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IWG/Regus: Owner-Operated, Proven, Cash-Generative Model

January 13, 2025 in Audio, Best Ideas 2025, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, Transcripts

Simon Caufield of SIM Limited presented his investment thesis on International Workplace Group (UK: IWG) at Best Ideas 2025.

Thesis summary:

IWG (Regus) is by far the leader in the growing, fragmented market for flexible office space. Historically, Regus was a serviced office provider taking long-term leases from building owners to offer short-term leases to customers.

IWG is not WeWork, as it has been consistently cash generative (excl. growth capex); it survived the dot com crash, the GFC, and covid lockdowns. ~25% of revenue comes from ancillary services like coffee, parking, IT, and secretarial. IWG is 6x larger and more diversified than WeWork — more countries, brands, and suburban. Each property is owned within an SPV, so that IWG can terminate leases or negotiate rent breaks. 40% of lease liabilities are flexible, with rent linked to landlord revenue.

The market for IWG is growing, and the runway is long. Flex has reached only about 15% of the UK’s total office space. Simon estimates that the total addressable market is more than 1,000x IWG’s recent market cap.

IWG is uniquely positioned to serve two segments. In the traditional serviced office business model, providers take long-term leases from building owners and sell shorter-term, flexible leases to customers. Customers are mainly smaller companies and startups with needs for a single office. IWG also provides multiple-office/region/country options for large and multinational businesses wishing to reduce their commitment to long, fixed leases. Demand is growing for a flexible “work-close-to-home” alternative/complement to traditional offices and home working. Only IWG is able to offer these services because its network is so much larger, diversified, and suburban than the networks of competitors. While capital intensive, this business model has barriers to scale.

Since 2019, IWG has been transitioning to a capital-light model. It franchised its Japanese business for 3.4x revenue plus an annual royalty of 4-5% of “system revenue”. It has since developed a superior “managed” capital-light model, in which IWG manages spaces, including sales and services, which franchisees generally do less well. The annual royalty to IWG is typically 10-15% of “system revenue”, and landlords incur capex. This business model has barriers to scale and minimal capital requirements.

In March 2022 IWG announced the £270 million acquisition of The Instant Group, a private software company providing an Airbnb-like service for booking office space. IWG subsequently merged its own fledgling software businesses into the division and renamed it “Worka”. In November 2022, IWG rejected an offer from CVC of £1.5 billion for The Instant Group, equivalent to 137p per IWG share. Today, Worka generates annualised revenue of $376 million and EBITDA of $140 million.

Simon estimates that IWG could be worth 737p per share, or 4.6x the recent 160p share price. Worka alone may be worth at least 137p per share, or 85% of IWG’s recent market cap. The remaining business could be worth 600p per share.

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About the instructor:

Simon Caufield is Managing Director at SIM Limited, a UK-based investment firm. Simon founded the firm in 2007 after selling his stake in Nomis Solutions, a B2B enterprise software company he founded in 2002. His circle of competence is deep value, cyclicals and deceptively cheap compounders amongst the industrial and consumer discretionary sectors.

Previously, Simon was a management consultant for more than a decade, including at Mercer Management Consulting. Simon has an MA in Engineering from Cambridge University and an MBA from London Business School.

Under Armour: Ongoing Turnaround at Leading Sports Clothing Brand

January 10, 2025 in Audio, Best Ideas 2025, Equities, Ideas

Ken Majmudar of Ridgewood Investments presented his investment thesis on Under Armour (US: UAA) at Best Ideas 2025.

Watch this session:

audio recording

About the instructors:

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as its Chief Investment Officer focusing on managing long-term Value Investing based strategies. Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt – where he posted a buy recommendation on Nvidia in 2002 – possibly one of the best long-term investment ideas ever posted on VIC. He has also been a member of SumZero – an online community for professional investors, and written for SeekingAlpha – among others. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. He is admitted to the Bar in NY and NJ, though retired from the practice of law, as well as a member of the CFA Institute and EO (Entrepreneurs Organization).

The content of this website is not an offer to sell or the solicitation of an offer to buy any security. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this website. BeyondProxy’s officers, directors, employees, and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein.

