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Loomis Sayles on Alnylam Pharmaceuticals $ALNY US
Thesis: Alnylam's innovative biotech platform and substantial late-stage pipeline present a significant growth opportunity, with the company poised to transition to profitability and long-term value creation.
Extract from their Q2 letter, link here
Analysis: We believe the uniqueness of Alnylam's pioneering scientific expertise and technology is evident from both its existing products, which provide meaningful value to previously underserved patient populations, as well as the numerous partnerships in which world-class global pharmaceutical companies and specialty competitors alike have sought to access its proprietary technology. With its approved therapies and substantial pipeline of significant late-stage clinical programs, we believe the company has now reached the point at which its existing therapies will continue to contribute positively and its subsequent innovations will shift its financial profile from that of an early-stage biotech company to a profitable business with normalized margins that is able to internally fund its ongoing growth needs. Over our long-term investment horizon, we believe the company can generate substantial revenue growth, while turning profitable and generating substantial cumulative free cash flow. We believe Alnylam’s market price continues to reflect a lack of appreciation for the significant value embedded in the platform the company has built and the company’s clinical-stage assets, which we believe is unsupported by the company’s established track record for producing genetically validated therapeutics. Further, while embedded expectations reflect some success for its currently marketed products, we believe the market remains narrowly focused on the near-term path to approval and timing for vutrisiran in ATTR-CM. We believe Alnylam’s platform is validated and improving in efficacy, duration, and breadth of issues addressed, which we believe will serve as the basis for ongoing innovation over our long-term investment horizon and beyond. As a result, we believe the company is selling at a substantial discount to our estimate of its intrinsic value and offers a compelling reward to risk opportunity.
Mar Vista on Broadcom $AVGO US
Thesis: Broadcom's leadership in AI and strategic acquisitions, such as VMware, position it for substantial growth and expanding profit margins in the rapidly evolving tech sector.
Extract from their Q2 letter, link here
Analysis: We initiated a position in Broadcom in Q2. As a skilled aggregator, Broadcom acquires firms, streamlines their operations, and invests R&D dollars in mission-critical products that generate industry-leading profit margins, robust cash flows, and high returns on invested capital. Its primary markets include AI accelerators targeting generative AI applications, networking & wireless semiconductors, and mission-critical infrastructure software solutions. Broadcom is well-positioned to benefit from the rapidly expanding demand for custom AI accelerator chips that support the evolution of the generative AI market. The company is the second-largest producer of AI accelerator chips behind Nvidia and leads the market in custom AI ASIC chips. Its customers include leading hyperscalers like Alphabet and Meta who are turning to Broadcom for custom silicon due to its performance and cost advantages. We believe the company is a direct beneficiary of a multi-year capital cycle driven by hyperscalers building out next-generation AI factories. Broadcom recently acquired VMware, the leader in virtualization software targeting the enterprise market. The integration of VMware is tracking ahead of plan as management has simplified its product bundles, transitioned to a subscription revenue model, and reduced operating costs. We believe this simplified go-to-market structure will result in strong top-line revenue growth and expanding operating margins.
THB AM on Casey’s General Stores $CASY US
Thesis: Casey's unique rural presence and strong customer loyalty position it for continued growth and consolidation opportunities in the fragmented convenience store market.
Extract from their Q2 letter, link here
Analysis: Casey's is the third largest convenience store chain and the fifth largest pizza chain in the U.S. It operates over 2,600 convenience stores and fuel stations throughout 17 states in Midwest and Southern regions. Notably, 50% of these stores are in smaller towns with a population under 5,000, areas typically underserved by national-chain convenience stores and where units are less expensive to build, buy, and operate. This unique rural footprint positions Casey's as the primary food establishment, gas station, and social hub in many midwestern communities, fostering strong customer loyalty and repeat business. The strong following is evidenced by the 7.7 million members in their rewards program. The convenience store industry is highly fragmented with ample opportunity for consolidation, which the company is supplementing with new builds to increase store counts while also expanding its higher-margin prepared food business.
Polen Capital on CCC Intelligent Solutions $CCCS US
Thesis: CCC Intelligent Solutions' dominant position in auto claims processing and robust, recurring revenue model make it a stable and attractive investment, even in fluctuating economic conditions.
Extract from their Q2 letter, link here
Analysis: CCC Intelligent Solutions is a cloud-enabled platform used by insurance carriers, repair shops, and parts suppliers in the auto insurance, claims, and repairs industries. The business model combines attributes from software companies and online marketplaces by serving as the connective tissue that processes 85% of all U.S. automotive claims volume. It operates as a near monopoly and reduces friction for what would otherwise be a very manual process involving significant coordination among industry participants. There is a growing, high recurring revenue business with high operating margins. Long-term growth has been driven by 99% gross dollar retention and 110%+ net dollar retention from continued product innovations. We believe the fundamentals are uniquely stable and largely driven by auto claims volumes that do not necessarily reflect typical economic cycles.
Newbridge AM on Celsius Holdings $CELH US
Thesis: Celsius Holdings' rapid growth, strong brand appeal, and strategic partnerships position it for substantial market share gains in the competitive functional beverage space.
Extract from their Q2 letter, link here
Analysis: Celsius Holdings, Inc. (CELH) — Celsius is a rapidly growing developer and marketer of functional drinks and liquid supplements. Its assortment of “better for you” flavored beverages has gained share in a large, highly competitive market. The company's biggest competitors include Red Bull and Monster Beverage. Most of Celsius’s sales are derived from North America (~95%), but the company has recently announced expansion into Europe and the U.K. The company’s distribution agreements with PepsiCo and Suntory will contribute significantly to the company’s future growth and international expansion. We believe that Celsius is not simply an “energy drink” brand but more of a lifestyle brand. The company enjoys a wide demographic profile, as consumers focus on health, wellness, and function. About half of Celsius users are women, which shows broader appeal versus its larger competitors. Its “Live Fit” brand message has resonated well and has gained share from existing energy drink customers while drawing new customer groups into the brand and category. We have also found that its appeal is widespread regionally throughout the United States. Celsius products are sold through retail stores, convenience and gas, food service and club stores, and online. Each distribution point has seen greater sales, and we expect the expansion to continue as the company gets more product facings in coolers and more shelf space in non-refrigerated spaces. We expect sales to grow in a mid-30% range over the next few years and believe operating margins will continue to expand as the company gains greater scale in the marketplace. We believe that having strong distribution partners like PepsiCo and Suntory, compelling product innovation, and greater brand awareness will contribute to market share gains over the next several years.
