, especially as it streamlines its portfolio
Extract from their Q2 letter, link here
Analysis: Zoetis is a global leader in animal health serving both segments of companion animals and livestock through medicines, vaccines, and diagnostics products. Zoetis spun out of U.S. pharma company Pfizer in 2013 having operated as an animal health business since 1952. It is the largest pure-play animal health company with significant scale in R&D leading to innovation in drug discovery which has allowed it to take market share from smaller competitors. Animal health is in many aspects more attractive than the wider pharma industry given the smaller number of competitors, lighter regulation for drug development and go to market strategies (animal trials start and end with pets; shortening the trial periods compared to human drug testing) and less threats from generics. Zoetis has established itself as the highest quality marketer to the veterinarians and livestock producers where quality and reliability of a drug are key competitive advantages, increasing switching costs. We have followed the company closely since 2018.
During that time Zoetis’ business mix shifted meaningfully to a higher and more profitable contribution of its companion animal segment which has moved from less than half to approximately 65% of company revenues and closer to approximately 75% of cash flow according to company reports. From a sustainability perspective Zoetis offers medicine and diagnostics that can extend lives of pets while also helping to secure our food supply through the protection of livestock globally. Following the company’s announcement of the divestment of its medical feed additive portfolio (~4% of revenues) - which is expected for the end of 2024 - the company’s exposure to livestock antibiotics will be focused on antibiotics used to cure infections, meaningfully reducing Zoetis antimicrobial resistance exposure. We had an opportunity to invest in Zoetis at a double-digit annualized 5-year base case IRR when the share price came under pressure from the U.S. launch of their osteoarthritis pain drug that highlighted a rare number of cases with severe side effects. This will likely be addressed through re-labeling. Additionally, vet visit volumes have declined post-COVID-19 for wellness/preventative visits that have little medical content and therefore little impact to Zoetis, and competitors announced product launches to Zoetis’ Simparica Trio parasiticide protection treatment and a rival osteoarthritis treatment for dogs. Both treatments are solving now previously unmet needs and are therefore in direct competition with Zoetis’ drug where Zoetis has a dominant market share. We reduced our position in General Electric to fund the new investment in Zoetis.
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Andvari Associates on Zoetis $ZTS US
Thesis: Zoetis’s leadership in the resilient and growing pet healthcare market, combined with strong financials, makes it a standout investment with consistent cash generation
Extract from their Q2 letter, link here
Analysis: Zoetis was spun out of Pfizer in 2013 and is the largest company serving the animal health market. They make medicines, vaccines, diagnostics, devices, and technology solutions for their pet owners and veterinarians. Their revenues are split 65% for pet care and 35% for livestock.
The nice thing about Zoetis, and the pet healthcare market in general, is the trend of increasing pet ownership and the increasing willingness to spend more money on pets every year. When compared to overall consumer spending, spending on pets has nearly doubled since 1990. The resilience of the pet healthcare industry is particularly exceptional—the industry has never had a year of negative growth in the last 15 years. Zoetis in particular has grown several percentage points faster than the industry.
The financials of Zoetis are also exceptional. It has steady revenue growth, gross margins in the 70s, an ability to reinvest in the business at 20% returns, and is still able to return billions to shareholders with dividends and share repurchases. Despite having the highest ratio of capex to revenues in this group of new holdings, Zoetis is still very cash generative. The company generated $1.8 billion of free cash over the last twelve months off of $8.7 billion of revenues, a healthy 20% margin. In its first five years after being spun from Pfizer in 2013, Zoetis averaged 4.1% of capex to revenues. The reason for capex trending higher over the last five years is to support a slate of fast-growing new products, inventory buildups, and productivity enhancements. We believe this capex ratio will slowly come down over time as revenues come in for its newer products and as customers draw down inventories.
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Bell AM on BE Semiconductor $BESI NA
Thesis: BESI's leadership in advanced packaging technology positions it to set new industry standards, driving robust growth and margin expansion in the semiconductor market
Extract from their Q2 letter, link here
Analysis: BE Semiconductor (BESI) is an innovator and supplier of assembly equipment used in semiconductor manufacturing. Led by founder Richard Blickman, the Dutch multinational company is an expert in die attach, plating, and packaging solutions, which have become increasingly critical as more precise interconnects and complex packaging architectures provide a pathway to extend the performance enhancement roadmap. By focusing on the high-end (~30% market share) of each of its end markets through tech leadership, BESI has been improving its gross margin consistently over the past decade (65% vs. peers at 50%), defying some of the historical struggles in a cyclical industry. More recently, BESI widened its leadership in advanced packaging technology, with its equipment in hybrid bonding and thermal compression bonding delivering significantly better accuracy and throughput compared to the nearest peer. We expect these new technologies to become the industry standard across semiconductor foundries worldwide in the near future, resulting in a revenue CAGR of over 20% and steady EPS growth through FY27. Our initial position size is quite small. We will look to take advantage of any share price volatility to potentially increase the holding into further weakness. We also added to some of the newer portfolio additions such as Fortune Brands (Industrials) and OBIC (Information Technology).