Fairfax India: Well-Managed, Cheap HoldCo Exposed to India Growth

January 10, 2025 in Audio, Best Ideas 2025, Best Ideas 2025 Featured, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, Transcripts

Jeffrey Stacey of Stacey Muirhead Capital Management updated his investment thesis on Fairfax India Holdings (Canada: FIH.U) at Best Ideas 2025.

Thesis summary:

Fairfax India (FIH) is an investment holding company whose objective is to achieve long-term capital appreciation by investing in public and private equity securities and debt instruments in India and Indian businesses.

Fairfax India sponsor Fairfax Financial Holdings has an excellent long-term record in India. The Fairfax India IPO was completed in January 2015. Fairfax Financial owns 43.4% and OMERS owns 15.1% of Fairfax India. The latter receives investment support from Fairbridge Capital in Mumbai. FIH reports financial results using IFRS investment entity accounting. As a result, book value per share is a “rough” proxy for intrinsic value.

FIH’s largest holding by far is the privately held Bangalore International Airport. It is India’s third-largest airport and one of the world’s fastest-growing airports, with a strategic position in southern India. The airport reported a record 37.5 million passengers and 439,524 MT of cargo in FY2024. Jeff views the recent published valuation of $2.5 Billion (on a 100% ownership basis) as extremely conservative.

FIH had book value per share of nearly $22 as of Q3 2024. Due to the conservative nature of management’s value estimates, Jeff believes fair value may be ~$10 per share higher, resulting in an adjusted fair value of roughly $32 per share. FIH recently traded at roughly one-half of this adjusted fair value estimate.

Since inception, FIH has repurchased 22 million shares, or 14% of total shares outstanding for $289 million or $13 per share.

View Jeff’s FIH presentations at Best Ideas 2022 and Best Ideas 2023.

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About the instructor:

Jeffrey Stacey is the founder of Stacey Muirhead Capital Management Ltd. and he has over 35 years of investment industry experience. Jeff has an Honours Bachelor of Business Administration degree from Wilfrid Laurier University and is a Chartered Financial Analyst.

Jeff has been involved in many charitable and board activities throughout his career. He has served on several investment committees including for two Canadian universities. In addition, he has served on the advisory boards for two university student managed investment funds.

Jeff is married and has two children. Personal interests include hiking, fitness, reading, travelling, and playing drums.

Three Differentiated Small Banks: UBAB, Northeast Bank, FFB Bancorp

January 10, 2025 in Audio, Best Ideas 2025, Best Ideas 2025 Featured, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, Transcripts

Keith Smith of Bonhoeffer Fund presented his in-depth investment theses on three small banks — United Bancorporation of Alabama (OTC: UBAB), Northeast Bank (Nasdaq: NBN), and FFB Bancorp (OTC: FFBB) — at Best Ideas 2025.

Thesis summaries:

United Bancorporation of Alabama (“UBAB”) is a community bank located in Alabama that provides banking service to small and mid-sized businesses (“SMEs”) in Alabama and Northwestern Floria and low-income housing and municipal loans across the Southeast. UBAB services one of the fastest growing regions of Alabama and Florida (the Panhandle Beach Cities). UBAB also originates and services low-income loans which results in a large amount of non-interest income via fees, grant and tax credits (which can be sold to third parties). UBAB operates out of its headquarters in Atmore, Alabama, and nineteen locations in Alabama and Florida. UBAB services Baldwin, Escambia, Monroe, Mobile, Jefferson and Wilco counties in Alabama, and Santa Rosa county in Florida. UBAB is a designated community development finance institution (“CDFI”) thus is eligible for US Treasury incentive payments. UBAB has grown EPS by almost 17% per year over the past five and 22% over the past ten years. This growth is driven by providing low-income loans, selling tax credit and providing commercial and commercial real estate loans. UBAB’s lending franchise and loan purchase generates an average loan yield of 6.7% and has organically grown loans by 15% per year over the past five years. The strong loan growth is comprised of criticized plus watch list loans of 5.0%, non-performing loans (“NPAs”) of 2.2% and a loan loss reserve to NPAs of 80%. UBAB finances its loans through non-interest bearing and interest bearing deposits generating a low cost of funds of 1.3%. The resulting net interest margin (NIM) is 5.4% and is sustainable as funding costs will decline with declining loan yields. UBAB’s largest shareholder is its management, which holds 4.5% of its common stock. UBAB generates about 20% of its revenue from non-interest bearing or spread activities. UBAB’s current valuation is about 7x earnings with high-teens expected EPS growth.

