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Ariel Investments on Affiliated Managers Group $AMG US
Thesis: AMG’s unique business model, which balances independence with scale advantages, makes it an attractive opportunity in the boutique asset management space
Extract from their Q2 letter, link here
Analysis: We initiated a new position in boutique asset manager, Affiliated Managers Group, Inc. (AMG). AMG purchases meaningful equity interests in boutique asset management firms and in return receives a fixed percentage of revenues. The company’s partnership approach allows for its affiliates’ management teams to own significant equity stakes while maintaining operational independence. AMG’s size and scale allow the company to be the leading destination for growing boutique firms addressing succession issues and/or seeking assistance in marketing, distribution, and product development. In our view, investors currently underappreciate the company’s active and alternative-asset affiliate business model.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Alphabet $GOOGL US
Thesis: Alphabet’s AI leadership, coupled with its unmatched scale and financial discipline, offers a compelling risk/reward for long-term investors
Extract from their Q2 letter, link here
Analysis: We also added to Alphabet. The company reported solid financial results with first quarter revenue growth of 15% year-over-year, driven by 14% growth in search, 21% growth in YouTube, and 28% growth in cloud (which accelerated from 26% growth in the fourth quarter). The company has also increased its cost discipline efforts, which drove operating margins to 31.6% (compared to 25% in the first quarter of 2023). With regards to GenAI, while we are cognizant of the potential risks to the dominance of search, we believe that on the range of outcomes, Alphabet remains well positioned through its massive user distribution (9 products with over 1 billion users each), long-standing AI research labs (DeepMind and Google Brain), top AI talent, a solid cloud computing division in Google Cloud, and deep pockets for investing in AI. During the quarter, Alphabet also held its annual I/O conference, where it provided an update on its efforts in AI including: Gemini is now used by 1.5 million developers; model quality is expanding rapidly (e.g., context window is now 2 million tokens of length); the new genomics model, Alphafold 3 can predict structures of molecules and potentially accelerate drug discovery; new TPU6 AI chips has shown a 4.7 times improvement in compute performance compared to the prior generation; and Gemini for workspace is showing early data on a 30% increase in user productivity. Alphabet also has real value in assets such as Waymo, which are not factored into valuation today (and are potentially included at a negative valuation as they currently generate losses, hurting EPS). We continue to believe that the current valuation of Alphabet presents an attractive risk/reward for long-term owners of the business and have therefore increased our position.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Apple $AAPL US
Thesis: Apple’s growing ecosystem, powered by AI and a massive base of loyal users, positions the company for renewed growth and sustained value creation
Extract from their Q2 letter, link here
Analysis: This quarter we re-initiated a position in Apple Inc., a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shifts, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on-device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.
Check here for the latest results, quarterly call and analysts' estimates.
Riverwater Partners on Aris Water Solutions $ARIS US
Thesis: Aris Water Solutions’ sustainable water recycling model and strong infrastructure provide a significant competitive advantage in the oil and gas industry
Extract from their Q2 letter, link here
Analysis: We also added Aris Water Solutions (ARIS), a company providing water handling and recycling solutions for the oil and gas industry. ARIS gathers, transports, and, unless recycled, handles produced water generated from oil and natural gas production. It also develops and operates recycling facilities to treat, store, and recycle produced water. ARIS’ model is inherently based in sustainability. Their focus is to recycle water and reuse it multiple times. In fact, ARIS reduced groundwater withdrawal by more than 270 million barrels in the past 3 years. The company also has a strong competitive moat as their pipeline infrastructure took years to build out and would be expensive and time-consuming to duplicate.
Check here for the latest results, quarterly call and analysts' estimates.
Conestoga on Energy Recovery $ERII US
Thesis: Energy Recovery’s innovative pressure exchanger technology, vital for addressing global water scarcity, offers strong growth potential amid rising demand for energy efficiency
Extract from their Q2 letter, link here
Analysis: Energy Recovery, Inc. (ERII): ERII is a global leader in energy efficiency technology. ERII's main product is the pressure exchanger (PX), which has become a platform to service numerous industries, including desalination, wastewater, and refrigeration. The PX recycles energy within a system with 98% efficiency, leading to savings of up to 60% in energy usage. ERII’s primary market, desalination, has strong secular tailwinds as water scarcity is an increasingly critical issue for many countries globally. The United Nations estimates there will be a 40% gap in freshwater supplies by 2030.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Equity Residential and AvalonBay Communities $EQR $AVB US
Thesis: Equity Residential and AvalonBay’s high-quality portfolios and attractive valuations position them for strong long-term returns
Extract from their Q2 letter, link here
Analysis: In the second quarter, we increased the Fund’s REIT exposure to best-in-class multi-family owners/operators Equity Residential and AvalonBay Communities, Inc. Our meetings with each management team supported our view that both companies are led by astute executives that are highly focused on driving value creation for shareholders. Equity Residential and AvalonBay each own approximately 80,000 apartment homes primarily in coastal markets. We believe these portfolios offer superior long-term growth prospects due to favorable long-term demographic trends driven by strong population and job growth in their key geographic markets, an undersupply of housing in the U.S. with outsized cost of ownership versus renting in their respective markets, a high-earning, well-employed resident profile with attractive rent-to-income ratios allowing for future pricing power, and low leveraged balance sheets which may present attractive opportunities for accretive external growth. Despite strong performance in the second quarter, we continue to believe that shares of Equity Residential and AvalonBay are attractively valued relative to private market values and each company owns and operates excellent and relevant real estate that should perform well over the long term.
Check here for the latest results, quarterly call and analysts' estimates.