Pershing Square on Chipotle $CMG US
Thesis: Chipotle's focus on operational efficiency and international expansion sets the stage for significant growth and margin improvement.
Extract from their Q2 letter, link here
Analysis: Strong sales growth and more efficient operations led to restaurant-level margin expansion of 140 basis points in the second quarter. We believe that Chipotle's attractive economic model remains firmly intact despite several near-term headwinds, including higher avocado costs and investments in improving portion consistency, the latter of which is already producing improvements in customer survey scores. Management has several exciting initiatives underway to simplify operations and improve throughput, including optimization of staff deployment as well as new equipment and automation technology. The dual-sided grill, which can cook chicken and steak in less than half the time as the current plancha with more consistent execution, will be deployed in 84 restaurants by the end of this year, ahead of a broader rollout. Longer-term, the fully automated digital make-line, which will be installed in a restaurant for the first time this summer, has the potential to have a transformational impact on throughput and the customer and employee experience. Chipotle is on track to open approximately 300 new restaurants this year and expects to more than double its store base to at least 7,000 locations in North America over time. International expansion beyond Canada remains a largely untapped opportunity. The new leadership team in Europe is making good progress on improving unit economics of the company-owned stores, while Chipotle’s first franchised restaurant in Kuwait is off to a great start.
Loomis Sayles on CRISPR Therapeutics $CRSP US
Thesis: CRISPR Therapeutics' innovative platform and strong cash position present a compelling high-reward opportunity for investors at current discounted valuations.
Extract from their Q2 letter, link here
Analysis: CRSP has a number of therapies currently undergoing clinical trials but remains pre-revenue pending the rollout of Casgevy. However, at scale, we believe the company can attain the economics of a successful biotech company, including operating margins that could exceed 40% and cash flow returns on investment that substantially exceed its cost of capital. The company's cash burn is averaging about $150 million per quarter. With a $2.1 billion cash balance, which equates to over three years of runway, we believe the current cash balance will provide a sufficient funding bridge, and that commercial proceeds from Casgevy will bridge the company to sustainable cash generation to internally finance its operations and investments. We believe the expectations embedded in CRSP’s market price substantially underestimate the potential of its curative therapies, its ability to rapidly innovate, and its structural advantages in the development process that should lift its probability of success compared to traditional biopharmaceutical therapies. We believe management is executing on a sound investment strategy that we expect to eventually generate meaningful free cash flow growth that is not reflected in current expectations. As a result, we believe the company is selling at a substantial discount to our estimate of its intrinsic value and offers a compelling reward-to-risk opportunity.
Madison Funds on Deere & co $DE US
Thesis: Deere's leadership in precision agriculture technology and its expanding high-margin software services position it for long-term growth, making current market conditions an attractive entry point.
Extract from their Q2 letter, link here
Analysis: Deere & Company is the runaway leader in the global farm equipment industry. The company has the strongest network of dealers in the U.S., and incredible brand loyalty among generations of farmers. “Precision ag” is revolutionizing the farming industry through automation and productivity tools, which increase crop yields and lower costs for the farmer. We believe Deere is the standout leader in these technologies through its farsighted commitment to technology investments that it’s maintained over the last couple of decades. This dedication through the inevitable ups and downs of the agriculture cycle has enabled Deere to manufacture equipment today that is seamlessly integrated with precision ag technology packages. As a result, we believe Deere’s competitive advantage has widened considerably relative to peers who must deal with a legacy of frequent acquisitions and changes in corporate strategy. The other benefit accruing to Deere from its technology investments is the ability to create new revenue streams beyond selling equipment. Deere is now monetizing services and analytics under its “John Deere Operations Center” platform where farmers can manage their operations through a single software application. Importantly, revenues generated from farmers subscribing to various precision ag tools are much higher margin and recurring in nature. While this opportunity is still relatively early, Deere believes software revenue can grow to 10% of the total by 2030. The current outlook at Deere is clouded by a downturn in the market for ag equipment due to low commodity prices, high interest rates, and a hangover from an unprecedented boom in demand. This uncertainty presented the opportunity to invest in Deere shares at an attractive price.
Polar Capital on Deere & co $DE US
Thesis: John Deere's integration of AI and digital technologies is easing sector cyclicality, positioning the company for resilient growth even during downcycles.
Extract from their Q2 letter, link here
Analysis: While performance in the agriculture sector has softened after a bumper 2020-2023 cycle, supported by the low cost of equipment financing, John Deere has continued to roll out its technology-enabled fleets, encompassing autonomy, digital, and AI planning. This higher technology content is showing early signs of driving a faster equipment refresh cycle for farmers, better pricing power, and higher margin products. These factors can combine to make the trough of the cycle shallower, meaning the company’s peak-to-trough earnings per share (EPS) decline is likely to be less significant than some fear compared to previous cycles. In our view, a higher ‘trough margin’ profile with lower volatility should also be rewarded with a higher multiple. John Deere expects price realization to be positive this year despite volumes falling year-on-year—a rare occurrence in a cyclical industry. Even if it is only just taking the edge off at the margin in this downcycle, it prepares them well for 2025 and beyond as these technologies mature. They have targets for 10% of revenue to be recurring by 2030, which would be a big lift to the multiple because of the lower cyclicality and high-margin nature of software/data revenue. As a result, while we are conscious that the industry is currently working through a downcycle, we see reasons to be constructive when the next agriculture cycle begins.