Northeast Bank (“NBN”) is a community bank located in Maine that provide banking service to small and mid-sized businesses (“SMEs”) in Maine as well as SBA loans nationwide as well purchasing and servicing orphan loans. Orphan loans are loans which are sold by either the FTC, as a result of forced sales associated with mergers, or the FDIC, as a result of forced sales from insolvency. NBN operates out of its headquarters in Portland, Maine, an office in Lewiston, Maine, an office in Boston, Massachusetts and seven branch locations across Maine. NBN’s strategy includes purchasing orphan loans as well as originating specialty loans such as PPP loans during COVID or SBA loans currently. FFBB also has specialized loan purchase group (National Lending Group) that purchases and services orphan loans. The orphan loans team has over 30 years experience in originating and servicing FTC and FDIC sold loans. Much of the NLG’s current management team worked for Capital Crossing Bank that was founded by NBN’s CEO Richard Wayne in the late 1980s to purchase orphan loans. Capital Crossing was sold to Lehman Brothers in 2007. As a public company, Capital Crossing generated 20% annualized returns from the IPO to sale. After the financial crisis, Richard Wayne was able to reassemble the Capital Crossing team as NBN after Mr. Wayne gained control of NBN in 2010. Other banks that have grown via buying orphan loans include Beal Bank and First Citizens whose current or peak size is multiples of NBN’s current size illustrating decent growth potential for NBN. NBN has grown EPS by almost 40% per year over the past five and ten years. This growth is driven by opportunistically buying orphan loans and originating PPP loans during COVID and SBA loans currently. NBN’s lending franchise and loan purchase generates an average loan yield of 8.9% and has organically grown loans by 26% per year over the past five years. The incremental loan yield is estimated by management to be 8.8%. This loan growth is good growth characterized by criticized plus watch list loans of 1.4% of loans, non-performing loans (“NPAs”) of 0.9% and a loan loss reserve to NPAs of 118%. NBN’s finances its loans via CDs and generates a high cost of funds of 4.0%. The resulting NIM is 4.9% and is sustainable as funding costs will decline with declining loan yields. NBN’s largest shareholder is its management, which holds 15% of its common stock. NBN’s current valuation is about 9.1x earnings with 20%s expected EPS growth.

FFB Bancorp (“FFBB”) is a regional bank located in California that provides high touch banking services to small and mid-sized businesses (“SME”). Two large functional areas of growth include transaction processing and SBA loans. FFBB operates out of one branch in Fresno providing financial services to California’s Central Valley as well as Southern and Northern California. FFBB also has a loan production office in Torrance, California servicing Southern California. FFBB’s strategy includes hiring an experienced regional banking head to hire relationship managers and business development officers in Northern and Southern California. FFBB also has technologies groups that are used to automate banking service functions and develop new applications for targeted customer bases such as small businesses and restaurants. Management has aspirations to grow its assets in three regions it operates in (Central Valley, Northern California and Southern California) by six times over the next seven to ten years. FFBB is one of only five firms whose EPS has grown by 20% or more in each of the last five consecutive years. This growth is driven by transaction processing and increased loan revenue from SMEs and Southern California multi-family real estate. FFBB’s lending franchise generates an average loan yield of 6.7% and has organically grown loans by 23% per year over the past five years. The incremental loan yield is estimated by management to be 8%. This loan growth is good growth characterized by criticized plus watch list loans of 1.6% of loans, non-performing loans (“NPAs”) of 0.5% and a loan loss reserve to NPAs of 145%. FFBB’s deposit franchise generates low cost of funds of 1.1% from transaction processing float and non-interest bearing deposits from SME and real estate loan clients. The resulting NIM is 5.2% and is sustainable as incremental loan yield is higher than the current yield and the cost of funds is steady as processing revenue is increasing. FFBB’s largest shareholder is its ESOP, which holds 6% of its common stock. FFBB’s current valuation is about 8.8x earnings with 20%s expected EPS growth.

