This past week ValueConferences hosted Wide-Moat Investing Summit 2016, showcasing the timely insights of more than two-dozen instructors from around the world.
Selecting favorite ideas runs the same risk as selecting favorite children. With that said, the highlighted selections that follow are particularly dear to my heart because they come directly from fellow members of The Manual of Ideas!
Not yet a member of The Manual of Ideas? $83 per month and you could be; even less if apply a private code, see end of this message.
Dave Sather, President, Sather Financial Group (Victoria, Texas, USA)
Axalta Coating Systems (NYSE: AXTA), formerly known as DuPont Performance Coatings, may not seem like a typical “wide moat” business. After all, it makes paint. However, in observing Berkshire Hathaway repeatedly move into the Specialty Chemical arena, it got Dave Sather’s attention. Dave determined that paint is an oligopolistic market. There are about four major players. Axalta, which has been in existence for 150 years, commands a 19% to 25% market share depending upon the sector. Furthermore, now that Axalta is an independent company, management is highly motivated to quickly expand while incorporated necessary efficiencies. The Brexit situation has made Axalta a more compelling opportunity as 65% of their business comes outside of the U.S. Dave’s base case reflects a 20% return by 2017, and his best case reflects a 70% return by 2017.
Robert Deaton, Managing Partner, Fat Pitch Capital (Charlotte, North Carolina, USA)
Tribune Media (Nasdaq: TRCO) is a diversified media company whose primary businesses are local TV stations and the cable network WGN America. The company also owns a variety of non-core assets, such as a substantial real estate portfolio, investments in assets, including TV Food Network and CareerBuilder, wireless spectrum, and the digital data provider Gracenote. The company has a concentrated ownership base, with Oaktree co-founder Bruce Karsh serving as chairman of the board. Under CEO Peter Liguori, the company has shown an inclination and willingness to shed non-core assets and return capital to shareholders. Robert Deaton sees potential for the company to narrow its focus to the core businesses. Given values that should be attainable for the assets to be sold, investors could get the core businesses for a very attractive implied entry price.
Sahm Adrangi, Jordon Giancoli, and Isaac Ahn, Kerrisdale Capital Management (New York, New York, USA)
S&P Global (NYSE: SPGI) owns a portfolio of high-quality businesses: S&P Ratings (#1 ratings agency), S&P Indices (3 of 5 largest ETFs tied to S&P), Capital IQ / SNL (market-leading provider of data and analytics for finance professionals), and Platts (#1 benchmark price reporting agency for commodities industry). S&P has an exceptionally strong business model, with leading S&P brand commanding high barriers to entry; issuers typically use at least two ratings agencies (and nearly always S&P + Moody’s). The highly recurring revenue base helps to offset the perceived cyclicality of transaction levels (56% of ratings revenue non-transactional; 90% or more of revenue in Capital IQ, SNL and Platts from subscriptions). SPGI comps (MCO, MSCI, FactSet, OPIS) trade at premium valuations; SPGI trades at ~13x EV/EBIT, implying 33% upside.
Jeffrey Stacey, Founding Partner, Stacey Muirhead Capital Management (Waterloo, Ontario, Canada)
Polaris Industries (NYSE: PII) is a manufacturer and marketer of on and off road vehicles including all-terrain vehicles(ATV’s), snowmobiles and motorcycles. The company also supplies associated parts, garments and accessories. Polaris has strong market share positions in all of its product categories and it generates industry leading returns on assets and invested capital. It has increased its dividend per share for 21 consecutive years while maintaining a conservative dividend payout ratio. Polaris has also retired approximately one third of its shares outstanding over the last 15 years through on ongoing share repurchase plan and it has recently increased its share repurchase authorization significantly. At current prices, the shares are attractively valued at 13.1 times earnings. The company should be able to continue growing its top and bottom line at double digit rates over the long term through continued organic growth and bolt on acquisitions.
Todd Sullivan, General Partner, Rand Strategic Partners (Westborough, Massachusetts, USA)
Kinder Morgan (NYSE: KMI) is the largest transporter of natural gas in the US. 38% of all natural gas transported in the U.S. flows through KMI’s pipelines. It operates under long term “take or pay” contracts that largely insulate it from natural gas price fluctuations. Rather, the demand for natural gas is what drives results. The EIA estimates U.S. demand for natural gas will grow 20% between now and 2020. For the first time natural gas has become the primary input for electric production in the U.S., replacing coal. This trend looks highly unlikely to ebb anytime soon. Additionally, the U.S. has begun to export liquefied natural gas, further increasing demand. KMI is expanding oil pipeline facilities and organically funding its current capex and dividend plans. It currently trades at <50% of its 2015 valuation despite seeing no deterioration in results over that time. Rather, the stock price has acted as if the company is drilling for oil and gas versus simply transporting it.
Elliot Turner, Managing Director, RGA Investment Advisors (Stamford, Connecticut, USA)
Envestnet Corp. (NYSE: ENV) strives to be investment advisors’ chosen platform for technology-based solutions, combining three distinct business lines into one holistic platform. This company is well positioned for the transitions in client preferences and the regulatory regime in the wake of the financial crisis. An industry-wide fiduciary standard would be a major tailwind. Envestnet has two longer-standing businesses: its AUM/A business and its Tamarac software platform. More recently, the company acquired a third: Yodlee, for data aggregation. The AUM/A business is the largest segment, generating 80% of revenue prior to the Yodlee acquisition; now ~60%. We like this business because it is sticky, the allocation is diverse and stylistically agnostic, and the long-term growth profile approximates the 60/40 portfolio plus the household savings rate. As such, when it does reach a terminal growth state, its terminal growth should be faster than GDP, a rarity. Tamarac is a practice management and reporting platform for advisors that includes reporting, billing, rebalancing and other practical needs. Retention rates are between 97-98%, as advisors build their entire workflow around the platform, the learning curve is steep and the data accumulates exponentially over time. Their primary competitor was recently bought out for 18x EV/estimated EBITDA, with the rich multiple reflecting the high-margin nature of the business and the extended pipeline of growth. When Envestnet bought Yodlee, their 3rd line of business, the stock collapsed and created the present opportunity. Yodlee has built the premier platform for financial account aggregation, and Envestnet sees an opportunity to cross-sell these service and data to advisors. The stock dropped at the time for three main reasons: investor skepticism about a new line of business; Envestnet’s downgrading of its long-term revenue growth target from 20+% to the high teens; and merger arb trades as this was a partly stock-based transaction. In effect, the entire cost of Yodlee, plus some, was subtracted from Envestnet’s valuation, leaving the stock far too cheap for such a sticky business with a long growth runway.
Charles Hoeveler, Managing Partner, Norwood Capital Partners (Greenbrae, California, USA)
Carrols Restaurant Group (Nasdaq: TAST) is a franchisee operator of Burger Kings in the US. Carrols operates ~720 restaurants, with plans to double its store base over the next four years. The company’s unique Right of First Refusal for Burger King store purchases and operational excellence allow for 30%+ returns on capital through the growth phase. The company’s moat is derived from its ability to both efficiently operate its stores (20%+ four-wall margins in its most mature stores), and the rebound in the Burger King brand driven by 3G Capital. Charles forecasts a mid-to-high 20s share three years from today as Carrols executes its high-return growth plan.
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