Heartland Advisors on Fidelity Information Services $FIS US
Thesis: FIS's strategic refocus under new leadership, along with its strong recurring revenue base, positions the company for improved profitability and growth.
Extract from their Q2 letter, link here
Analysis: Fidelity Information Services, Inc. (FIS) is one of three major suppliers of core processing software and services utilized by banks, capital market participants, and corporations. Whenever you log into your mobile phone banking app, pay a bill, or transfer money, there is a decent chance that FIS enables that transaction. Given the contractual nature of its business, 80% of the company’s revenues are recurring, providing better revenue visibility and less profit volatility than sector peers. FIS is a classic self-help story about strategic course correction and capital allocation. The company’s prior management team took a wrong turn by following competitor Fiserv into the merchant acquiring industry — the intermediaries that stand between credit card networks like Visa or Mastercard and card issuers like Capital One or Citi — when it overpaid for Worldpay in 2019. Rather than boosting FIS’s growth as planned, the acquisition was a distraction as software startups began taking share from incumbents, including Worldpay. Starting in 2022, new CEO Stephanie Ferris began to change course, selling a majority stake in Worldpay and using the proceeds to pay down debt, taking leverage down from more than 4 times Net Debt to EBITDA to below 2 times. At the same time, she refocused the business by shifting sales incentives away from new client wins and toward selling additional services to existing customers to make the business stickier and more profitable.
FMI Funds on Henry Schein $HSIC US
Thesis: Despite recent challenges, Henry Schein's market leadership and growth prospects in dental services make it an attractive investment at current valuations.
Extract from their Q2 letter, link here
Analysis: Henry Schein is the largest dental distributor in the world, holding a leading market share position in all of its main geographies, and is also a leader in medical distribution. Henry Schein provides value to both product manufacturers and its customers. Manufacturers benefit from cost-effective access to a highly fragmented customer base, as well as sales and marketing support for products. Practitioner customers benefit from timely access to a broad range of products, a reduction in the number of vendors they need to deal with directly, inventory management services, and equipment servicing. Henry Schein also sells practice management software that is used by ~40% of dental practices in the U.S., which is a very sticky business. We expect continued strong long-term growth in spending on dental services, which will be driven by an aging population, along with a focus on preventive care and demand for cosmetic dentistry procedures. Schein’s stock has been under pressure in the near term because it is still recovering from a cyber-attack that took place late last year, and the macro backdrop continues to be challenged, which has led to muted elective/discretionary sales across the business. The stock is trading well below the market, which we view as attractive given its above-average business quality.
Pershing Square on Hilton $HLT US
Thesis: Hilton's accelerating unit growth and strategic partnerships, coupled with robust revenue streams, position the company for strong long-term earnings growth.
Extract from their Q2 letter, link here
Analysis: Net unit growth continues to accelerate towards Hilton's 6% to 7% long-term growth target supported by new brand concepts including Spark and LivSmart Studios by Hilton. Over the coming quarters, net unit growth will be further boosted by Hilton's acquisition of Graduate Hotels and the onboarding of properties from Hilton's partnership with Small Luxury Hotels of the World (SLH), which is seeing better-than-expected owner uptake with 400 hotels poised to join the Hilton system. The SLH partnership expands Hilton's network into a new category of hotel, while providing incremental sources of value for Hilton Honors members and travelers. While Hilton only earns fee revenue on the proportion of sales that comes through Hilton's channels, the comparatively higher average nightly rate of SLH hotels relative to Hilton's systemwide average means that even modest penetration levels could become a meaningful incremental fee stream to Hilton. Over the medium-term, strong net unit growth combined with continued RevPAR growth (which has compounded at a 3% rate over the last 15 years) and a double-digit rate of growth from Hilton's non-RevPAR fee revenue, which comprises about 20% of revenues, all combine to generate strong high-single-digit revenue growth. Coupled with excellent cost control, high incremental margins, and a substantial capital return program, Hilton should continue to realize robust mid-to-high-teens compounded earnings growth for the foreseeable future.
Madison Funds on Inspire Medical Systems $INSP US
Thesis: Inspire Medical Systems is well-positioned to capture significant market share in the sleep apnea treatment market, driven by strong growth, high margins, and technological advantages.
Extract from their Q2 letter, link here
Analysis: Portfolio activity was de minimis in the second quarter. We initiated positions in Inspire Medical Systems (INSP) and Option Care Health (OPCH). The INSP purchase was based on our work suggesting the total addressable market for INSP’s hypoglossal nerve stimulation (HGNS) device for moderate to severe sleep apnea was quite large, and further refinements to the device would increase the utilization of patients looking for an alternative to CPAP. CPAP, while a very successful form of therapy, has a high non-compliance rate of 35%. The business has great gross margins and significant operating leverage as revenue scales. Revenue growth has been exceptionally strong, averaging 65% per annum over the last five years. The barriers to entry for its product are bolstered by strong clinical data and its head start in the HGNS market. Our work suggests that competitors will be at a significant technological disadvantage when they launch.
Polen Capital on Kinsale Capital $KNSL US
Thesis: Kinsale Capital's specialized insurance focus and strong performance make it a standout in its sector, promising continued growth and market leadership.
Extract from their Q2 letter, link here
Analysis: Kinsale Capital Group is a founder-led specialty insurance company focused on the excess and surplus lines market. Kinsale’s business model emphasizes efficiency, technology, and underwriting expertise. The company delivers above-industry growth and returns, consistently outperforming its peers and taking industry market share. A focus on smaller accounts and hard-to-place risks, together with emphasis on technology-driven operations and disciplined underwriting contribute to Kinsale's competitive advantage. We believe these factors, combined with the company's attractive financial performance and foundation for continued growth, make Kinsale Capital an appealing addition to our Portfolio.