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About the instructor:

Keith Smith, the fund manager, brings over 20 years of valuation experience to the Bonhoeffer Fund. He is a CFA charterholder and received his MBA from UCLA. Keith currently serves as a Portfolio Manager at Bonhoeffer Capital and was previously a Managing Director of a valuation firm and his expertise includes corporate transactions, distressed loans, derivatives, and intangible assets. Warren Buffett and Benjamin Graham’s value-oriented approach of pursuing the “fifty-cents on the dollar” opportunities, underpins Keith’s investment strategy. The combination of his experience and track record led Keith to commit most of his investable net worth to the Bonhoeffer Fund model.

Haivision: Owner-Operated Growth Business at Attractive Valuation

January 10, 2025 in Audio, Best Ideas 2025, Best Ideas 2025 Featured, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, Transcripts

James Emanuel of Rock & Turner presented his in-depth investment thesis on Haivision (Canada: HAI) at Best Ideas 2025.

Thesis summary:

Haivision has been led by its founder-CEO for more than two decades, growing at a 23% CAGR over sixteen years pre-IPO using just $8 million in seed funding. The company has a capital-light, service-driven model and enjoys high barriers to entry due to specialized networks and strong customer relationships.

In 2020, Haivision raised capital through an IPO to fund a couple of acquisitions and accelerate growth. Revenue has grown 62% since then. The acquisitions are expected to be value-accretive from H2 2025. The company also has two key partnerships, which have broadened the offering and paved the way for new avenues for growth. Haivision serves diverse clients, including governments, military, and blue-chip corporates (no concentration risk). Haivision supplies its own hardware and has developed industry-standard software backed by 600+ alliance members, including YouTube, Microsoft, and AWS.

Insiders own 31% of the company, with the CEO holding 14% (~20x annual compensation) and increasing his stake in the open market, aligning the interests of management with those of shareholders.

Haivision consistently delivers gross margins above 70%, trending toward 75%, demonstrating pricing power. The service is incredibly sticky and has strong recurring revenue. The company is transitioning to higher-margin cloud and software services while shedding lower-margin segments. As operating leverage takes hold, EBITDA margins appear likely to double. The recent strategic shift and acquisition costs have temporarily acted as a drag on unit economics, which has driven the market cap to less than half of the IPO value — despite the business being far stronger today.

With the company trading at slightly more than 1x revenue, Haivision offers a compelling opportunity. With rising revenues, expanding margins, and multiple expansion — plus, the company has initiated share buybacks (management citing confidence that the stock’s market valuation does not reflect true value — the business has the full set of drivers for strong future shareholder returns.

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About the instructor:

James Emanuel lives and works in London, England. He is happily married and has three children. He qualified in English law having achieved a Bachelor of Laws degree with Honours (and several academic prizes along the way). He subsequently secured a post graduate Legal Practice Certificate from the Law Society of England and Wales. However, having enjoyed the academic side of law, practicing law was not what excited him. Sharing a family aptitude for mathematics and economics — his father, being a retired stockbroker and his brother an actuary — he was drawn into the world of finance, particularly investing in businesses. As an investor in some of the world’s leading businesses, he has engaged with corporate leaders and learned what success looks like. He constantly introduces constructive challenges to inform corporate decision making and has improved the fortunes of the companies in which he has a financial interest. He has also served as a special advisor to the U.K. Government in matters relating to business policy.

Driven Brands: Classic GoodCo/BadCo Setup, With Multiple Catalysts

January 9, 2025 in Audio, Best Ideas 2025, Best Ideas 2025 Featured, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, Transcripts

Kyle Mowery of GrizzlyRock Capital presented his in-depth investment thesis on Driven Brands Holdings (US: DRVN) at Best Ideas 2025.

Thesis summary:

Driven Brands offers the best of both worlds: private equity control and stewarship as well as public market liquidity and the ability to purchase an equity stake at a discounted valuation.

Kyle sees Driven Brands as a classic “GoodCo/BadCo” setup, with Maintenance, Collision and Glass Repair, and International Car Wash as the good businesses (90% of 2024E EBITDA) and United States Car Wash as the bad business (10% of 2024E EBITDA).

DRVN shares are down ~50% over the past 18 months due to poor US car wash performance and CFO turnover. DRVN trades at a low stock price and valuation even as earnings growth appears set to inflect materially higher.

