One of the best business books I've ever read. It came highly recommended from Peter Kaufman of Glenair, who knows a thing or two about operating a business: pic.twitter.com/bVzef0xwSp
— Connor Leonard (@Connor_Leonard) June 29, 2018
Harley Davidson: 10+% FCF Yield Being Paid Out in Dividends and Buybacks
June 29, 2018 in Audio, Consumer Discretionary, Equities, Mid Cap, North America, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018Steve Gorelik of Firebird Management presented his in-depth investment thesis on Harley Davidson (NYSE: HOG) at Wide-Moat Investing Summit 2018.
Thesis summary:
Harley Davidson is a motorcycle manufacturer with a widely recognized brand and ~50% cruiser/touring market share in North America, its most important market. Dominant size, proprietary dealership network, and a fan base willing to brand themselves with Harley’s logo ensure margins and ROIC double that of the competition.
Due to concerns about the North American motorcycle market and an unusual capital structure that includes the debt of the financing business, Harley trades at an FCF yield of 10+%. All of the FCF is paid out to shareholders in the form of dividends and buybacks.
The North American large motorcycle market is assumed to be in terminal decline due to changing preferences of younger consumers. However, registrations are near all-time highs and an increase in the average age of motorcycles suggests there is no change in preferences and that cruiser/touring sales should be 20% higher than recent levels.
Adjusting for leverage and the value of the highly profitable financing business, Harley Davidson trades at a mid-single digit EV/EBITDA multiple, well below fair value for high-quality business with a moat.
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About the instructor:
In addition to being Head of Research at Firebird Management, Steve Gorelik is the Fund Manager of Firebird U.S. Value Fund as well as portfolio manager of Firebird’s Eastern Europe and Russia Funds. He joined Firebird in 2005 from Columbia University Graduate School of Business while completing education from a highly selective Value Investing Program. Prior to business school, Steve was an operational strategy consultant at Deloitte working with companies in various industries including banking, healthcare, and retail. He holds a BS degree from Carnegie Mellon University as well as a CFA (chartered financial analyst) charter and a membership in Beta Gamma Sigma honor society. Steve serves on the boards of Teliani Valley (Georgia), Arco Vara (Estonia), and Pharmsynthez (Russia). He speaks Russian, English and his native Belarussian.
Cerner: Healthcare IT Leader to Grow in High Single-Digits in Coming Decade
June 29, 2018 in Audio, Equities, Information Technology, Large Cap, North America, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018Luis Sanchez of Overlook Rock Asset Management presented his in-depth investment thesis on Cerner (Nasdaq: CERN) at Wide-Moat Investing Summit 2018.
Thesis summary:
Cerner is a leading IT company focused on the healthcare industry. The company is the #2 global provider of electronic health records software. Cerner also sells revenue cycle management software, healthcare IT outsourcing services, and population health management software which is a predictive analytics subscription product. Electronic health records software is critical IT infrastructure for hospitals and serves as the basic foundation for a hospital’s IT ecosystem. Cerner is deeply integrated with customers, creating a sticky client base (99% retention rate).
The company benefits from secular tailwinds that should enable revenue to grow at a high single-digit rate over the next ten years. Cerner is executing a plan to increase operating margin by 50-100 basis points per year. The combination of tailwinds and margin enhancement should enable the company to compound earnings growth at a double-digit rate for the foreseeable future.
Recently trading at ~14-15x EBITDA, investors can buy Cerner at a slight premium to the overall market for a high-quality asset with stronger earnings growth prospects.
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About the instructor:
Luis Sanchez is a Managing Partner at Overlook Rock Asset Management LLC, an investment firm which manages separate accounts for clients. Overlook Rock employs a quantamental investment approach which marries quantitative techniques with value investing principles.
Canadian Agriculture Equipment Dealers Benefit from Consolidation
June 29, 2018 in Audio, Communication Services, Consumer Discretionary, Equities, Micro Cap, North America, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018David Fleer of Bristlecone Value Partners presented his in-depth investment theses on Rocky Mountain Dealerships (TSX: RME) and Cervus Equipment (TSX: CERV) at Wide-Moat Investing Summit 2018.
Thesis summary:
Canadian Agriculture Equipment Dealers: Two publicly-traded Canadian agricultural equipment dealers have consolidated ownership of significant clusters of local dealerships of the two large, global equipment manufacturers.
Rocky Mountain Dealerships is the largest North American dealer of Case / New Holland agriculture equipment and Cervus Equipment is a major Deere dealer.