RS Investments on Fortrea $FTRE US
Thesis: Fortrea’s turnaround potential, led by new leadership and strategic cost-cutting, offers a promising long-term investment despite short-term challenges
Extract from their Q2 letter, link here
Analysis: Fortrea (FTRE), a leading global contract research organization (CRO), underperformed during the second quarter relative to the health care sector and the market. Prior to Labcorp’s acquisition in 2014, Covance (former name) was a stand-alone CRO. Under Labcorp, the CRO business languished under half a dozen different business leaders. We saw the potential for improvement with the 2023 appointment of Tom Pike, former CEO of Quintiles, and became investors shortly after the spin-off. Performance since then has been mixed, including challenging second-quarter performance, most notably book-to-bill of 1.1x and mid-single-digit EBITDA margins, alongside a delayed 10-Q filing and high debt levels. Since the quarterly results in May, Fortrea has announced asset sales and receivables factoring, yielding a total of $575 million, mostly used to reduce debt. Despite recent setbacks, we remain confident in Fortrea’s long-term value creation potential if they can stabilize growth, make more efficient use of their infrastructure, and exit costly transitional service agreements (TSAs) from the former parent. We anticipate mid-teens EBITDA margins within 12-24 months and high teens to 20% over a longer time horizon. Fortrea’s latent earnings power, path to deleveraging quickly, and the track record of senior leadership give us conviction in adding to the position during recent weakness.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on Genpact $G US
Thesis: Genpact’s expertise in specialized BPO services and strong cash flow generation make it an attractive, undervalued opportunity despite industry challenges
Extract from their Q2 letter, link here
Analysis: We made one new purchase in Q2, adding Genpact, a business process outsourcing (BPO) company. BPO companies are third-party providers of outsourced business services. Common areas that companies outsource are HR, finance/accounting and customer care. Other areas seeing strong trends toward outsourcing are supply chain, process automation and procurement. BPO companies need to build sufficient scale to compete, which leads them to specialize in specific service areas. Genpact has built domain expertise in a few select verticals where it can be No. 1 or No. 2, focusing on financial services, consumer, healthcare and high-tech manufacturing industries. Companies seek to partner with Genpact to improve productivity, increase competitiveness and drive better business outcomes. Genpact has over 129,000 employees in 35+ countries to enable its offerings. At its all-time highs in early 2022, Genpact shares were selling in the low $50s at around 22X FY21 earnings. Today, they sell in the low $30s at a 10X multiple. Though the business has performed well—continuing to generate free cash flow and grow earnings—the market has become concerned about Genpact’s future. Outsourcing is a tough industry. It’s labor intensive, which can mean less pricing power, high rates of attrition and risks of labor arbitrage shifts, plus there is the need for continual technology investment. AI is also a risk. However, technological-driven automation isn’t new to the industry. Technology is continually replacing low-value work. However, Genpact is not a commoditized body shop. The company has domain expertise, its contracts are long-term in nature, it provides services that are essential, and the tailwind of specialization via outsourcing appears to have a long runway. The business generates a lot of free cash flow, much of which is being returned to shareholders via dividends and share buybacks. At 10X enterprise value to EBITDA for a business that should continue to grow, we believe odds are tilted in our favor.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Ibotta $IBTA US
Thesis: Ibotta's strong partnerships, especially with Walmart, and its scalable, profitable cashback model position it as a leader in the digital rewards space, poised for significant growth
Extract from their Q2 letter, link here
Analysis: We initiated a position in Ibotta, Inc. in its April IPO. Ibotta offers cashback rewards on various purchases through its Ibotta Performance Network (IPN) and direct-to-consumer app. Ibotta partners with retailers (e.g., Family Dollar and Kroger) who want to offer loyalty programs, and earns money from brands (e.g., Nestle and Unilever) who want to offer digital cashback rewards on their products. For example, brands find these cashback rewards useful as a measurable way to attract customers away from private label brands and launch new items. Ibotta gets paid on a measurable basis, averaging $0.80 per cashback redemption. In total, Ibotta serves over 2,400 brands, and through its third-party retailer network, reaches over 200 million potential end consumers (“redeemers”). Given the scalability of offering online rewards across its platform, Ibotta has a highly profitable and cash flow generative model, with 70% incremental margins in its third-party business. Ibotta was founded in 2011 as a direct-to-consumer app in a highly competitive space. In 2021, Ibotta began powering cashback rewards programs with the IPN for large third-party retailers, which is a much faster growing space and is already half of Ibotta’s revenue today. To date, Ibotta has credited American consumers with $1.8 billion in cash rewards through its network. With the IPN, Ibotta competes in a very large, digital total addressable market, and we believe that Ibotta, which enables effective return on brand spending, has significant room to grow from a base of $320 million in revenue in 2023. Competitively, Ibotta is the clear leader in providing consumer rewards/incentives for large retailers, with more meaningful scale, better technology, and sharper focus than legacy competitors. We believe it would be very difficult to replicate Ibotta’s relationships with 2,400 brands and 85 retailer point-of-sale integrations offering item-level transaction data. We also believe this is a market where there should be a winner that takes most/all, and we believe Ibotta is on track to be that winner. While this shift will take time, Ibotta’s deep partnership with Walmart should be a catalyst. Ibotta has signed an exclusive multi-year deal to power all cashback rewards for Walmart, which we believe will expand its redeemer base substantially and attract other retailers who look to follow Walmart’s lead. At the end of May, Ibotta reported their first quarter as a public company: revenue grew 52% year-over-year to $82 million and adjusted EBITDA 28%. However, Ibotta’s second quarter guidance was a bit soft (versus expectations), which we believe is because Walmart and other retailers are still ramping and remain far from maturity. With the stock trading down, we find Ibotta’s valuation attractive and added to our initial position.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Inspire Medical Systems $INSP US
Thesis: Inspire Medical’s innovative sleep apnea device and large, underpenetrated market present a compelling growth opportunity, especially amid potential limitations of GLP-1 therapies
Extract from their Q2 letter, link here
Analysis: We bought shares of Inspire Medical Systems, Inc., a medical device company which offers a treatment for moderate to severe obstructive sleep apnea called hypoglossal nerve stimulation. Obstructive sleep apnea (OSA) is a common sleep disorder caused by relaxation of the airway muscles and obstruction of the airway, which interrupts normal breathing during sleep. First-line therapy for OSA is continuous positive airway pressure (CPAP), which requires the patient to wear a mask and an air flow generator delivers air pressure to the patient’s throat to keep the airway open. Compliance rates with CPAP are low because many patients find the mask cumbersome or cannot tolerate the pressure. Inspire offers a small surgically implantable device that delivers mild stimulation to the patient’s hypoglossal nerve which causes the patient’s tongue to move forward, opening the airway. Since receiving FDA approval in 2014, Inspire’s device has gained rapid adoption, growing from $8 million in sales in 2015 to an estimated $783 to $793 million in 2024. For context of the market opportunity for Inspire, there are 8 million CPAP users in the U.S., and only 24,000 Inspire procedures were done in 2023 (with 60,000 done since the product launched). During the quarter, the stock came under pressure due to final data published in June from Eli Lilly and Company’s SURMOUNT-OSA trial. The trial showed that Lilly’s GLP-1 drug (tirzepatide) reduced OSA in adults with obesity by up to 62.8%, and up to 51.5% of participants met the criteria for disease resolution. In our view, Lilly’s tirzepatide and other GLP-1 medicines will have an impact on the OSA treatment paradigm. However, we think that even if some patients fall out of Inspire’s sales funnel after taking a GLP-1, many new patients will enter the funnel. This is because patients who have an extremely high body mass index (BMI) are not currently considered candidates for Inspire therapy, and if those patients lose enough weight with a GLP-1, they can become candidates for Inspire. We also think the total addressable market (TAM) opportunity for Inspire is large and underestimated. One of the principal investigators in the SURMOUNT-OSA study estimated that 1 billion people around the world have OSA. Inspire management has estimated TAM to be at least 500,000 patients in the U.S. alone, and the company’s penetration rate is less than 10%. Finally, we also note that not everyone can tolerate a GLP-1 medicine (particularly the high doses used in the study), and to maintain the effect on OSA patients would need to stay on the drug forever. Given their high costs, insurance companies could place limits on their use. Inspire trades at a compelling valuation (under four times 2025 EV/Sales). Axonics and Silk Road were acquired for far higher multiples. This is too cheap for a company growing revenue rapidly (over 20%) in a hugely underpenetrated market with high (84%) gross margins. Given all these factors, we think Inspire offers a terrific investment opportunity.