Kyle sees several upside catalysts, including (1) a sale or stabilization of the car wash segment (early 2025); (2) growth in the “Take 5” business may drive improved investor perception (2025); (3) resegmentation (2025); and (4) 2025 and 2026 earnings guidance (February 2025 and February 2026).

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About the instructor:

Kyle Mowery is the founder and managing partner of GrizzlyRock Capital. Kyle holds an MBA from the University of Chicago Booth School of Business and a BA in Economics from UCLA. GrizzlyRock takes a fundamental, value-oriented research approach focused on finding clarity within complexity in small cap companies. GrizzlyRock’s rigorous research and structured investment process provides a sturdy foundation for systematically identifying substantially mispriced securities with high risk/reward asymmetry.

UNFI: Grocery Distributor Coming Off Historically Low Margins

January 9, 2025 in Audio, Best Ideas 2025, Best Ideas 2025 Featured, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, Transcripts

Steven Gorelik of Firebird Management presented his in-depth investment thesis on United Natural Foods Inc (US: UNFI) at Best Ideas 2025.

Thesis summary:

United Natural Foods Inc is an organic and conventional grocery distributor serving 30,000+ customers in the US. The company recently had an enterprise value of $3.8 billion, while reporting trailing sales of ~$31 billion and adjusted EBITDA of $535 million.

UNFI was founded in 1976 as a distributor of specialty and organic products. The company went public in 1997. UNFI grew sales and EBITDA at a low-teens CAGR from 1997 to 2018. The acquisition of Supervalu in 2018 more than doubled the company’s size but introduced significant leverage and complexity, as conventional and organic distribution businesses tend to be vastly different. Supervalu was a conventional distributor with retail operations. UNFI acquired Supervalu for $2.3 billion, and debt to EBITDA spiked to more than 10x following the acquisition.

From 2019 to 2021, combined company sales grew 21% while cash from operations grew by 3x. UNFI achieved almost $200 million in cost synergies related to the acquisition. The company reduced net working capital dramatically and benefited from product scarcity and high inflation. UNFI paid down debt by $1.3 billion during the COVID period thanks to strong cash flow.

Distributors benefit from inflation due to tight margins and a time lag between the purchase and sale of inventory. UNFI’s margins fell by 1% between 2022 and 2023 due to food inflation being below wage growth and due to a lack of supplier rebates. Meanwhile, the cost-of-living crisis shifts consumption away from UNFI’s customers to discounters and Walmart.

The rate of change in inflation is more important to UNFI’s business than absolute inflation levels. The company has extended its distribution agreement with Whole Foods through 2031, allowing for debt refinancing. Supplier rebates have been coming back to pre-COVID levels. UNFI is also seeing early benefits from investments in automation and lean process implementation.

Steve cites a forecast of $100+ million in free cash flow in 2025, a 6% FCF yield based on UNFI’s recent market cap. FCF could exceed $300 million in 2027 due to the normalization of margins and benefits of automation. The recent market quotation of UNFI shares implies <5x EV/2027 EBITDA and a 20+% 2027 FCF yield. Steve expects the company to generate one-third of the recent market cap in free cash flow over the next three years.

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About the instructor:

In addition to being Head of Research at Firebird Management, Steve Gorelik is the Lead 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 number of supervisory boards of listed and private companies in the Baltics. He speaks Russian, English and his native Belarussian.

Golar LNG: Markedly Improved Thesis Due to Secular LNG Growth

January 9, 2025 in Audio, Best Ideas 2025, Diary, Discover Great Ideas Podcast, Equities, Ideas, Member Podcasts, Transcripts

Nitin Sacheti of Papyrus Capital presented his in-depth investment thesis on Golar LNG (US: GLNG) at Best Ideas 2025.

Thesis summary:

Golar LNG appears poised to deliver record earnings, backed by improved contracts across its floating liquefied natural gas (FLNG) fleet.

Historically, Golar faced challenges with nascent FLNG technology and risky capital allocation, barely avoiding financial distress.

Rising LNG demand, particularly in Asia, paired with abundant supply from the US and Qatar, solidifies LNG as a critical transition fuel.

Nitin sees potential for GLNG to be worth $100+ per share in the coming years, driven by estimated FCF power of $10–$12 per share.