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Artemis Funds on AOTI $AOTI LN
Thesis: AOTI’s groundbreaking oxygen therapy for diabetic ulcers promises explosive growth and strong cashflows as it secures nationwide Medicaid approval
Extract from their Q2 letter, link here
Analysis: AOTI is the market leader in using topical oxygen therapy (TWO2) to heal diabetic foot ulcers, principally in the US. Strong trial data indicates this treatment has better efficacy and results in lower levels of recurrence, leading to better patient outcomes. In addition, fewer hospitalisations and amputations help to reduce overall costs. The combination of high growth (about 40% a year), a long runway (the Medicaid funding market is opening up on a state-by-state basis and the potential nationwide opportunity is yet to be factored into forecasts) and gross margins of more than 80% should soon translate into strong cashflows. Incidentally, AOTI is only the second IPO that we have participated in since 2018.
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Polen Capital on GlobalData $DATA LN
Thesis: GlobalData’s strong growth, driven by stable demand and strategic acquisitions, positions it for significant cash flow compounding over the next five years
Extract from their Q2 letter, link here
Analysis: GlobalData is a data analytics and consulting company headquartered in London. It provides market research and business intelligence services to corporates and professional services firms primarily on a subscription basis. Over the past five years, the company has compounded the per-share sales at over 10% compound annual growth rate (“CAGR”). CAGR and earnings before interest and taxes (“EBIT”) at a nearly 50% CAGR. GlobalData has grown the top line organically in the high single-digit range. It complements this with bolt-on acquisitions of data-centric boutique market research firms that complement their existing datasets. We believe the business benefits from stable demand, high operating leverage, and an excellent track record for capital allocation. We believe the company can compound free cash flow per share at a high-teens to low-twenties rate over the next five years. The company currently has a robust net cash balance sheet, and we think should be able to self-fund future growth.
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Polen Capital on Medley $4480 JP
Thesis: Medley’s robust growth, fueled by demographic trends and international expansion, makes it a promising player in Japan’s medical services sector
Extract from their Q2 letter, link here
Analysis: We have also started a 2% position in Medley. This Japanese-based business provides medical human resource recruitment, medical system management, online medical treatment, medical information updating, and other medical web services throughout Japan. Over the past five years, the company has increased revenues at a roughly 35% CAGR, including bolt-on acquisitions, while EBIT has compounded over 60%. We believe the business will benefit from the increasing cost of social welfare in Japan due to demographics and labor shortages. They should also see an uplift from international expansion, aiming to leverage the network platform built in the Philippines and Japan. The company currently has a positive net cash balance that we think can support further bolt-on acquisitions and organic growth.
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Bell AM on OBIC $4684 JP
Thesis: OBIC’s dominance in Japan’s SME ERP market, coupled with strong margins and growth potential, makes it a compelling buy at current valuation lows
Extract from their Q2 letter, link here
Analysis: One of the new names purchased was OBIC, a leading enterprise resource planning (ERP) software provider in Japan. OBIC boasts the number 1 market share within Japan's small-to-medium enterprise (SME) market with approximately 30% market share. The company’s ERP platform is also ranked number 1 in customer satisfaction in Japan and the company has enjoyed a 99% customer retention rate over the past decade. OBIC has delivered consistent operating margin improvement over the past couple of decades (FY24: 63.5%), helped by moving their customer base to the cloud. Going forward, the company has an opportunity to expand their presence in larger corporates who either operate an 'in-house' ERP system or one provided by competitors such as Oracle Japan, Fujitsu or SAP. We believe OBIC will continue to grow its earnings above 10% p.a. for the medium term, with additional shareholder returns from effective deployment of the company’s strong cash flow and net cash balance sheet. Valuation is trading at 5-year lows, creating an attractive investment entry point.
