Gary Mishuris of Silver Ring Value Partners presented his in-depth investment thesis on Arcadis (Netherlands: ARCAD) at Best Ideas 2019.

Thesis summary:

Arcadis offers consulting and engineering design services without taking on project execution risk. The company is under new management, with the board having removed the prior CEO and brought in the ex-COO of Fluor, an engineer by training.

The business had previously averaged ~10% operating margin, but due to a combination of execution issues and a decline in oil-related infrastructure demand, the business operates closer to a 7% margin. Management actions should restore the margin partway to historical levels, aided by low single-digit organic sales growth.

The stock has a high short interest, with short-sellers claiming the company overstates earnings and understates debt (recently at ~2.5x net debt to EBITDA). Gary has spoken to some of the short-sellers, analyzed their assertions, and concluded that the company’s finances are sound.

At less than 10x run-rate depressed earnings and less than 7x Gary’s estimate of normalized mid-cycle EPS/FCF, the shares trade at less than half of Gary’s base case value estimate, with ~30% downside to the worst case.

Risks include potential inability to improve margins, Gary’s balance sheet analysis proving incorrect, and a global recession lowering profitability in the medium term.

Listen to this session:

slide presentation audio recording

About the instructor:

Gary Mishuris is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm with a concentrated long-term intrinsic value strategy. Prior to founding the firm in 2016, Mr. Mishuris was a Managing Director at Manulife Asset Management since 2011, where he was the Lead Portfolio Manager of the US Focused Value strategy. From 2004 through 2010, Mr. Mishuris was a Vice President at Evergreen Investments (later part of Wells Capital Management) where he started as an Equity Analyst and assumed roles with increasing responsibilities, including serving as the co-PM of the Large Cap Value strategy between 2007 and 2010. He began his career in 2001 at Fidelity as an Equity Research Associate. Mr. Mishuris received a S.B. in Computer Science and a S.B. in Economics from the Massachusetts Institute of Technology (MIT).