Riverwater Partners on Limoneira $LMNR US
Thesis: Limoneira's undervalued land assets and strategic shift toward more profitable ventures offer significant upside potential, making it a compelling long-term investment.
Extract from their Q2 letter, link here
Analysis: Limoneira, a company with a rich history dating back to 1893, stands out not only for its longevity but also for its commitment to environmental stewardship and sustainable business practices. We believe the company's stock is significantly undervalued, with potential upside of 50-100%. While the business itself might not seem exciting at first glance, its longevity and 15% market share in the US lemon industry—up from just 4% in 2011—speaks volumes about the quality of its operations. However, the primary reason for our enthusiasm is that the market has not appropriately valued their extensive holdings of land and water rights. Limoneira has publicly stated that the value of their agricultural land and water rights is between $450-$550 million. Additionally, the sale of less productive agricultural land to developers, along with their development joint venture, is expected to be worth another $100-$150 million over the next six years. The company also holds close to $100 million in equity in their real estate JV, with $15 million of that expected to be distributed. Considering these assets at fair value, Limoneira's total value could reach as much as $800 million. After subtracting debt, this translates to approximately $41 per share, significantly higher than the current market price of around $20.
Mar Vista on Meta $META US
Thesis: Meta's strategic pivot towards AI and operational efficiency, combined with its global reach, positions it for strong long-term growth in digital advertising.
Extract from their Q2 letter, link here
Analysis: We previously divested from Meta during a period of stagnant advertising growth and the company's initial, significant investment in the metaverse project. At that time, investors appeared complacent to the risks associated with an increasingly competitive landscape, and the Street's robust financial expectations as the company transitioned towards monetizing short-format video (Reels). The subsequent decline in Meta's stock price during 2022 reflected these concerns. Since then, Meta has demonstrably shifted its strategic focus. The company has prioritized operational efficiency, implemented strategies to monetize Reels effectively, and initiated a robust artificial intelligence (AI) development program. We believe the focus on AI represents a more prudent capital allocation strategy compared to the earlier metaverse initiative. Meta AI holds significant potential to unlock substantial monetization opportunities and enhance user engagement, while maintaining tight controls on operating costs. Meta's unparalleled global reach, fostered by its extensive suite of applications, translates to a dominant position within digital advertising. This competitive advantage is further bolstered by the difficulty of replicating Meta's user base. We anticipate that the company's ability to expand its global advertising market share and leverage AI for innovative business ventures should translate into 13-15% intrinsic value growth per annum.
Madison Funds on Option Care Health $OPCH US
Thesis: Option Care Health's leading market position and strong cash flow generation make it a compelling investment in the growing in-home healthcare sector.
Extract from their Q2 letter, link here
Analysis: Option Care is the leading provider of in-home infusion and alternative site infusion services in the U.S., with a dominant 22% share. The market is heavily fragmented with CVS and Optum as the only other players with scale. In-home infusion is gaining share over infusion centers as clinicians and patients value in-home care due to patient convenience and better outcomes. We expect the penetration of the infusion market to continue along historical trends. As a business, Option Care is a prodigious free cash flow generator and it returns capital to its shareholders in the form of buybacks. We admire the company’s recurring revenue profile and its long growth runway. Our intrinsic value for the company is $42/share, which is derived from discounted cash flow analysis.
THB AM on Progress Software $PRGS US
Thesis: Progress Software's strong recurring revenue and strategic acquisitions position it for sustained growth and profitability in the software industry.
Extract from their Q2 letter, link here
Analysis: Progress Software offers a suite of programming languages, development tools, and applications used by clients to run critical business functions. They specialize in data processing, hosting, and infrastructure management. From a strategic perspective, they look to build or acquire digital assets that command high switching costs and implement recurring revenue models. An example of this is their OpenEdge platform, which develops the programming language American Business Language and is the largest component of their revenue. American Business Language is a niche programming language but comprises a significant amount of programming scripts relied upon by the U.S. banking system and other industries. Over several decades, this has earned them steady and predictable licensing income from Fortune 500 clients. They have a highly defensible position, and their platform acts as the foundation for higher potential sales and profit opportunities by cross-selling and upselling newer features. They currently have 80% recurring revenues and retention rates of 99% across their product lines.
FMI Funds on Quest Diagnostics $DGX US
Thesis: Quest Diagnostics' strong market position and cost advantages in clinical testing provide a stable and attractive investment, poised for steady growth and returns.
Extract from their Q2 letter, link here
Analysis: Quest Diagnostics is one of the largest independent clinical laboratory testing companies in the U.S. with a 24% market share of independent lab testing, and its scale gives it a cost advantage. The clinical testing industry sees steady volume growth, helped by increasing test volume due to an aging population, higher prevalence of chronic disease, and advancements in medical technology that continue to expand the scope of clinical testing. The broader lab industry is an $85 billion market, accounting for only 2% of total healthcare spending, yet influencing over 70% of medical decisions. Today, nearly 60% of diagnostic tests are performed in a hospital or at a hospital outreach laboratory. Importantly, performing the same diagnostic test at an independent lab can cost anywhere between two and five times less than performing the same test in a hospital lab. Quest’s average revenue per requisition is under $50. There is a nationwide focus on increasing preventative healthcare and lowering healthcare costs in general. Independent labs are part of the solution, as there is a huge value to be reaped by pushing more volumes through them. In the past, Quest has seen reimbursement challenges from both government and commercial payors. We believe that reimbursement headwinds have largely abated due to all payors recognizing the large cost-benefit of higher volumes flowing through the independent labs. We expect Quest to generate mid-single-digit topline growth and expand margins, leading to high-single-digit earnings growth. With Quest’s dividend and share repurchases, there are prospects for a low-double-digit total annual return, which is attractive given the defensive nature of the business and well-below market valuation.