Check here for the latest results, quarterly call and analysts' estimates.
Artisan Partners on LKQ $LKQ US
Thesis: LKQ’s dominant market position, consistent cash flow, and attractive valuation present a compelling opportunity for value investors
Extract from their Q2 letter, link here
Analysis: LKQ is the dominant player in salvage/aftermarket collision parts distribution in North America, with over 70% market share. In addition to continued cost inflation, lower-than-expected collision claims in North America due partly to a mild winter resulted in disappointing quarterly earnings. What was already a cheap stock when we initiated our position in January of this year has become even cheaper. At a 10X P/E, shares trade at a distinct discount to their historical 10-year average of 14X and are also cheaper relative to LKQ’s auto parts retailer peers, which arguably have similar long-term growth profiles. LKQ isn’t a fast-growing business, but it can grow 2% to 4%, and given its dominant market share and mid-teens return on tangible capital, we believe it should trade at a higher valuation. Over the last decade, LKQ has also become the largest mechanical parts distributor in Europe. As is the case in North America, independent European mechanics value LKQ’s reliable distribution and competitive pricing. The European business has improved operationally over the last five years as LKQ has focused on the integration of its various acquisitions to drive margin and free cash flow improvements. LKQ operates in end markets with limited cyclicality as 90% of revenues are tied to non-discretionary spending and reliably has strong free cash flow generation. The company also meets our requirement for a sound financial condition as its debt load is manageable at 2X EBITDA due to its attractive free cash flow. We added to our position on weakness.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Loar Holdings $LOAR US
Thesis: Loar’s strategic focus on high-margin aerospace parts and disciplined M&A approach positions it for sustained growth and profitability
Extract from their Q2 letter, link here
Analysis: We initiated a position in Loar Holdings Inc. as part of the company’s IPO. Founded in 2012, Loar is a niche aerospace parts manufacturer with an 85% proprietary portfolio and over half of revenue focused on the high margin aftermarket channel. Loar’s business comprises roughly 15,000 products with around 1,400 employees and 12 manufacturing locations. We believe Loar can grow revenue 10% organically supplemented by a disciplined acquisition strategy that has allowed the integration of 16 acquisitions over the past 12 years. This exceptionally strong M&A franchise has been integral to the 38% sales and 46% EBITDA CAGR since inception. Given secular aerospace tailwinds, strength of the business model, and a management team with over a decade of proven success, we see a long runway of growth ahead for the company to compound EBITDA organically in the mid-teens with a potential double-digit addition from M&A.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Martin Marietta Materials $MLM US
Thesis: Martin Marietta’s dominant position in aggregates, coupled with strong pricing power and accelerating infrastructure spending, positions it for sustained growth
Extract from their Q2 letter, link here
Analysis: In the second quarter, we acquired shares in Martin Marietta Materials, Inc., a leading producer of aggregates (77% of gross profit) and specialty products. The company’s products are sold and utilized in infrastructure projects such as highways, as well as residential and non-residential construction. Martin Marietta has local leadership positions across its footprint. We believe aggregates are an attractive business for two main reasons: high barriers to entry limit new competition, as permits to open new quarries are difficult to obtain, and the approval process typically takes 5 to 10 years. Martin Marietta has more than 75 years of aggregates reserves at its current extraction rates. Consistent pricing power through cycles: Aggregates producers have historically enjoyed great pricing power owing to the difficulty in opening competing new quarries, the limited substitutes for quality aggregates, and a high weight-to-price ratio that makes transportation expensive relative to the cost of the material. In the last 30 years, pricing of aggregates has increased, on average, 4% per year. We believe the multi-year growth prospects for Martin Marietta are especially attractive for four reasons: Infrastructure-related spending is accelerating and will be elevated over the next several years. The Infrastructure Investment and Jobs Act allocates significant sums towards new and existing infrastructure spending through 2026. In addition, outsized state-level infrastructure spending will drive demand across the company’s footprint. Private construction spending (residential and non-residential) may accelerate over the next several years. Residential construction may remain strong owing to an acute need for more new homes following a 15-year period of underbuilding relative to the demographic needs of our country. Non-residential spending may accelerate to meet the real estate needs in growing areas such as logistics warehouses, data centers, and manufacturing. Pricing power has been exceptionally robust in response to inflationary cost pressures, and we expect price growth to remain strong. Margin expansion opportunity. Management remains focused on improving productivity and maximizing unit-level profitability, with the goal of further expanding margins.
Check here for the latest results, quarterly call and analysts' estimates.
Conestoga on MSA Safety $MSA US
Thesis: MSA Safety’s leadership in worker safety products, combined with strong demand in key segments, positions it for sustained earnings growth
Extract from their Q2 letter, link here
Analysis: MSA Safety, Inc. (MSA): Founded in 1914 and based in Cranberry, PA, this company has as its core mission to protect people at work. The company develops, manufactures, and sells products that enable a safe and healthy environment for workers. MSA is a market leader in its segments, has a 20% ROE, is underleveraged, and should grow its bottom-line earnings by over 10%. We purchased the stock after multiple channel checks reinforced the view that MSA is gaining share in Firefighter Equipment and that they should see strong demand in Fixed/Portable Gas Detection areas. MSA should also benefit from a new suite of connectivity products as well as efforts to improve margins in Europe.
Check here for the latest results, quarterly call and analysts' estimates.