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Alger on Pan Pacific Holdings $7532 JP
Thesis: Pan Pacific Holdings is poised for long-term growth, leveraging Japan's value shopping trends and Don Quijote’s unique store format to outperform in a challenging economic environment
Extract from their Q2 letter, link here
Analysis: Pan Pacific Holdings is a Japan-based operator of the Don Quijote discount stores along with a general merchandise and international business. We believe the company is well-positioned to capitalize on value shopping trends as households contend with cost-of-living increases and stagnant wages in Japan. Despite some improvements in real wage growth in 2024, a significant segment of the population is likely to continue to frequent discount stores due to insufficient wage increases, in our view. Further, Don Quijote is aggressively expanding its store openings and enhancing its private label offerings, which could potentially improve gross profit margins. While the company reported strong quarterly earnings, where sales and operating profits beat analyst estimates, the company’s share price fell due to weakness in the Japanese yen relative to the U.S. dollar, thereby underperforming the index. Despite the near-term foreign currency headwind, we believe the company remains well positioned for long-term growth. We believe Don Quijote’s unique store format remains competitive against e-commerce, supported by ongoing stock-keeping-unit reductions and a focused enhancement of inventory turnover.
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Brown Capital on Dr. Lal Pathlabs $LALP IN
Thesis: Dr. Lal Pathlabs is set to dominate India's growing diagnostics market with its cutting-edge digital infrastructure and strategic expansion into underserved areas
Extract from their Q2 letter, link here
Analysis: Dr. Lal Pathlabs is the leading diagnostic chain in India with 277 labs and more than 5,100 Patient Service Centers across the country. It serves, on average, 74,000 patients a day. Lab results influence 70% to 80% of doctor decisions regarding patient care in India, similar to that in the U.S., but India is well below the U.S. in terms of tests per patient (2.6 vs. 8 to 9). Nearly half the market is still served by unorganized, mom-and-pop test centers.
Dr. Lal is an early adopter of a hub-and-spoke franchise model. The model is underpinned by its investment in what we believe to be an industry-leading digital infrastructure that can monitor and manage tests end-to-end, from sample collection to report generation. For example, if a collection-center crew member has not opened his or her app by 5 a.m. that day, it usually indicates that he or she will be late for the first patient appointment, prompting a call from headquarters. This is meaningful to patients as missing an appointment or receiving a delayed report may result in patients missing days of work as they often travel from rural areas. This franchise model with the digital backbone gives Dr. Lal an advantage in serving lower-tier city patients efficiently and effectively. This segment represents roughly one-third of Dr. Lal’s revenue. We believe Dr. Lal will deliver a low double-digit organic revenue growth rate, thanks to its continued penetration into lower-tier cities while maintaining its 25% to 26% EBITDA margin. We are excited about Dr. Lal’s market positioning in an expanding market.
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Ariel Investments on Infineon Technologies $IFX GY
Thesis: Infineon is set to capitalize on the shift to electric vehicles and renewable energy, with underappreciated growth potential in key semiconductor markets
Extract from their Q2 letter, link here
Analysis: We added Infineon Technologies AG, a leading player in power semiconductor and system solutions. In our view, Infineon is well-positioned to gain share from secular tailwinds in both auto and renewable markets. Near-term, the company is benefitting from the shift in battery electric vehicles towards plug-in hybrids given its distinctive manufacturing capabilities. Other notable growth opportunities include increased penetration of Infineon’s Advanced Driver Assistance System, enhanced focus on energy efficiency and industrial power applications, and sustainable energy efforts in data centers. At current valuation levels, we do not believe the market fully appreciates Infineon’s strong competitive position and growth prospects.
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Ariel Investments on Axa $CS FP
Thesis: AXA SA offers a compelling value opportunity, poised to close the valuation gap with its peers through strategic focus on higher-margin, recurring revenue segments
Extract from their Q2 letter, link here
Analysis: We purchased multinational insurance and financial services company AXA SA, which is currently trading at a significant discount relative to its U.S. peers due to weaker operating performance and its exposure to the European economy. We expect this gap will narrow as AXA prioritizes underwriting within the more predictable non-life business segments including—commercial, protection and health insurance—all of which offer recurring revenues and higher margins. Furthermore, as a stronger cash generator, investors are benefitting from rising dividends as well as opportunistic share repurchases.
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Artemis Funds on Vinci $DG FP
Thesis: VINCI’s diversified infrastructure portfolio, including toll roads and airports, provides steady cashflows and growth opportunities, with potential for strong shareholder returns despite political risks
Extract from their Q2 letter, link here
Analysis: The Trust first purchased shares in VINCI in June 2022 at €80 a share, buying more recently at €97, meaning it is now a 3% position. This €60 billion France-listed company started out as a contractor in construction and energy. It used its cashflows to invest in infrastructure concessions such as toll roads and airports, which now account for more than 60% of operating profit and a larger share of its value.