Madison Funds on Starbucks $SBUX US
Thesis: Starbucks' efforts to address operational challenges and enhance customer experience make it a promising investment, particularly at its current discounted valuation.
Extract from their Q2 letter, link here
Analysis: We purchased shares in Starbucks Corporation and Deere & Company. Starbucks is a global specialty coffee chain with an iconic brand that resonates with consumers around the world. Its loyalty rewards program is a true differentiator, with its unmatched scale (nearly 33 million members in the U.S. alone), and convenient mobile ordering and customization capabilities. The company has struggled over the last handful of years due to the pandemic shutdowns, the lingering traffic declines from workers no longer commuting to city centers, intensifying competition in China, and inflation in wages, freight, and packaging. But its biggest challenge is actually one of its own making. It’s a victim of its own success. Over the last decade, it has led the industry in shifting its business mix from hot beverages to cold beverages, and from in-store purchases to the use of mobile ordering and drive-thrus. These shifts have been hugely beneficial to Starbucks, intensifying customer loyalty, raising the frequency of purchases, appealing to younger consumers, and raising average selling prices. Yet, these benefits came at a very high price. The speed at which these shifts occurred left Starbucks management unprepared to handle the increase in operational complexity and customer expectations of faster service. The result was a noticeable decline in both customer experience and store employee satisfaction. After a couple of years of muddling to find solutions, we believe that the company is now addressing the matter with the urgency it requires. To improve efficiency, Starbucks is refurbishing stores with new equipment and layouts that make it easier to make the increasingly complicated drinks sought by customers. Store staffing levels and schedules are being adjusted to better deal with the changing demand patterns. The company is working to improve the mobile app’s utility, so that it can better estimate wait times, have a better check-out experience, and be used at licensed stores where mobile ordering isn’t currently available. And so on. These initiatives will take time to implement but should yield material improvements. Investors’ focus on the sluggish recent results presented the opportunity to purchase shares at a discount to our estimate of underlying business value.
Heartland Advisors on Stericycle $SRCL US
Thesis: Stericycle's successful strategic transformation and acquisition by Waste Management highlight its enhanced value and strong potential for shareholder returns.
Extract from their Q2 letter, link here
Analysis: Stericycle, Inc. (SRCL), a leading medical waste disposal and compliance company in the country, is an example where self-help has come to fruition. After undertaking a variety of self-help strategies — including divesting 12 non-core operations over roughly six years to focus on its core medical waste disposal and document destruction businesses while reducing debt — Stericycle agreed to be acquired by Waste Management for $62 per share, valuing the deal at $7.2 billion. This is SRCL’s reward for changing its game plan, turning what was a company that sought growth through aggressive M&A into a business focused on organic growth while seeking to optimize margins, capital allocation, and returns on investment. When we wrote about this stock a year ago, we referred to this as a metamorphosis from ‘holding company’ to ‘operating company’ with a better chance for rewarding shareholders. When Waste Management announced the acquisition, Stericycle was well into the process of implementing plans to improve revenue quality (through steps such as implementing better pipeline management processes) and operating efficiency (through modernization and innovation). Before the deal, we had assigned Stericycle a price target of $63 a share, which was near the takeout price. Waste Management seemed to agree with what we concluded: SRCL had been trading at a discount to its own history and to its waste industry peers that operate bond-like business models.
Polen Capital on Tetra Tech $TTEK US
Thesis: Tetra Tech's leading position in environmental consulting, bolstered by government contracts and increasing demand for sustainable infrastructure, makes it a compelling investment as the industry evolves.
Extract from their Q2 letter, link here
Analysis: Tetra Tech is an environmental consulting business that we have followed for several years and is the number one player in water and water infrastructure-related consulting. They are also a significant player in environment, renewable energy, sustainable infrastructure, and international development. The company has a long history of consistent growth and robust returns on capital. About 30% of the revenue derives from long-term projects from the federal government, another 11% from state and local government, and a portion from disaster response and international aid. In our view, this provides some ballast to Tetra Tech's demand, also driven by commercial projects. Overall, between significant infrastructure spending, the potential for widespread PFAS® cleanup, water scarcity, and changing environmental conditions, we believe the demand backdrop for Tetra Tech is improving, creating an attractive investment opportunity.
THB AM on Teva Pharmaceutical $TEVA US
Thesis: Teva's successful transformation and strong financial performance, driven by innovative product launches and market stability, present a compelling value opportunity that is currently undervalued by the market.
Extract from their Q2 letter, link here
Analysis: Teva Pharmaceutical (TEVA), a global manufacturer of generic and branded drugs, outperformed its peers and the broader market in the second quarter due to positive clinical data, successful product launches, and stabilizing generic pricing. Promising first-quarter sales from newer products like Ajovy for migraine and Austedo for tardive dyskinesia and Huntington's continue to highlight its innovative capabilities. TEVA also provided positive phase 3 data on Olanzapine for schizophrenia and received approval for biosimilar versions of Humira and Stelara. These developments, along with a stabilizing generic market, have improved TEVA's financial performance in recent years, allowing it to reduce net leverage to ~3x, with further reductions planned. Despite this progress, many investors undervalue TEVA at a ~7x Enterprise value (EV)/EBITDA, treating it like a commodity-generic company despite its transformation. We continue to hold the security.
Newbridge AM on Trane Technologies $TT US
Thesis: Trane Technologies' focus on energy efficiency and sustainability positions it well to leverage global megatrends, making it a strong long-term growth opportunity.
