Covetrus: Spinoff With Fast-Growing, Underappreciated SaaS Business

Gary Mishuris of Silver Ring Value Partners presented his in-depth investment thesis on Covetrus (US: CVET) at Wide-Moat Investing Summit 2020.

Thesis summary:

Covetrus is a spinoff that combines two animal health-related businesses whose economics are still not fully understood and whose financials do not adequately reflect the earnings power of the company. The company’s legacy animal health distribution business operates in an oligopoly and is in the process of being turned around by a new CEO, with initial evidence of progress. The second business is the leading software-as-a-service (SaaS) platform for vet practices to fulfill orders online. It is growing 40+%, has a meaningful ramp for future growth, and has much higher incremental margins than the distribution business.

The historical financials are misleading due to spinoff accounting and because the SaaS business is not yet contributing significantly to earnings. The balance sheet has been strengthened with a recent preferred offering and, given the low cyclicality of both businesses, is in little danger regardless of the way that COVID or economic crises unfolds.

The shares recently traded at ~60% of Gary’s base-case value estimate, despite the meaningful recent run-up in the stock price. Catalysts include (1) continued turnaround progress at the distribution business, and (2) the high growth of the SaaS business starting to meaningfully flow through to net income.

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About the instructor:

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm with a concentrated long-term intrinsic value strategy. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business. 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).