VINCI Autoroutes accounts for 40% of operating profit. The business operates 50% of all toll roads in France and 35% of all motorways. Traffic has historically grown above French real GDP (1.5% versus 1.1%) and fares formulaically increase by 70% of inflation per annum.
The toll roads exhibit many of infrastructure assets’ most desirable features: high predictability, inflation-linked revenues, stable regulation and negligible obsolescence risk. However, their weakness is in their limited duration, as the concessions are due to expire in approximately 11 years. We estimate the assets will generate about €40bn of free cashflow over this time.
Diversification benefits
VINCI Airports accounts for 22% of operating profit. The business owns (in part and whole) more than 70 airports across 13 countries carrying 267 million passengers.
These are attractive assets. Air-traffic volumes have consistently grown ahead of GDP while rising building costs (financial and societal) have increased the scarcity value of existing airports. While regulatory regimes vary significantly, the broad geographic exposure of VINCI’s portfolio provides diversification benefits.
As it has built out its airports business, it has increased the duration of its concessions business. Gatwick and Edinburgh are perpetual/freehold assets and Portugal/Japan have 39/36 years left on their concessions. We estimate the traffic-weighted duration of the portfolio is more than 35 years.
VINCI’s contracting businesses account for the remainder of operating profit, with a 60/40 skew towards energy over construction. Contracting businesses are often unpopular among investors as barriers to entry are low and losses on a small number of contracts can have an outsized impact on profits.
We believe VINCI’s business is run in a way that mitigates many of these risks. The organisation is highly decentralised, with local managers incentivised on contract profitability rather than volume. The average contract size is kept low at €10,000/€60,000 in construction/energy to minimise single-project risk. Any bolt-on acquisitions are made regionally. As a result, contracting revenue has grown by 6% per annum over the past 10 years and profits by 15%.
There is less scope for margin expansion but there is still the prospect of steady revenue growth. VINCI Energies is well placed to benefit from the energy transition, which is creating strong demand for contracting services. VINCI’s chief executive has described this as a “tsunami” and claims that Energies is the best division in the group: it is stable, will exist indefinitely and delivers a high return on capital.
Management and culture
Management and culture are key drivers of VINCI’s success. Despite having 280,000 employees, it does not suffer from excessive management layers or bloated costs – fewer than 300 people work at its head office. There is no cross subsidisation between divisions. The company takes a conservative approach to finances, operating with less than 1.5x net debt to EBITDA, despite its high cash generation. Employees own about 10% of outstanding shares.
VINCI trades on 11x forward earnings and yields 5%. The low valuation reflects concerns around French political risk and the short-duration nature of its toll roads.
The company has a history of using capital wisely and its diverse operations offer various possibilities to reinvest cashflows. There is also the potential to extend toll-road concessions in return for investment of about €20 billion to prepare existing infrastructure for electric vehicles.
Even if future returns on capital are lower than for past investments, the company can still grow earnings at low single digits (versus 9% historically). If the current rating is maintained, annual shareholder return potential will be in the low teens.
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Ariel Investments on BAWAG Group $BAW AT
Thesis: BAWAG Group's growth through strategic acquisitions and capital efficiency makes it a strong contender for long-term shareholder returns
Extract from their Q2 letter, link here
Analysis: We bought bank holding company, BAWAG Group AG. In our view, consensus estimates for 2025 and 2026 do not fully appreciate the sustainable growth potential, best-in-class cost efficiency, and sector-leading capital returns the business offers. Given the acquisition of Netherlands-based mortgage bank, Knab, as well as recent reports highlighting BAWAG as the leading contender to acquire Barclay’s German Consumer Finance business, we believe the company is well-positioned for future growth. In addition to its deal activity, management remains committed to free cash flow generation and returning capital to shareholders via dividends.
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Ariel Investments on Emaar Properties $EMAAR UH
Thesis: Emaar Properties is capitalizing on Dubai's post-COVID real estate boom, with strong growth across key sectors poised to drive substantial financial performance
Extract from their Q2 letter, link here
Analysis: We initiated a position in property investment and development company in the MENA region, Emaar Properties PJSC. We believe the company will continue to benefit from the post-COVID recovery in Dubai’s real estate market, which has been amplified by a large number of expatriates entering the country. Sales in the development, retail, hospitality, and entertainment segments have all demonstrated growth.
Here are some additional Q2 letters :
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