3Q Investor Letters - Part 3
Lot of interesting ideas here....
Running through investors letters is a great way to find new ideas. I’ve summarised the ideas but there are hyper-links to the lettrs if you want to dig deeper.
For full disclose I recently purchased a position in Citigroup. Will be doing more work on some of the names listed below going forward.
This is the Part 3. Links to the previous write-ups can be found on The Focal Point home page
DentalCorp (DNTL)
Owner of dental practices - largest consolidator in Canada w. 500 practices
Pipeline of 690+ practices that meet strict criteria. Focus on high quality, profitable practices. Lots of room to grow w. 3.6% mkt share
Post acquisition - expand product offerings, improve customer service w. technology and leverage scale driving EBITDA 10-15% higher after one year
95% of dentists continue in clinical role post sale
Dental costs have grown at 1.7x Canadian inflation since 1975
Levered at 4.2x but 74% fixed through May ‘26
Trades at 8.1x ‘24 EBITDA
Fidelity National Financial (FNF)
Largest title insurance agency in US (required for debt financing). Consolidated 3 player market.
Cyclical business w. profits down by >50% in ‘23 vs ‘21 peak. Still profitable at trough
Profits will normalise. Stock off >60%.
Clear industry leader (mkt share, margins and returns) yet at lowst multiple vs peers, Normalised 14% FCF yield
Citigroup (C)
A global systemically important bank. Along w. JPM and BAC
Increased regulatory supervision, higher bank capital ratios (CET1 capital ratio has gone from 10.6% to 13.5%( and less risk orientated biz model.
Middle of corporate transformation to simplify/hrink and reinvest in higer growth/ROE busineses
Trades at 0.48x TBV, the cheapest it has ever been. BAC and JPM are valued at >2x Citi despite the performance gap being closer
Clearwater Analytics
provider of investment portfolio reporting and analytics solutions for investment managers
Software simplifies operations, drives efficiency, accuracy and speed
20% top line growth w. meaningful margin expansion
Flywheel - sticky product, recurring revenue
XPEL
Mkt leader in automotive paint protection film
Extensive distribution and software product
20% OM w. high FCF conversion, higher ROC and solid b sheet
EXL Services
Outsoruced biz services in the insurance industry
Upgraded mgmt team w. more discipline on capital allocation
MSCI - new purchase
Competitively advantaged biz. Industry standard providing independent and objective reference points
CEO excellent allocator
Novo Nordisk
GLP-1 now >70% of sales.
Global epidemic in obesity.
Payors will recognise value of treating obesity in reducing CV events etc.
First Cash
Counter cyclical - largest pawn shop operator (2x mkt share of nearest competitor)
Macro turning favourable w. dwindling savings, higher rates and rising unemployment
Pawn loans outstanding per store (after a decade of being flat) grew DD in 2Q23
Limited competition due to high regulatory barriers
(as an aside, should benefit from rising gold prices)
BELFB
75-year old manufacturer of electronic components used in telecom, aerospace and consumer end mkts. Peers include Amphenol and Littelfuse
“Little pieces that go into bigger electrical systems”
Strong reputation for quality lead to repeat biz. Their products need to work for safety reasons/high cost of failure.
Sticky relationships with customers w. input on designs of customer SKUs
Family owned and controlled w. new CFO (first non internal hire)
Implemented operating efficiences, overhalued pricing strategy and incentivised sales force
GM up 1000bps and EBITDA margins up 3-fold
Clean net balance sheet
Medical Facilities Corp. (MFCSF)
Owns minority interests in a group of surgical hospitals. They partner w. physicians for ownership of the hospitals. MFCSF run the admin, billing and back office
Activist involvement change mgmt/strategy, led to dividend cut.
Best performing hospitals in geographies, less leverage than peers, have been operating for 20-40 years and earn high quality scores
Tailwinds from aging populatioon and demand for orthopedics
Seneca Foods
Canned vegetavles trading below net current assets. Real estate could exceed enire mkt cap
Stock fell 30% on being removed from S&P 600
Capital cycle - 3rd largest player exited the biz (Del Monte Foods) leaving 2 companies w. 85% of the market. Seneca has capacity to take share.
Passing on pricing after years of pricing wars
Deep dive into PAR, their largest position
Selected to be sole POS for Burger King in NAM, adding 7000 locations to their base of 22,000 (addign $25m in annual recurring revenue on base of $130m)
Underlines how much change has happened since 2019.
Offshore software development resources added, software re-written, balance sheet fixed, added multiplenew modules (back office, loyalty, online, drive-thru and payments) and culture change.
Win at BK likely to drive wins at other Tier 1 QSRs who need to replace home-built systems. Adding Popeyes and Ti Hortons would add >8000 locations. There are alos 10k BK ex-US locations. None of these would require massive R&D or massive marketing spend
“today’s sub-billiondollar valuation will seem quaint”