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About the instructor:

Nitin Sacheti runs Papyrus Capital GP LLC where is he the Portfolio Manager. He is also the author of Downside Protection: Process and Tenets for Short Selling in All Market Environments. Prior to founding Papyrus Capital GP LLC, Nitin was a Senior Analyst/Principal at Charter Bridge Capital where he managed the firm’s investments in the technology, media and telecom sectors as well as select consumer investments. Before Charter Bridge, Mr. Sacheti was a Senior Analyst at Cobalt Capital, managing the firm’s technology, media and telecom investments and a Senior Analyst at Tiger Europe Management. Mr. Sacheti began his investment career in 2006 at Ampere Capital Management, a consumer, media, telecom and technology focused investment firm, initially as a Junior Analyst, later becoming Assistant Portfolio Manager. He graduated from the University of Chicago with a BA in Economics, was a visiting undergraduate student in Economics at Harvard University and attended the Loomis Chaffee School.

Kenneth Jeffrey Marshall on His Book, Good Debt Cheap

January 9, 2025 in Audio, Diary, Fixed income, Full Video, Interviews, Meet-the-Author Forum

Kenneth Jeffrey Marshall discussed his book, Good Debt Cheap: Value Investing in Bonds, Preferreds, and Other Fixed Income Securities, at MOI Global’s Meet-the-Author Forum.

Research director Alex Gilchrist hosts MOI Global’s Meet-the-Author Forum. The event brings together members and a select group of book authors in the pursuit of worldly wisdom. We are delighted to have an opportunity to inspire your reading.

Watch the conversation (recorded in late 2024):

audio recording author page

About the book:

Most fixed income securities return barely better than a bank savings account. Those that promise more often carry big risks.

But value investors are able to find bonds and preferreds that outperform without increasing risk. They use common sense and simple analyses to identify fixed income securities that beat even exceptional stocks. Their advanced perspective reveals remarkable opportunities that others miss.

This book moves you towards becoming such an expert. You’ll learn to:

  • SELECT great securities wrongly tossed into the junk bond dumpster.
  • DODGE the conventional metrics that mislead others.
  • FORESEE the exercise of embedded options.
  • FOCUS on the yield measures that matter and skip those that don’t.
  • ANALYZE contexts to view a preferred more as debt or more as equity.
  • INTERPRET economic indicators to predict conversions and redemptions.

This book shares with you a model for gauging fixed income securities from a value investing perspective. It brings key concepts to life with case studies that span industries from franchising to software to manufacturing, and geographies from the U.S. to Germany to Japan. And it does all this with straightforward language and clear math that anyone can understand.

In developing your skills you’ll master the nuances of debentures, notes, convertibles, floaters, zeros, bills, munis, paper, corporates, and sovereigns. You’ll understand duration, solvency, covenants, seniority, liquidity, and credit ratings. You’ll breeze through basics like bond ladders, yield curves, and tap issues. Most importantly, you’ll develop the justified confidence necessary to navigate the biggest, oldest securities market in the world. Make your experience in fixed income one of insight and success with Good Debt Cheap.

About the author:

Kenneth Jeffrey Marshall is an author, professor, and value investor. He is the author of the McGraw-Hill book Good Stocks Cheap: Value Investing with Confidence for a Lifetime of Stock Market Outperformance, which was also published in Chinese; Small Steps to Rich: Personal Finance Made Simple; and Good Debt Cheap: Value Investing in Bonds, Preferreds, and Other Fixed Income Securities. He teaches value investing and personal finance at Stanford University; industry analysis in the masters in engineering program at the University of California, Berkeley; and investing in the masters in finance program at the Stockholm School of Economics in Sweden. He holds a BA in Economics, International Area Studies from the University of California, Los Angeles; and an MBA from Harvard University.

The content of this website is not an offer to sell or the solicitation of an offer to buy any security. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this website. BeyondProxy’s officers, directors, employees, and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein.

Distribution Businesses: Unsung Heroes of Consumer-Driven Economy

January 7, 2025 in Best Ideas Conference, Diary, Letters

This article is authored by MOI Global instructor Steve Gorelik, portfolio manager at Firebird Management.