At the manufacturer level, agricultural equipment is a well-established oligopoly, and many of the industry’s favorable competitive dynamics apply to the dealership business as well. While there are certainly offsets to the local dealers’ competitive strengths, given their intermediary position and dependence on the manufacturers, these are counter-balanced by their close relationships with end customers (farmers), exclusive distribution rights, and the critical support role they play in sustaining the manufacturers’ competitive position.
RME and CERV trade at modest valuations that give little recognition to their competitive position or their prospects for profitable growth. David believes this combination of factors sets the conditions for good investment returns.
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About the instructor:
David started his career in investment management in 1996. Prior to founding Bristlecone in 2004, David was a Senior Vice President and US equities portfolio manager/analyst at Oppenheimer Investment Advisers. David grew up in North Carolina, then moved to Massachusetts, where he earned a Bachelor of Arts degree in history from Amherst College (Amherst, MA) and a Master of Arts degree in art history from Williams College (Williamstown, MA), with a focus on Italian Renaissance. Researching and discussing investment ideas around the conference room table, it turns out, is not all that different than discussing Leonardo around the seminar table. David now lives in Los Angeles, California, with his wife, son and daughter. David has managed not to gain too much weight eating at Clementine, his wife’s bakery café, attempting to burn off the calories by playing and coaching (and sometimes just watching) soccer, among other pursuits.
China Mobile: World’s Largest Telecom Provider, with 1+ Billion Users
June 29, 2018 in Asia, Audio, Equities, Information Technology, Large Cap, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018A.J. Noronha of Desai Capital presented his in-depth investment thesis on China Mobile (NYSE: CHL) at Wide-Moat Investing Summit 2018.
Thesis summary:
China Mobile provides a compelling value investment opportunity with 30+% upside and numerous moats serving as value drivers.
A major moat comes from a powerful industry leadership position, as the company is the world’s largest telecom provider with 1+ billion users, and has local market share 60+% in China. A second moat comes from the financials, a share price that is ~30% below intrinsic value, net cash comprising ~40% of the market cap, and excellent profit margins. China Mobile is a state-owned enterprise, which is important in light of the moats arising from the industry’s heavy infrastructure investment requirements, which may lower competition via a high barrier to entry, as well as the regulations involved in telecom. The company is well-positioned to benefit from China’s middle class as consumers transition from simple phones on 4G networks to smartphones on faster and higher-margin 5G networks.
Many typical risk factors are less of a concern here, specifically that competitors have smaller market share and focus on less lucrative landline businesses, as compared to CHL’s focus on the growing data segment.
CHL offers a compelling opportunity with a discount to intrinsic value and strong moats providing upside if A.J.’s thesis is correct, balanced by a margin of safety if A.J.’s thesis is incorrect or takes longer to develop. A.J. believes CHL could be worth $60 per share over the next 18-36 months.
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A.J. Noronha has over eight years of investment management experience, and has worked closely with Mr. Desai since Desai Capital Management’s inception with all aspects of the fund, with his primary responsibilities being equity research, due diligence, and developing investment theses for DCM’s portfolio. He has been ranked as highly as #1 (Value) and #9 (Overall) in SumZero’s independent analyst rankings, and his independent research on Dow Chemical was selected as one of their top ideas of 2015.. He served as an instructor for MOI Global’s Best Ideas 2018, and was an invited participant (non finalist) in the 2017-2018 Sohn Conference Foundation Idea Contest and 2017 SumZero/Van Biema Value Partners Idea Challenge. Prior to DCM, Mr. Noronha gained investment experience working for a mid-market PE/VC fund, and also co-founded and served in an executive role for a biomedical engineering startup. He earned a degree in Finance, magna cum laude, from the University of Notre Dame, where he was selected to be a member of the prestigious Applied Investment Management honors finance course where students manage a portion of the University endowment under the guidance of the Chief Investment Officer, and also holds a JD with Dean’s List honors & a concentration in business enterprise (selected coursework taken through the Kellogg School of Management) from Northwestern University. He is a CFA Level III Candidate after successfully completed the CFA Level 1 & Level II exams on his first attempt, is an active Candidate Member of the CFA Society of Chicago & serves on its Professional Development Advisory Group Board, and a member of Irish Entrepreneurs & Harvard Alumni Entrepreneurs.
Spirit MTA REIT: Classic So-Called Bad Bank, Spun from Spirit Realty
June 29, 2018 in Audio, Equities, Financials, North America, Small Cap, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018Chris McIntyre of McIntyre Partnerships presented his in-depth investment thesis on Spirit MTA REIT (NYSE: SMTA) at Wide-Moat Investing Summit 2018.