RS Investments on Mueller Water Products $MWA US
Thesis: Mueller Water Products is positioned to capitalize on the aging U.S. water infrastructure, with improving margins and ROIC driving future growth
Extract from their Q2 letter, link here
Analysis: Mueller Water Products (MWA) manufactures valves, hydrants, and brass components utilized in infrastructure and residential water systems. With aging water networks across the United States, the company is benefiting from increased spending by municipalities and states to upgrade their water infrastructure. In addition to this secular driver, the company is at the end of a capital expenditure cycle which modernized many of Mueller’s manufacturing facilities. This past quarter we started to see the impact of this spend as margins improved meaningfully and, as the improved and new plants ramp up volumes, MWA should continue to demonstrate an improved cost structure resulting in increased return on invested capital (ROIC). We believe that Mueller is in the early part of this journey toward higher ROIC and continue to hold the stock as the market is starting to recognize a structurally improved business with secular tailwinds.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Procore Technologies $PCOR US
Thesis: Procore’s dominant position in construction management software, combined with a vast market opportunity and innovative pricing model, sets the stage for sustained growth and margin expansion
Extract from their Q2 letter, link here
Analysis: We initiated an investment in Procore Technologies, Inc. during the quarter. Founded in 2002, Procore provides cloud-based construction management software that helps general contractors, subcontractors, and asset owners manage every step of the construction process. Procore’s product suite includes project execution (storing and updating blueprints, designs, work orders and project schedules in a single system of record), pre-construction (managing bids, permitting, and approvals), workforce management (scheduling worker hours and recording safety compliance), financial management (budgeting and invoicing), and data analytics. Together these products help contractors execute projects more efficiently, plan more accurately, avoid costly rework, improve worker safety, and generate better margins. This has led to exceptionally low customer churn. Procore serves a large and growing addressable market – annual construction volume exceeds $2 trillion in the U.S. alone – that is still in the early innings of digitization and technology adoption. The company has a leading market share in the sector, with more than 16,500 construction firms and asset owners using its software to manage billions of dollars of annual project volume. Yet Procore is still only 12% penetrated in terms of U.S. construction volume and 2% penetrated internationally. We believe the company has several competitive advantages that will drive further share capture and strong growth. First, Procore is the only cloud-native technology vendor that addresses all stages of the project life cycle with a single, integrated interface and data model. Second, Procore was the first vendor to price its platform using a “take-rate” model, charging a percentage fee against its customers’ total construction volume. Compared to seat-based license models offered by many competitors, this approach has encouraged far more industry practitioners to trial and use Procore products. As of last year, over 500,000 collaborator companies were interacting with its product, driving a strong pipeline for new customer wins. We see a long runway for growth through new customer additions and expansion in existing accounts. The company has maintained low to mid-double-digit revenue expansion rates for existing customers by managing more project volume and by cross-selling additional product modules. Recent product innovations like Procore Pay (managing payments for the various vendors and subcontractors on a given project) and geospatial mapping (for larger civil engineering projects) should improve the company’s wallet share over time. Procore is cash flow positive today and has been increasing its margins meaningfully over the past two years. We think the business can continue to grow at a healthy rate while further expanding free cash flow margins to north of 20% as it benefits from market share capture, higher take rates, and operating leverage. This should lead to good earnings growth and bode well for the stock long term.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Samsara $IOT US
Thesis: Samsara’s innovative cloud-native platform and expansive data-driven AI create a strong foundation for long-term growth in the connected asset market
Extract from their Q2 letter, link here
Analysis: We initiated a position in Samsara Inc. during the quarter. Samsara provides a cloud software platform for commercial vehicle telematics, video-based driver safety, driver workflow automation, and industrial equipment monitoring. Its software collects and analyzes data from sensors and cameras installed in its customers’ commercial trucks, construction equipment, warehouses, and other assets, helping companies visualize and improve the state of their operations. More than 17,500 customers in the transportation, field services, construction, utilities, and other industries have adopted Samsara, and last year the company became one of the fastest software companies ever to reach $1 billion in annual recurring revenue (ARR). Samsara has been winning share from competitors in the $51 billion connected fleet software market due to its superior cloud native architecture, ability to address multiple use cases in a single platform, and its rapid product release cycle. As Samsara continues to expand its connected asset base, it is building an unmatched data asset that it is using to drive better outcomes for its customers. Capturing more than 9 trillion data points from over 44 billion hours of camera footage across millions of miles driven, Samsara uses AI to help companies optimize their vehicle routes, prevent accidents, improve asset utilization, reduce fuel expenses, and lower insurance premiums. In 2023, across its customer base, the company prevented 200,000 accidents and reduced carbon emissions by 2.3 billion pounds. We see a long runway for growth as Samsara expands in existing accounts and wins new logos. Samsara is less than 50% penetrated in its existing customers’ vehicle fleets and has a significant opportunity to cross-sell newer non-vehicle products (which already account for $125 million of ARR) into its base. The company has also increased its customer count by more than 20% year-over-year every quarter and identified hundreds of thousands of potential new accounts to win. As it has scaled, Samsara has delivered healthy operating leverage, and we think free cash flow margins can ultimately expand beyond 20% longer term.
Check here for the latest results, quarterly call and analysts' estimates.
Heartland Advisors on Science Applications International $SAIC US
Thesis: SAIC’s new management, focused on boosting government contracts and leveraging capital strategies, positions the company for potential turnaround and value growth
Extract from their Q2 letter, link here
Analysis: We see a similar opportunity in Science Applications International Corp. (SAIC), which offers a range of IT services to its customers. SAIC has faced recent challenges with lower-than-average government contract renewals and lower demand for their IT services, prompting the appointment of new management to address business development concerns. We purchased shares of SAIC in the second quarter on the premise that the new management team, led by a CEO previously with Microsoft, will be able to succeed in two key self-help efforts: increasing the volume of SAIC bids and improving the firm’s below-average industry "recompete rates," which consist of rebidding on previously awarded expiring government contracts that are typically 5 years in length. These efforts, coupled with internally focused capital allocation strategies that include dividend growth and active share buybacks, are likely to drive price appreciation for the stock. In the meantime, SAIC shares trade at a modest 13 times forecast earnings with a strong 8% free cash flow/enterprise value yield. Additionally, SAIC’s newly appointed CEO and CFO purchased shares during the quarter — suggesting to us the management team is confident in future prospects at SAIC.
Check here for the latest results, quarterly call and analysts' estimates.