Steve is an instructor at Best Ideas 2025.

In the last five years, only 25% of the 620 or so companies in the S&P 500 index managed to outperform the benchmark’s 15.5% annualized return. While some of the best performing names, like Nvidia or Eli Lilly, are well known to the public, one relatively obscure category of companies has done surprisingly well against a high-performing benchmark.

As of this writing, 26 publicly listed companies in the distribution business have market caps of around $1 billion or larger. Of the 26 companies on our list, 14 (or 54%) delivered returns better than the S&P 500 over the last five years. Moreover, the top five performers, which have annualized at 25% or better, have come from five different industries, suggesting that the business model, not the end markets, is the reason for the strong performance.

The advantage of the distributor’s business model comes from the high volume of small transactions going through large warehouses. While their margins are usually small, the capital efficiency is high due to the high velocity of sales and relatively small capital expenditures needed to maintain the distribution network. On average, distribution companies generate a return on total capital employed[1] in high teen/low 20’s percentage. This compares to roughly 4-5% generated by the S&P 500.


Source: Bloomberg, Firebird Value Advisors Research

As an aside, distribution businesses are unsung heroes of the consumer-driven economy. The coordination and technology required to get goods, some of which are perishable, from thousands of suppliers to tens of thousands of customers in a short period is truly remarkable. It is also mind-boggling that they do it profitably while marking up the cost of the products by only 15% – 30%.

While half of the companies outperformed the market, the other half did not. To better understand the industry, we broke down the returns over the last five years into fundamental factors (revenue growth, margin expansion, dividends, share buybacks) and non-fundamental reason for multiple expansion. Unsurprisingly, the most common predictor of whether the company did well was the multiple expansion, which contributed 10% or more of annualized returns in some cases.


Source: Bloomberg, Firebird Value Advisors Research

With this in mind, the key question is which factors are more likely than not to result in multiple expansion. To do that, we ran a regression analysis with the following factors:

  • Revenue Growth – Did the company generate revenue growth of at least 5% per annum between 2018 and 2023
  • Share Repurchases – Did the company buy back more than 2% of shares per year in the last five years
  • Starting FCF Yield – Did the company trade at more than 7% FCF yield in the beginning of 2019
  • Significant acquirer – Did the company spend more than 50% of its free cash flow on M&A
  • Margin expansion – The change in operating cash flow margin between 2018 and 2022

Given that we have less than 30 observations, our analysis is not of an academic paper quality, but we think we have enough data to be “approximately right.”

The analysis suggests that the above factors, high starting free cash flow yield and high revenue growth, contribute positively to multiple expansion. Eight out of 14 companies that outperformed the market had both features, and none of the companies that underperformed the market had them. Both components must be present, as neither one of them is predictive on a standalone basis.

The portion of free cash flow spent on acquisition has positive predictive power as well, but it is almost fully o􀆯set by the negative influence of companies with high revenue growth and a high percentage of cash on M&A.[2]

The other relevant factor is a positive change in operating cash flow margin. For each 1% improvement in the operating cash flow margin, the companies, on average, generated 2.4% of multiple expansion IRR per year.

Distributor margins are somewhat cyclical and dependent on macro factors such as inflation, supply chain disruptions, and the strength of end market demand, which impacts supplier rebates. Given that distributors operate at low margins, even a 1-2% change in profit margin can have a significant impact on their financials and, evidently, on stock market performance.

The outsized impact can go both ways. When the cyclical factors are working against distributors, as we are seeing currently in the food distribution space, these companies can experience significant declines in negative performance. The interplay between cyclical margins and macroeconomic conditions adds a layer of complexity to evaluating these companies and argues for an active management of these investments rather than a buy-and-hold approach. That said, the distribution sector is an essential segment of global trade and a fertile ground to look for investment opportunities.

[1] For the purposes of this calculation Return on Total Capital Employed is calculated as Cash Flow from Operations – Capital Expenditures/(Total Assets – Net Working Capital – Intangible Assets)
[2] Of the ten companies that spend more than 50% on M&A, 9 are also considered fast growing. While M&A factor technically delivers 28% of annualized IRR, the fast growing with M&A factor takes away 31% of IRR more than fully o􀆯setting the benefit. This is why we are choosing to ignore this data point.

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