Thesis summary:
Spirit MTA REIT is a classic “bad bank” recently spun from Spirit Realty. While the market views SMTA as an overlevered, “too difficult” stock, properly analyzed, Chris views SMTA as a simple story: a portfolio of high-quality (aka “wide-moat”) real estate assets, with minimal recourse leverage, that is likely to be liquidated and the cash returned to shareholders in the next three years at nearly $30 per share, a 200% return. Chris believes the recent spin dynamics and a lack of investor familiarity with the ABS structure of SMTA’s largest asset provide a favorable entry point. Compensation incentives strongly align the board and management with shareholders.
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Chris McIntyre is the founder of McIntyre Partnerships, a concentrated value fund located in New York City. He employees a selective-contrarian strategy focused on event driven, GARP, and distressed investments. Prior to founding McIntyre Partnerships, he was a Managing Director at MAK Capital, a value focused equity and credit fund, where he managed investments in consumer, telecom, and special situations. Prior to that, he was an analyst at several funds including Cobalt Capital and MDR Capital. Chris is a CFA charterholder. He is a University of Virginia graduate with degrees in Economics and Government.
Central European Media Enterprises: Turnaround Progressing, with Catalysts Ahead
June 29, 2018 in Audio, Equities, Europe, Small Cap, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018Amit Chokshi of Cross Island Advisors presented his in-depth investment thesis on Central European Media Enterprises (Nasdaq: CETV) at Wide-Moat Investing Summit 2018.
Thesis summary:
Central European Media Enterprises is a leading television network company operating in Romania, Bulgaria, the Czech Republic, and the Slovak Republic. CETV operates 26 channels and maintains the #1 market position in each country of operations. The company and its investors have endured a tumultuous decade, whereby top-tier television assets that generally hold leading market positions were paired with an inflexible and costly debt structure that led to several dilutive transactions from 2009-2014.
Since the appointment of new management in Q4 2013, the company has improved revenue, cash flow, the and capital structure, with revenue growing by ~20% over the past two years and EBITDA increasing by 50+% over the same period. The company’s cost of borrowing dropped from ~11% to under 4% from 2014 to Q1 2018. CETV has reached an inflection point whereby additional levers can be pulled to drive further operating performance that should lead to additional price appreciation and a potential upward re-rating in the valuation.
CETV’s progress over the past three years and potential valuation drivers in the coming years are somewhat analogous to U.S.-based television broadcasters from 2011-2016 when many of these companies experienced sharp, positive re-ratings in valuation due to increased ad revenue pricing and a higher proportion of revenue derived from less volatile retransmission fees.
Similarly, CETV has the ability in its largest country, the Czech Republic, to drive growth in carriage fees as television distribution shifts from Digital Terrestrial TV to satellite, cable, and IPTV. If CETV achieves the same increase in valuation U.S. broadcasters did from 2011-2016 or if CETV achieves a multiple comparable to two of its operating segments (Slovenia and Croatia) that are in the process of being sold, the shares would be worth 100+% from recent prices.
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Amit Chokshi is the Chief Investment Officer of Cross Island Advisors (CIAD), a New York-based SEC Registered Investment Advisor. CIAD was initially created to advise Doshi Capital Partners, a New York-based single family office, in the allocation of its capital across public and private investments. Prior to joining Doshi Capital Partners, Amit was a Portfolio Manager at City National Rochdale (“CNR”), where he managed capital across multiple asset classes for high net worth, ultra high net worth, and family office clients. From 2007 – 2012, Amit was the Portfolio Manager for Kinnaras Capital Partners, a deep value / special situations hedge fund he founded. Prior to Kinnaras Capital, Amit was an Associate in the Leveraged Finance Group of the Royal Bank of Scotland (“RBS”) where he was involved exclusively in financial sponsor-backed middle market and mega cap transactions. Amit started his career as an Analyst at Morgan Stanley. He is a CFA Charterholder and served on the Board of the CFA Society of Stamford from 2006 – 2014. Amit has a B.S. in Finance from Bryant University and MBA from Emory University.
Monster Beverage: Energy Drinks Leader, Potential Coca-Cola Target
June 29, 2018 in Audio, Consumer Staples, Equities, Large Cap, North America, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018Joe Magyer of Lakehouse Capital presented his in-depth investment thesis on Monster Beverage (Nasdaq: MNST) at Wide-Moat Investing Summit 2018.
Thesis summary:
Monster Beverage is one of the leading global brands in the fast-growing energy drinks category. The business is gaining share in existing markets, entering new distribution verticals, and entering new geographies. It is also debt-free, capital-light, and significantly profitable with a 36% EBIT margin.