Extract from their Q2 letter, link here
Analysis: Trane Technologies plc (TT) — Having owned Trane Technologies in the past, we are familiar with the company's business mix, opportunities, and risks. Trane is a leading global manufacturer and servicer of innovative indoor climate systems and refrigerated transport solutions. We view Trane as a high-quality industrials company with significant levers to grow attractively over the near to long term. While the pandemic had accelerated opportunities for Trane to improve indoor air quality across commercial and residential buildings, its objective to help its customers reduce energy costs and reduce emissions is a secular opportunity driven by the megatrends of energy efficiency and sustainability. These global megatrends will continue to be top-of-mind considerations driving companies’ and homeowners’ decisions for air conditioning options. Trane became a pure play following a corporate action in March 2020 that separated its climate businesses from the other assets of Ingersoll Rand. The company is domiciled in Ireland, with U.S. corporate headquarters in Davidson, North Carolina. Seventy-eight percent of Trane's sales are derived from the Americas, while EMEA accounts for 14% of sales and Asia Pacific contributes 8% of sales. Trane is heavily leveraged to commercial sales (~65% of sales) which present opportunities and risks. The clearest opportunity is for building owners to improve the energy efficiency of their HVAC systems through new systems or retrofits using Trane's innovative product and service solutions. Economic slowdowns and/or dislocations in commercial verticals are risks. Data centers, pharmaceutical, healthcare, semiconductors, and education verticals have been areas of recent strength. While investor enthusiasm has focused on Trane's opportunity for high growth potential in data centers, this vertical likely represents a low-double-digit percentage of overall sales. That said, with the increasing use and rapid expansion of AI, Trane will continue to benefit.
Riverwater Partners on Veeco $VECO US
Thesis: Veeco's strategic positioning in the semiconductor industry and its role in AI technology make it a strong contender for sustained growth and long-term value creation.
Extract from their Q2 letter, link here
Analysis: Veeco is an innovative manufacturer of semiconductor process equipment. In simple terms, VECO makes the machines that make the chips that go into everything. VECO traditionally specialized in equipment used to make memory and storage products (DRAM, hard disk drives, etc.), which tends to be a very cyclical business. Because of this, VECO historically traded at a discount to its peers. VECO’s acquisition of Ultratech in 2017 brought laser annealing technology in-house, an important step in the manufacture of leading-edge semiconductors. New design wins at leading semiconductor fabs further solidified VECO's position as a vital supplier across the semiconductor manufacturing landscape. Its ability to produce leading-edge chips going into iPhones, wearables, AI servers (NVIDIA chips), etc. enabled VECO's business to grow through the memory downturn of 2021-22. Today, the insatiable need for storage/retrieval of data used by AI servers has significantly increased the need for memory and storage, which is VECO's legacy business. Combined with VECO's recent entry into annealing and other leading-edge process steps, VECO has become an extremely important supplier to companies across the semiconductor manufacturing spectrum.
Newbridge AM on Vertiv Holdings $VRT US
Thesis: Vertiv's strong positioning in the rapidly growing data center infrastructure market, coupled with its strategic partnerships, offers significant growth potential.
Extract from their Q2 letter, link here
Analysis: Vertiv Holdings Co. (VRT) — Vertiv is a leading critical digital infrastructure technology company that should benefit from strong growth tied primarily to the buildout and expansion of data centers and associated needs of AI technologies, including graphics processing units (GPU). The company’s cooling and power management products have earned significant traction in the marketplace, and we believe Vertiv will continue to gain market share in what is a long-tailed opportunity. The company’s leadership position in direct-to-chip liquid cooling technology has been a competitive advantage. Foremost GPU chip manufacturer NVIDIA has recognized Vertiv as a strong partner. The computing requirements of AI will continue to accelerate data center infrastructure growth, which is still in a nascent stage. Vertiv’s cooling and power management products are vital to run data centers efficiently and safely. About 75% of Vertiv’s revenue is derived from “the data center.” Among its competitors, it is the most exposed to this vertical. We believe the company can grow revenue in the low-double-digit percentage range, while we expect significant margin expansion and share buybacks should allow EPS to grow in the mid-20% range over the next few years.
Rewey AM on Webster Financial $WBS US
Thesis: Webster's strong valuation metrics and potential strategic actions, such as an IPO of its Health Care Financial services segment, present a significant upside opportunity for investors.
Extract from their Q2 letter, link here
Analysis: We see a compelling valuation opportunity in WBS shares, which closed the quarter at $43.59, down 18.4% from the 12/14/23 high of $53.39. WBS is forecast to earn $5.59 in 2024 and increase earnings to $6.27 per share in 2024, for Price/Earnings ratios of 7.75x and 6.91x respectively. WBS is compelling on a price to book and price to tangible book basis as well, at 0.87x and 1.41x respectively, especially given the historical growth CAGRs of 9.9% and 4.3% over the last five years. Our near-term Assessed Fair Value price target for WBS is $60, up roughly 38% from 2Q24 closing levels. This valuation level is under a 10x PE for 2025, which in our view prices in some conservatism for WBS to build reserves if desired. Importantly, any reserve build, in our view, would likely be an income statement impact for WBS, and not a balance sheet issue, and thus we view our PE metrics as very conservative, with upside to a 12x-14x PE ratio if rates are cut in 2025 and CRE fears ebb. Moreover, WBS has the balance sheet strength and the will to keep paying its dividend, which has a 3.69% yield. Lastly, although we don’t incorporate sum-of-the-parts catalysts into our AFV targets, we see significant upside potential and immediate strategic need for WBS to do a 19.9% IPO of its Health Care Financial services segment. HQY, HSA’s largest competitor, trades at a 28.5x PE multiple on this year’s earnings, and it is using its higher priced stock to roll-up smaller HSA competitors. If WBS were to IPO 19.9% of its Health Care unit, it would retain full control of the low-cost deposits, but create a new currency, likely at a significant PE premium to WBS shares, to compete with HQY for acquisitions to grow and defend its market share. Any gain on the sale of these shares would also bolster WBS capital levels, which could be used for share repurchase, reserve building or balance sheet repositioning. While WBS has said it is not an outright seller of this unit, we were intrigued by CEO Cuilla’s comments on the 4Q24 call when he answered the HSA spin/sale question as “we continually evaluate” all lines of business to “maximize economic profit of those business lines and whether or not that happens as a wholly owned activity or joint-venture opportunity”. In our view, where there is smoke and undervaluation, there is fire.