Baron Capital on Tempus $TEM US
Thesis: Tempus AI’s powerful combination of AI-driven diagnostics and an unmatched clinical-genomic data platform positions it to revolutionize personalized medicine and drive significant growth
Extract from their Q2 letter, link here
Analysis: During the quarter, we established a new position in Tempus AI, Inc., an intelligent diagnostics and healthcare data company. Founder/CEO Eric Lefkofsky says, "Tempus was designed to bring AI to diagnostics, because diagnostics sit at the epicenter of life and death decisions. Physicians rely on test results at each pivot point. When that data is connected to medical records for the patient for whom it was ordered, we have the necessary ingredients to contextualize the diagnostic and personalize it, resulting in more tailored and optimal therapies." Tempus has two synergistic business units: Genomics and Data & Other. Within the genomics business, Tempus provides diagnostic tests, particularly for cancer treatment selection. The company’s labs sequence the tumor’s genome and transcriptome (gene expression) and can help oncologists select the best treatment for their patients. Compared with other cancer diagnostics companies, Tempus has industry-leading tests in terms of breadth, accuracy, and turnaround time and it is the only lab that provides data on how other patients with similar clinical profiles have fared on different therapies. We think the cancer treatment selection sequencing market has a long runway for growth and Tempus is well positioned as a leader in the field. There are approximately 700,000 patients in the U.S. diagnosed with metastatic cancer each year and each patient could benefit from several therapy selection tests (solid and liquid biopsy, as well as testing upon recurrence). As access and reimbursement improves, we think cancer therapy selection diagnostics could address a $10 billion total addressable market (TAM) in the U.S. alone. We believe that Tempus’s diagnostic business could more than triple in size and exceed $1 billion in revenues by 2030. The genomics testing data also feeds into Tempus’s value as a data company. Tempus has amassed a huge (over 200 petabytes) proprietary multimodal dataset that combines clinical patient data (which includes clinical records and imaging data from two-way collaborations with health systems) with genomic testing data from the Genomics business. Tempus’s dataset includes 7.7 million clinical records, over 1 million imaging records, over 910,000 matched clinical and molecular dataset profiles, and over 970,000 samples that were sequenced. In addition to using this data to empower more intelligent diagnostics, Tempus licenses this data to biopharmaceutical companies who use it to design smarter clinical trials and identify potential new drug targets. Tempus works with 19 of the top 20 pharmaceutical companies in this capacity and has disclosed 9-figure deals with three biopharmaceutical companies. In total, Tempus has $620 million in remaining contract value and an additional $300 million in opt-ins, compared to approximately $169 million in Data revenues in 2023. Based on our discussions with customers, they see immediate value using the data to better define biomarkers and stratify patient populations. We think this proprietary dataset is unique and would prove challenging for competitors to replicate. We also believe that it brings meaningful value to biopharmaceutical R&D and are therefore willing to underwrite a long runway for growth for Tempus as more customers take advantage of its data in their drug development programs.
Check here for the latest results, quarterly call and analysts' estimates.
Davis fund on Tencent $TME US
Thesis: Tencent’s integration of generative AI across its social media, gaming, and cloud platforms positions it to capitalize on AI advancements, offering substantial growth potential
Extract from their Q2 letter, link here
Analysis: Within its social media platforms, we expect Tencent to see meaningful gains from AI-driven ranking and recommendation improvements in areas like Video Accounts, the company’s short-form video product that has become a core use case within WeChat. Ranking and recommendation improvements drive increases in user engagement as well as advertising efficiency across the platform via better targeting and personalization. In addition, generative AI will make it easier for content creators and advertisers to create engaging content and advertisements, further increasing the monetization potential of its platform. As the most popular messaging app in China, WeChat also provides Tencent a massive distribution advantage that will enable it to quickly launch and scale any breakthrough generative AI products that might develop over time. One example is with search, where we think the company has an opportunity to leverage generative AI technology to gain substantial share in the search market. Generative AI also has obvious applications in the company’s video game business. We expect Tencent will utilize generative AI to create more engaging video games by, for example, making non-player characters more interactive. In addition, generative AI will help reduce the cost and timelines for creating video game art and design assets (e.g., virtual worlds) which today is still a labor-intensive process. Similarly, Tencent should see cost and development time reductions when it comes to making long-form videos in its TV and movie studio business. Finally, as one of the leaders in China’s cloud computing market, the company also stands to benefit from its cloud customers building and adopting AI-based applications, which potentially could drive increased usage of Tencent’s cloud infrastructure offerings dramatically over time. With plenty of opportunities to enhance its business with AI, and no major businesses that look vulnerable to AI-driven disruption, Tencent looks like a clear AI winner across the board.
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Artisan Partners on Vail Resorts $MTN US
Thesis: Vail Resorts’ dominant position, enhanced by advanced pass sales and strategic investments, offers stability and long-term growth potential despite seasonal challenges
Extract from their Q2 letter, link here
Analysis: We also added to our existing position in Vail Resorts, a premium skiing, lodging, and resort company, that has fallen by nearly 25% over the past year. Mother nature didn’t cooperate this past winter as there was below-average snowfall early in the ski season and highly variable temperatures. That contributed to reduced visitation, which had second-order effects on retail, rental, and lodging activity. On the positive side, growth in advanced pass sales drove low-single-digit growth in lift revenues, while labor costs were well controlled. Vail is one of a couple dominant players in an industry that benefits from high barriers to entry due to the fixed supply of suitable mountains. Of course, this is a highly seasonal business, dependent on appetite for ski vacations and the right weather conditions, but the company has made strides to improve the business model by increasing the percentage of its business from the advance commitment pass product, which transforms the business from one of uncertainty and weather dependency to one of greater visibility and predictability. This provides stability and the ability to spend on capex during the off-season to improve the guest experience, as well as pursue additional footprint expansion.
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Acatis on Veeva Systems $VEEV US
Thesis: Veeva Systems' robust position in cloud-based healthcare solutions, combined with a diversified product offering and strong cash flow, positions it for continued high-margin growth
Extract from their Q2 letter, link here
Analysis: Veeva Systems: Veeva is a leading cloud-based software company that specializes in biosciences and healthcare. The company, which was founded in 2007 and is still managed by the owners, services more than 1,000 customers; moreover, four out of five pharmaceutical sales employees use Veeva’s CRM system. The company continuously expands its product range, and more than half of all customers use at least three different products. This should enable the company to continue its high-margin growth rate with high free cash flows in the future. Because of the corrections currently taking place in the health industry, the share price is extremely competitive at this time.
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Baron Capital on Vulcan Materials Company $VMC US
Thesis: Vulcan's dominant position in aggregates, coupled with high barriers to entry and robust pricing power, makes it a prime beneficiary of accelerating infrastructure spending in the U.S.