The shares have pulled off their recent highs and the company has taken advantage by repurchasing ~1.6% of the stock thus far in 2018.
Lastly, the business may also be acquired at some point by Coca-Cola, which is thirsty for growth and already has a strategic investment in Monster.
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Joe Magyer is the Chief Investment Officer of Lakehouse Capital. He’s also the Portfolio Manager of the Lakehouse Small Companies Fund, and the Lakehouse Global Growth Fund. He has held senior investing roles in both the USA and Australia and has been with the company for 11 years. He previously served as Director of Research at The Motley Fool Australia as well as the Portfolio Manager of Australia’s Motley Fool Pro. Before making the leap to Australia, Joe served as the Lead Advisor of Motley Fool Inside Value, which was recognised by The Wall Street Journal and Hulbert Financial Digest for outstanding performance. Joe is also known for his columns for the Australian Financial Review and regular appearances on the likes of CNBC and Sky News Business. Joe holds a Bachelor of Business Administration from the University of Georgia and a Master of Science in Finance from Georgia State University. He is a CFA charterholder.
BlackBerry: Transformed into Enterprise Software Security Firm
June 29, 2018 in Audio, Equities, Information Technology, Mid Cap, North America, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018, Wide-Moat Investing Summit 2018 FeaturedRodrigo Lopez Buenrostro of KUE Capital presented his in-depth investment thesis on BlackBerry (NYSE: BB) at Wide-Moat Investing Summit 2018.
Thesis summary:
BlackBerry is a software security company. It has left behind the smartphone hardware market it dominated in the pre-iPhone era. The company offers security solutions for enterprises, including nine of ten of the largest commercial banks and insurance companies, eight of ten of the largest healthcare and aerospace/defense companies, and all of the G7 governments.
Blackberry’s wide moat is supported by the solid patent portfolio it has built over the past thirty years, including elliptic curve cryptography (ECC), essentially the most secure and efficient cryptography for the near future. CEO John Chen has proven an ability to monetize the patent portfolio since he took office five years ago, resulting in a company with 72% gross margins, net cash on the balance sheet, and 75% of revenue recurring in nature.
While the patent portfolio provides downside protection in terms of valuation at ~$11 per share, the upside stands at a value of $25-27 per share in five years, assuming conservatively that BB maintains market share in the fragmented cybersecurity industry.
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Rodrigo Lopez Buenrostro works at Kue Capital where he invests to preserve capital over time. He currently pioneers the asset management division within the firm and divides his time between equity research and manager selection with a global mandate. Previously, Rodrigo worked as a summer equity analyst at SW Investments, a value-focused hedge fund in Chicago. He began his professional career as an Investment Banker at BBVA. Rodrigo is a recent MBA graduate from Chicago Booth ’15 where he earned a concentration in Analytic Finance and was actively involved in the IM / HF community. He studied Business and Accounting at ITAM (Mexico Institute of Technology) for undergrad where he wrote his thesis on hedge funds and started to invest personally. Rodrigo has always had an interest in finding the real value of assets, reading, and volunteering at NGOs to teach basic concepts related to investing.
Texhong Textile: World’s Dominant Producer of Spandex Yarn
June 29, 2018 in Asia, Audio, Consumer Discretionary, Equities, Small Cap, Wide-Moat Investing Summit, Wide-Moat Investing Summit 2018Mike Kruger of MPK Partners presented his in-depth investment thesis on Texhong Textile (Hong Kong: 2678) at Wide-Moat Investing Summit 2018.
Thesis summary:
Texhong Textile is by far the world’s leading producer of spandex yarn. Founder, CEO, and 53%-owner Hong Tianzhu started Texhong from scratch by buying distressed PP&E. Today, the company has become what Buffett refers to as an “inevitable”. Texhong is now vastly larger and more profitable than any of its direct competitors and is consolidating this fragmented sector.
Cotton price volatility is a distraction — tough times put competitors out of business or up for sale.
Tangible book per share plus cumulative dividends has grown at a CAGR of 29% since 2001, yet the shares trade at 1.9x tangible book and less than 7x EV/EBIT or P/E on 2018E estimates.
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Mike Kruger’s first investment experience was watching his shares of Berkshire Hathaway get cut in half during the tech-mania of the late 1990’s. But he didn’t panic, and today manages a global focused value portfolio of equities and distressed debt in New York City. He previously worked as a former equity and credit analyst at Promethean Asset Management LLC in NYC, and prior to that as a high-yield credit analyst at Liberty Mutual in Boston. He holds a Bachelor’s degree from the College of Arts and Sciences at Cornell University.