Pershing Square on Universal Music Group $UMG NA
Thesis: UMG's leadership in the music industry and potential for improved monetization through strategic partnerships and pricing power make it a compelling investment despite short-term headwinds.
Extract from their Q2 letter, link here
Analysis: We believe the quarter’s disappointing subscription and streaming growth is due to certain idiosyncratic factors unique to UMG combined with some weakening in the overall economic environment. As evidenced by UMG’s peers’ results, however, music streaming is still growing at a healthy rate. We believe that UMG’s underperformance this quarter will prove to be short-term in nature and does not impact our view of UMG’s medium and long-term growth prospects. We continue to believe that music has a long runway of future growth, as it remains under-monetized relative to history and when compared to other forms of media. We expect the industry to improve monetization through new products and services, with better segmentation of customers including higher-priced tiers and increased subscription rates. UMG’s subscription revenue growth of 7% slowed from 13% last quarter, as the company began to lap last year’s price increases. Slower growth at certain digital service providers (DSPs) offset strong growth at Spotify and YouTube. While quarterly performance can fluctuate, we believe that each of UMG’s core DSPs has a healthy business and that UMG can further drive streaming and subscription growth by working with its DSP partners to improve their offerings. The company is now working with Spotify in launching a premium offering for superfans which UMG estimates could ultimately be adopted by as much as 20% of Spotify’s subscriber base. We believe there is ample room to increase pricing in the coming years as music subscriptions have been kept at flat prices for nearly a decade until some recent increases. As the industry matures in developed markets, ad-supported users who today receive free music can be charged a monthly subscription fee, as is typically the case in the video streaming industry. While each of the major DSPs increased prices for individual subscriptions from $9.99 to $10.99, only Spotify and Deezer have raised prices to $11.99 and only in certain geographies and for certain plans.
Royal London AM on 4imprint $FOUR LN
Thesis: 4imprint's leadership in a fragmented market and efficient business model position it for strong growth and high returns on capital.
Extract from their Q2 letter, link here
Analysis: 4imprint markets, designs and sells a wide range of promotional products for businesses, with items ranging from personalized pens to embroidered apparel. They are the market leader in a highly fragmented market, but nevertheless hold a relatively low market share. This provides them with a significant opportunity to grow through leveraging their substantial marketing scale, increased brand awareness, broad product portfolio, and excellent customer service. Organic revenue growth and margins are impressive, and the capital-light model allows them to generate extremely strong returns on capital despite expanding. The current management team has been in place for over a decade and has a strong track record.
Royal London AM on Raspberry Pi $RPI LN
Thesis: Raspberry Pi's strong brand and expanding industrial market presence position it for long-term growth in the computing sector.
Extract from their Q2 letter, link here
Analysis: Raspberry Pi is a developer of low-cost, high-quality single-board computers. The company is run by a founder-led management team who have an impressive track record and retain a meaningful shareholding. Raspberry Pi is well established in the enthusiast and education market, but they generate a greater proportion of revenues from the industrial and embedded end market, and we expect this to remain the main driver of growth. Engineers have been designing in Raspberry Pi's products to power edge computing applications and to enable industrial connectivity—together providing substantial long-term growth tailwinds to this market. Raspberry Pi has been taking share in this market thanks to their excellent brand, known for highly cost-effective and reliable products, which crucially benefit from both company-developed and user-developed software applications.
THB AM on Rotork $ROR LN
Thesis: Rotork's strong market position and strategic shift towards emerging industries position it for accelerated growth under new leadership.
Extract from their Q2 letter, link here
Analysis: Rotork designs and manufactures actuators and flow control products that help manage the flow of liquids and gases serving the oil & gas, water & wastewater, power, and industrial markets. The company holds a leading market share of 20% in niche mission-critical applications and offers maintenance and support services to ensure efficient and safe operations for their clients. Aftermarket services account for approximately 20% of their sales, providing a good recurring revenue base and cyclical protection. While historically relying on the oil & gas sector, the company is repositioning itself to capitalize on emerging industries such as battery chemical manufacturing, hydrogen storage, and carbon capture systems. Rotork is also seeing strong demand for its products driven by the ongoing electrification of flow control products. Chief Executive Officer Kiet Huynh, who joined in 2018 to manage their fastest-growing division, became CEO in 2022 and has recently onboarded a completely new management team including a new CFO who was the VP of Finance and IT at a major competitor, the Weir Group. Rotork is a high-quality company with a strong market position and a superior margin profile with 45% gross margin and over 20% operating margins. We believe the new management team will accelerate the growth profile of the company in new markets and applications.
FMI Funds on Ryanair Holdings $RYA LN
Thesis: Ryanair's low-cost model and market leadership position it for long-term growth, making its current valuation an attractive entry point.
Extract from their Q2 letter, link here
Analysis: Ryanair is Europe’s largest airline by passenger volume (~20% market share). It employs a very simple, yet unique business model. It flies only point-to-point, books flights almost solely through its website/app, heavily utilizes secondary airports, flies a single-variant fleet, and has a widespread geographic distribution (40 countries and 96 bases), which helps mitigate the impact of strikes or unfavorable regulations that occur in a single geography. Ryanair is one of the only international airlines to post high growth and stellar returns through a full cycle, owing mostly to the company’s obsessive focus around efficiency and agility. Ryanair has created a deep cost advantage that allows it to price fares at levels that would be unprofitable for the vast majority of peers, leading to continued market share gains. The current industry setup is favorable, as the European in-service short-haul fleet is in short supply. Elevated storage rates are unlikely to revert due to aircraft age and restoration costs. Additionally, there are supply chain challenges and large backlogs that are limiting the pace of delivery of new planes. Ryanair’s mid-single-digit capacity growth is locked in through 2034. Recently, its fares have been a bit softer than expected due to a weak consumer in Europe, and capacity hasn’t expanded as quickly as expected due to Boeing delivery delays. We view both issues as transitory in nature. Valuation is well below historical averages and is likely to recover over a 3-5 year time horizon.