Extract from their Q2 letter, link here
Analysis: We initiated an investment in Vulcan Materials Company. Vulcan is the largest producer of construction aggregates in the U.S. and generates approximately 90% of its gross profit from mining, processing, and transporting crushed stone, sand, and gravel (collectively, “aggregates”) from its quarries. The balance of its gross profit is derived from strategically located ready-mix concrete and asphalt. Vulcan’s products are utilized in infrastructure projects such as roads, highways, and bridges, as well as in residential and non-residential construction. We believe the aggregates industry contains high barriers to entry and strong pricing power. The approval process for a new quarry typically takes 5 to 10 years. This limits new competition and constrains supply, placing companies with existing quarries in an advantaged position. In addition, a high weight-to-price ratio makes transportation expensive, limiting the distance that aggregates can be shipped economically. As a result, aggregates producers have historically enjoyed pricing power. During the past 30 years, aggregate prices have increased, on average, 4% annually. Pricing power has been exceptionally robust during the past several years in response to inflationary cost pressures, and we expect above-trend price growth to continue. We believe the multi-year growth prospects for Vulcan are especially attractive. Infrastructure-related spending, which accounts for approximately 40% of Vulcan’s aggregate shipments, is accelerating. It should remain elevated as the Infrastructure and Investment Jobs Act allocates significant sums from the federal government towards new and existing infrastructure projects. Outsized state-level infrastructure spending will also drive demand across the company’s footprint. Private construction spending (residential and non-residential) may accelerate over the next few years as well. Residential construction may respond to an acute need for more new homes following a 15-year period of underbuilding relative to the demographic needs of our country. Non-residential spending may accelerate to meet the real estate needs in growing areas such as logistics warehouses, data centers, and manufacturing.
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Baron Capital on eMemory Technology $3529 TT
Thesis: eMemory’s dominant position in embedded memory IP, coupled with strong demand for security solutions, supports a path to significant profit growth
Extract from their Q2 letter, link here
Analysis: Taiwan-based eMemory is a world-leading Intellectual Property (IP) provider of embedded non-volatile memory (eNVM) to all major semiconductor chip manufacturers. eNVM is integrated directly into a chip for the purpose of retaining data, such as code and parameter settings, even when power is turned off, and provides higher speed and performance than external memory. The company does not design nor manufacture its own chips, but rather licenses its technology to chipmakers and generates the vast majority of its revenue from royalties. We expect the penetration rate of eMemory’s eNVM IP will steadily increase over the next five years, given its strong advantages in memory density, security, and re-programmability compared with the legacy “eFuse” technology. We are also optimistic about the long-term potential for eMemory’s Physical Unclonable Function (PUF) IP. PUF is like a chip fingerprint, which is generated by the unique physical properties of every chip. While still at an early stage of adoption, we believe PUF could become a critical solution for multiple chip security issues, such as device authentication and key generation. We expect the company to maintain its dominant position in both eNVM and PUF IP, with deep competitive moats including its highly differentiated technology, decades-long customer relationships, and strong patent portfolio. We forecast that rising eNVM and PUF adoption will sustain over 20% compounded revenue growth over the next three to five years. Moreover, with industry-leading profit margins and high operating leverage thanks to its IP licensing business model, we expect eMemory’s profit will grow considerably faster than its revenue.
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Davis fund on Development Bank of Singapore $DBS SP
Thesis: DBS’s stronghold in low-cost funding and wealth management, combined with its advanced digital banking platform, positions it for continued growth and resilience in Asia
Extract from their Q2 letter, link here
Analysis: One of our long-held international investments is the Development Bank of Singapore (DBS), the largest bank in Singapore and one of the largest in Asia. With about 50% of the bank’s deposit base in low-cost current accounts and savings accounts, DBS has a significant advantage in the cost of funding. In addition to a retail customer base with strong brand loyalty, DBS has increased its competitive advantage and ability to attract low-cost deposits by offering sophisticated cash management services for corporate clients and by making wealth management a strategic focus for the bank. Through mergers and acquisitions (M&A) and organic growth, DBS has become one of the top-three banks in Asia for wealth management services. This business has been accretive to group return on equity (ROE) and is a natural fit to DBS’ structural advantages including domicile in a AAA-rated rule of law country and having Temasek, Singapore’s Sovereign Wealth Fund, as an anchor investor. Aside from its home market in Singapore, DBS is building its presence in Greater China (China, Hong Kong and Taiwan), India and Indonesia through M&A activity and measured organic growth. Management also had the foresight to see the threat from nontraditional competitors and has invested to make DBS one of the most technologically advanced banks globally. We think its approach to digital banking will maintain the company’s competitive advantage in terms of efficiency and customer retention for the near future. We like their management and under the long-term CEO’s nearly 15-year tenure, DBS has delivered in excess of annualized 8% revenue growth, 11% net income growth and 11% total return for the stock. Their balance sheet remains robust (most recent capital ratio of 14.7% versus operating range of 12.5-13.5%) and has allowed for meaningful dividend increases and room for accretive deals. DBS trades at around 10x estimated 2025 owner earnings, delivering a return on tangible equity in the high-teens and a 6% cash yield. Key risks would be structural weakness in regional trade flows and increased geopolitical tensions in the region.
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Baron Capital on BE Semiconductor $BESI NA
Thesis: Besi’s leadership in hybrid bonding technology positions it to capitalize on the chiplet revolution, driving sustained earnings growth
Extract from their Q2 letter, link here
Analysis: Besi is a leading supplier of semiconductor assembly equipment based in the Netherlands. The company is a pioneer in hybrid bonding equipment and will be a key beneficiary of the proliferation of “chiplets” over the next decade. Moore’s Law, which observed that the number of transistors on a chip doubles every two years, has underpinned the semiconductor industry’s exponential growth over the last six decades. Today, chipmakers squeeze billions of transistors onto an area the size of a fingernail. However, as these transistors are now nearing the size of a single atom, it is becoming extremely costly and complex to make them even smaller. Thus, the industry must innovate in other ways, and is now shifting towards chiplet architecture. Traditionally, multiple computing functions would be integrated on a two-dimensional, “monolithic” chip. Chiplets break apart these functions into individual blocks, such as processing, memory, and input/output communication, which can then be stacked on top of each other, using the third dimension for the first time. A system comprised of chiplets has several advantages, including higher yield, lower cost, and better performance. For example, stacking a memory chiplet directly on top of a processor can significantly improve speed and energy efficiency compared to a monolithic approach, which requires data to move longer distances horizontally around the chip. Hybrid bonding is a new technology used to integrate multiple chiplets and delivers a major bandwidth improvement over conventional chip packaging. Besi enjoys technological and first mover advantages in hybrid bonding, which we believe will enable the company to sustain strong double-digit earnings growth for many years to come.
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Artemis Funds on Prosus $PRX NA
Thesis: Prosus offers an attractive entry point into Tencent’s growth story, with additional upside from buybacks and a significant discount to NAV
Extract from their Q2 letter, link here
Analysis: In April we added a 1.5% holding in Dutch-listed media and tech company Prosus. Prosus is effectively a holding company for its position in Tencent, which ranks as one of the most successful investments of all time. It originally purchased 46.5% of Tencent for $32m in 2001—a position that has delivered a 51% IRR (internal rate of return) over 23 years. The company’s 24% stake in Tencent is currently worth $109bn, which is more than Prosus’s $92bn market value. Tencent is a dominant Chinese technology company whose key assets include the WeChat ecosystem, a near-monopolistic Chinese super-app with more than 1 billion users, which contributes about 20% of group revenue. Tencent also owns Tencent Financial (a payments and financial services business which contributes about 33% of revenue), and many other media and advertising assets (17% of revenue). Most of the remaining revenue is derived from video games, where Tencent owns key domestic franchises. Recent adverse regulatory changes resulted in a dramatic slowdown for Tencent, with revenue growth falling from 33% a year between 2015 and 2021 to 4% between 2021 and 2023. Tencent's advertising business was hit by a regulatory clampdown on private education, while the video games business was harmed by a slowdown in approvals and the introduction of usage restrictions for under-18s. Falling profits led Tencent to drastically reduce costs in 2022, cutting headcount by 10%, a sharp change from growth of about 30% per annum in the prior three years. Despite its success, Tencent's core internet properties have remained dramatically under-monetised relative to local competitors and Western peers. In video games, it monetises only 20% of its active gaming user base compared with 40% at Netease and Fortnite. In short-form social media, its advertising load is materially lower than Meta’s. Like Meta and other Western social media firms, Tencent is also enjoying the benefits of AI-driven advertising which boosts user engagement. Use of AI has increased advert click-through rates by up to 40%. These factors, alongside a stabilization in the regulatory backdrop, have led to a reacceleration in revenue growth with a geared impact on profitability. Tencent is trading on 17x forward earnings. It owns a portfolio of third-party investments worth $136bn (equivalent to about 30% of the market cap) which implies the core business is on an underlying multiple of 14x. Operating margins are 10 percentage points below their prior peak. The combination of self-help measures on cost and an improved environment for revenue growth suggest further recovery is possible. This would indicate potential for medium-term earnings to compound at more than 10% a year. Prosus trades at a discount of about 40% to its net asset value (NAV) as it owns other assets with a value of $32bn. The company is pursuing an open-ended buyback program whereby it sells Tencent shares to fund repurchases of its own stock. Since June 2022, Prosus has repurchased 22% of its free float, increasing NAV per share by 8%. We expect returns from investing in Prosus to be similar to those from investing in Tencent, with the added tailwind of NAV per share accretion from its buyback of about 4%. Any potential narrowing of the company’s discount would further improve returns.
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Artemis Funds on SSP $SSPG LN
Thesis: SSP’s strategic growth investments and potential for high returns, coupled with undervaluation, create an attractive risk-reward opportunity
Extract from their Q2 letter, link here
Analysis: SSP shares have been weak this year, reflecting the market’s lack of confidence in SSP’s investment in the significant growth opportunity it has before it (particularly in North America). This increase in investment has depressed near-term free cashflows, but our analysis suggests that SSP is investing this cash at attractive returns, potentially in the region of 25-30% return on capital. A cash-generative company with a multi-year runway of growth at highly attractive, self-funded returns seems an attractive setup to us, yet the UK stock market is not prepared to value SSP by looking beyond the next three months of earnings. We anticipate the shares are likely to trade on a double-digit free cash flow yield by 2025/2026 as these growth investments start to translate into earnings and cash. SSP is one of the most global mid-cap businesses listed in the UK, and in the past has been private equity-owned. SSP’s prior owners were more comfortable with higher leverage and appreciated SSP’s global nature and growth characteristics. The fact that the UK market does not—and the current market capitalization is £1.3bn—renders SSP vulnerable to a takeover in our view. As a result, the risk reward looks attractive to us at this juncture. We have been adding to the position.
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Baron Capital on Park Systems $140860 KS
Thesis: Park Systems’ leadership in AFM technology positions it for substantial growth as semiconductor inspections become more complex and critical
Extract from their Q2 letter, link here
Analysis: Park Systems is a Korean manufacturer of nanoscale metrology systems and the leading global supplier of Atomic Force Microscopes (AFM) for the semiconductor industry. Unlike electron microscopes and optical inspection tools which produce two-dimensional images, AFM uses a cantilever with a very sharp tip to produce a three-dimensional topographic map of a surface with superior, atomic-level resolution. Until recently, AFMs were mainly used in academic research. However, over the last five years, as the dimensions of chip features have become ever smaller and chip design has become increasingly vertical, legacy optical equipment has struggled to meet more stringent inspection demands. Thus, the semiconductor industry has started using AFMs for sub-angstrom measurements and defect analysis to improve manufacturing yields. We believe AFMs are still in the early stage of adoption and will see strong demand over the next five years, ultimately becoming a mainstream tool uniquely suited for the rising complexity and intensity of semiconductor inspections. We are confident that Park Systems will maintain its dominant market share in AFMs thanks to its significant technological advantages and sticky customer relationships. We also expect that Park Systems’ unrivaled AFM platform will enable the company to successfully expand into new innovative products, such as a tool to repair photomasks used in EUV lithography, which is already starting to receive meaningful orders. With strong expected growth in leading edge semiconductor manufacturing capacity to meet surging AI demand, increasing penetration of AFMs, and an expanding product line, we believe Park Systems will generate over 20% compounded earnings growth over the next three to five years.
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Baron Capital on Ajinomoto Co $2802 JP
Thesis: Ajinomoto’s near-monopoly in high-margin ABF technology and strong demand in AI-related semiconductor markets position it for significant profit growth
Extract from their Q2 letter, link here
Analysis: We initiated a position in Ajinomoto Co., Inc., a Japanese multi-national which traces its roots back to 1909 as the inventor of monosodium glutamate (MSG). The company has since become one of the most profitable food companies in the world and has expanded into a wide range of products and services across seasonings, pharmaceutical contract development and manufacturing, and semiconductor functional materials. We expect that Ajinomoto’s core food business will maintain steady growth, supported by Southeast Asia’s emerging middle class, as rising incomes drive both higher volume and the upgrade to higher-priced premium products. Most notably, we are optimistic about the growth prospects for Ajinomoto Build-up Film (ABF), an insulating material used within the packaging of high-performance semiconductors, including CPUs and GPUs in PCs and servers. Ajinomoto invented ABF in the late 1990s and has since maintained a near monopoly in this material, which plays a critical role in electrical isolation, signal routing, and heat dissipation. We expect Ajinomoto’s high-margin ABF revenue to surge over the next five years, driven by strong AI-related demand for high performance chips, increasing ABF content per chip to support ever more complex chip designs, and an uplift in ABF pricing. We forecast that Ajinomoto can more than double its earnings over the next five years, with ABF driving most of the profit growth.