Royal London AM on Shaftesbury Capital $SHB LN
Thesis: Shaftesbury Capital's prime London portfolio and post-COVID recovery potential make it a compelling investment at a discount to asset value.
Extract from their Q2 letter, link here
Analysis: Shaftesbury Capital is a real estate company comprised of a unique portfolio in London's West End. The Real Estate Investment Trust (REIT) was formed following the merger of Shaftesbury and Capital & Counties in 2023, and management expects to deliver significant cost synergies as they realize benefits from the merger. Their portfolio benefits from already high occupancy rates and this, combined with an ongoing recovery in central London tourist numbers post-COVID, should support compound growth in rental income. Despite the unique asset status of the portfolio and long-term valuation underpin that this provides, the shares are trading at a significant discount to asset value.
Ross & Van Compernolle on Bank Central Asia $BBCA IJ
Thesis: Bank Central Asia's strong profitability, efficient cost structure, and potential for further growth in Indonesia solidify its position as a top-performing bank in the region.
Extract from their Q2 letter, link here
Analysis: During 2Q24 the entire Indonesian banking sector had a strong sell off, predominantly due to BBCA’s peers. We took advantage of this latest sell off to accumulate a 4% weighting in the best performing bank in the country. As per the latest May 2024 figures, BBCA continues to demonstrate that it is the best bank in Indonesia, YTD May-2024 headline profit at IDR 21.6tn (+12% y-y), funding costs of 1.01%, far below the rest at >2.5%, and given the BI’s upcoming further relaxation on reserve requirements (i.e., by giving a larger incentive for lending towards priority sectors), this could further improve system liquidity, thereby reducing funding costs pressures across banks. BBCA is likely to continue its energizer-bunny form of compounding growth in Indonesia.
Mayar Capital on Vestas $VWS DC
Thesis: Vestas' leadership in wind energy, supported by its strong servicing business and substantial R&D investments, positions it for sustained profitability and resilience in a growing global market.
Extract from their Q2 letter, link here
Analysis: Vestas, now Vestas Wind Systems, was founded as the Second World War was ending and started out as a general manufacturer of steel goods, from household appliances to cranes and hydraulic equipment. After a quarter of a century, during the energy crises of the 1970s, the company produced its first wind turbine. The company decided to exclusively manufacture wind turbines from the 1980s and today stands as the largest western producer of wind turbines, with a cumulative 177 GW of wind power installed across the world. This is ahead of GE (120 GW), Siemens Gamesa (114 GW), and China's Goldwind (~113 GW). Today, wind makes up just 10% of our global electricity mix and just 15% of the global energy mix, with almost 1,050 GW of worldwide installed capacity. However, this is growing quickly as we try to decarbonize our energy system. Based on announced pledges by governments, wind capacity will need to grow by 6.8% a year to almost 6,000 GW by 2050, equivalent to adding 187 GW per year over the next 26 years. To get to Net Zero, Vestas estimates that wind capacity will need to grow to 7-8,000 GW by 2050. One important feature of the wind market is the extent of Chinese isolation thus far. China is building a considerable amount of wind capacity—with two-thirds of global new capacity being built in the country—yet it is being built almost exclusively by Chinese companies like Goldwind, Envision, and Windey. For context, less than 5% of Vestas' global installed capacity is built in China. Vestas is a classic industrial in that it comprises two distinct but related businesses. Firstly, the ‘original equipment’ business, in which Vestas builds, delivers, and installs wind turbines for clients around the world. Today, this business makes up the greater part of Vestas’ revenues and accounted for over three-quarters of revenues in 2023. The remainder of Vestas’ business is in servicing these wind turbines to ensure they remain in good condition. However, the ‘original equipment’ business is a difficult one. The production and installation of massive equipment in remote locations across the world can be challenging, and Vestas—like other wind turbine producers—has faced a number of challenges over the last few years. These include exploding costs of steel, logistics services, and energy, which the company struggled to immediately pass on to customers. Vestas saw the cost with each delivered MW of wind turbine power increase by 35% from the summer of 2021 to the end of 2023, while the average revenue per MW delivered didn't increase meaningfully until the second half of 2023, when, after almost two years of losing money, the original equipment business became profitable again. If this all sounds like more trouble than it's worth, it's important to realize that the real prize for Vestas lies within the long-term contracts it signs to maintain and service those turbines it has installed. At present, the servicing business accounts for a minority share of revenues as Vestas focuses on the vast market opportunity in the installations market. However, we expect the payoff in the future to be high, as this business is more profitable, less resource-intensive, and much more stable. If Vestas were to stop growing today—that is, stop installing new equipment—the business would look more like an annuity-like set of recurring revenues with stable and high margins. In our view, this business has great competitive advantages and is where a significant portion of Vestas’ value lies. Vestas has a number of components to its economic moat which has allowed it to generate pre-tax returns on capital of 23% over the last two decades. This includes scale (as the largest non-Chinese developer of turbines) and know-how as a producer with a long history in the business which has invested almost EUR 2 billion in R&D in the last five years alone. As with all heavy industry, there are cyclical factors and other structural worries that long-term owners will have to endure. We will always need to be wary of Chinese competition, but so far western governments have been keen to stop the Chinese entering the market. If Vestas can continue to invest in its products, manage the intricacies of the installation business, and execute on its servicing business, the company should continue to produce attractive economic returns well into the future.
Here are some additional Q2 letters :
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