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Baron Capital on Bharat Electronics Limited $BEL IN
Thesis: BEL’s stronghold in India’s defense electronics market, supported by government initiatives and rising defense budgets, positions it for solid earnings growth
Extract from their Q2 letter, link here
Analysis: BEL is a leading defense electronics manufacturer in India with approximately 60% market share. It is also the second-largest Defense Public Sector Unit under India’s Ministry of Defense. The company develops a wide range of equipment and systems in fields such as defense communication, radars, tank electronics, electro optics, arms and ammunition, and unmanned systems. Most of its revenue comes from the Indian government and government-related entities, with customers including India’s Army, Navy, Air Force, and state governments. As India implements policy initiatives to encourage indigenous design, development, and manufacturing of defense equipment, we believe BEL will be a key beneficiary of such reforms. Other growth drivers for the company include India’s rising defense budget and growing export and non-defense businesses. We expect BEL to deliver mid-teens compounded earnings growth in the next three to five years.
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Baron Capital on GMR Power and Urban Infra Limited $GMRPUI IN
Thesis: GPUIL’s strategic position in India’s power sector and ongoing infrastructure projects make it a key beneficiary of the nation’s energy expansion, promising steady growth
Extract from their Q2 letter, link here
Analysis: GPUIL, based in India, specializes in power generation, railway and road construction, and urban development. The company operates power generation plants across India with a total installed capacity of 3 GW, utilizing a mix of coal, gas, hydro, and renewable energy sources. We believe GPUIL is well positioned to participate in India’s power upcycle, as the government is committed to expanding overall power generation capacity by approximately 10% annually from 2024 to 2030, while renewable energy capacity is expected to grow at a 15% to 20% compounded rate. The company has also won a smart electricity meter contract in the state of Uttar Pradesh through competitive bidding, which involves installing 7.6 million smart meters over a period of 10 years. In addition to participating in growth in the power sector, we also expect the company to strengthen its balance sheet by monetizing stranded power and land assets, recovering receivables from state-owned power distribution companies, and continually reducing corporate debt. We expect GPUIL to deliver low double-digit EBITDA growth over the next three to five years, with further upside from improving balance sheet health.
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Baron Capital on Indus Towers $INDUSTOWER IN
Thesis: Indus is poised for re-rating and growth as 5G expansion and improving customer viability drive enhanced cash flow and operating leverage
Extract from their Q2 letter, link here
Analysis: Indus is a leading telecommunications tower operator in India. The telecommunications towers sector in India is currently structured as a duopoly, with Indus and a key competitor accounting for approximately 60% market share. The company has been a key beneficiary of ongoing industry consolidation and telecommunication providers’ rollout of 5G services. However, its valuation has remained deeply discounted compared to global tower peers, primarily due to a key customer, Vodafone Idea (Vi), which has been experiencing share losses that triggered insolvency concerns. With its recent improvement in financial viability, Vi resumed monthly payments to Indus, which, in our view, will be a key re-rating catalyst for Indus’ stock. Additionally, as Vi completes an equity raise, Indus will benefit from Vi’s planned 4G expansion and 5G rollout, which will drive tower additions, tenancy ratio improvement, and consequently higher operating leverage and free cash generation. We expect Indus to deliver high single-digit revenue growth and approximately 10% compounded earnings growth over the next three to five years, with nearly all the incremental earnings enhancing distributable free cash flow.
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Davis fund on Meituan $3690 HK
Thesis: Meituan’s dominant position in China’s local services and food delivery markets, combined with attractive valuations, provides a compelling long-term growth opportunity despite competitive and regulatory challenges
Extract from their Q2 letter, link here
Analysis: Meituan is China’s leading super app for local services with more than 700 million users annually. The company operates the go-to platform for local business search and discovery (e.g., restaurants, salons, spas, karaoke, etc.) built on user-generated reviews, ratings, photos/videos and recommendations. In addition, the company offers a range of other popular services such as food delivery, hotel booking, movie-ticket reservations, and shared-bike rentals. Among its many products and services, food delivery is the most valuable because of its scale (nearly 20 billion orders amounting to about $130 billion in meals in 2023) and high user frequency (customers order 39 times per year on average). Based on its strong competitive position (about 70% market share), proven profitability and solid growth prospects, we believe Meituan owns the most attractive food-delivery business globally. Outside of food delivery, the company’s local services marketplace business monetizes largely via commissions on in-store coupons, along with hotel bookings sold and advertising for increased merchant visibility in the app. Given Meituan’s well-known brand in local services and the low costs associated with running the platform, this business has been a major driver of profit growth since its initial public offering. However, during the last two years, the company has had to respond aggressively to competitive encroachment into the local services space by Douyin, China’s version of TikTok, which has resulted in slower profit growth for the business. We believe these profit growth headwinds will prove temporary and that both Meituan and Douyin will learn to share the market rationally over the long-term, with Meituan maintaining overall leadership and Douyin excelling in certain use cases and verticals that are better suited to its strength in livestreaming. Given the relatively low online penetration rate of local services, especially as compared to e-commerce, and the still attractive duopoly market structure going forward, we remain excited about Meituan’s long-term prospects in this business. These near-term competitive concerns gave us an opportunity to substantially increase our position in Meituan at very attractive prices. Even after the 36% year-to-date stock price increase, we still find Meituan’s valuation attractive at 14x 2024 and 11x 2025 normalized owner earnings, given the company’s durable market position and management’s track record of strong execution and value creation. Beyond the competitive threat from Douyin, key risks we are closely monitoring include the potential for increased regulatory scrutiny, particularly as it relates to courier employment and benefits, and market saturation in food delivery caused by an inability to increase penetration among lower-income consumers.
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Acatis on Wavestone $WAVE FP
Thesis: Wavestone’s consistent growth in book value and strong position in IT consulting make it an undervalued opportunity, trading at crisis-level valuations
Extract from their Q2 letter, link here
Analysis: Wavestone: French consulting firm Wavestone, which also specializes in IT consulting, has long benefited from the significant transformation requirements of many European corporations (cloud computing, AI, IT regulation, and cybersecurity). We met the CEO and founder of this owner-managed company at an investment conference in France; he is a down-to-earth entrepreneur with integrity and a performance profile that speaks for itself. For example, over the last 20 years Wavestone has steadily increased its book value per share with an annual growth rate of 20.5%; the company’s share currently trades at the valuation level of the financial crisis, the Euro crisis, or the COVID-19 low of March 2020.
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Here are some additional Q2 letters :
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