Company Reports

Snap-on provides premium tools to vehicle repair shops and industrial customers. We believe it will continue to be the top player in the tool industry. The company benefits from a strong brand reputation among repair technicians. Customers value Snap-on’s high-quality and strong-performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. We think customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options.

PG&E emerged from bankruptcy in July 2020 after 17 months of negotiations with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. Shareholders lost some $30 billion in settlements, fines, and costs but retained control. Bondholders were mostly made whole.

Since Ian Edwards took the helm as president and CEO in June 2019, management has transformed and significantly derisked AtkinsRealis' portfolio. During his tenure, the company has ceased bidding on lump-sum turnkey (LSTK) projects and divested its oil and gas business. We view the new strategic direction favorably, as cost overruns on LSTK projects led to negative cash flows in recent years. The company has steadily reduced its LSTK backlog to only CAD 0.3 billion at the end of the first quarter of 2024, which we believe significantly reduces the risk of further material cost overruns. The firm’s operating cash flow inflected positive in the second half of 2023, and we expect more stable results once the firm completes the remaining LSTK backlog.

Once known as a producer of midtier men's shirts, PVH transformed itself by purchasing fashion brand Calvin Klein in 2003, Tommy Hilfiger in 2010, and Calvin Klein licensee Warnaco in 2013. More recently, it disposed of most of its noncore labels to focus on Calvin Klein and Tommy Hilfiger. While the firm lacks diversification, we think it was prudent to focus on its highest-potential properties and returning capital to shareholders through share repurchases. However, although they are popular worldwide, we do not believe that either of PVH’s major brands has the pricing power or competitiveness to provide an economic moat.

In our view, Honeywell is one of the stronger multi-industry firms in operation today. Its underlying strategy is similar in each end market: to embed its own products into the operations of customers from which recurring revenue can be generated through aftermarket servicing. We predicate our long-term thesis on secular demand for warehouse automation, data analytics in power plants, remote security management, energy savings in buildings, and the broader commercial aerospace recovery. Over the next five years, we think Honeywell is capable of mid-single-digit organic top-line growth, incremental segment operating margins in the high 20s to low 30s, 9%-10% adjusted earnings per share growth, and free cash flow margins in the midteens.

Since its initial public offering in late 1995, MSC Industrial Direct has increased its top line at an impressive 11% compound annual rate. Over the past 25 years, MSC has become one of the largest industrial distributors in United States and is especially well known in the metalworking industry, where we estimate it enjoys approximately 10% market share. MSC has historically been a conservatively capitalized company, but it is not afraid to flex its balance sheet when the right opportunity presents itself. The company spent $900 million to acquire J&L Industrial Supply in 2006 and Barnes' North America distribution business in 2013, which bolstered its metalworking and inventory-management products and services. In our view, these acquisitions were prudent uses of capital that improved MSC’s competitive standing.

The majority of Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition—a segment with substantial pricing power. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain, especially given the ongoing premature infant fomula litigation in North America. At the same time, we expect that further secular declines in birthrates in the US will continue to be a drag to the company’s mid-single-digit growth ambitions.

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. We believe that the advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success.

Sungrow Power Supply is one of the largest suppliers of solar inverters, with more than 20% global market share in 2022. With an established stronghold in supplying inverters for utility-scale solar, Sungrow is trying to expand its presence in distributed solar. Distributed solar is a more fragmented market than utility-scale solar, and we expect Sungrow to face more competition on this front. Nonetheless, we expect Sungrow’s solar inverter shipment to grow at a 15% CAGR over our projected five-year period given rapid growth in solar installations.

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation. The December 2021 launch of Adobe Express helps further broaden the company’s funnel, as it incorporates popular features of the full Creative Cloud but comes in lower cost and free versions. The 2023 introduction of Firefly marks an important artificial intelligence solution that should also attract new users. We think Adobe is properly focusing on bringing new users under its umbrella and believe that converting these users will become more important over time.

Virgin Money UK (LSE: VMUK; ASX: VUK) consists of the CYBG business (demerged from National Australia Bank), and the Virgin Money brand in the UK The CYBG merger with Virgin Money UK virtually doubled the size of the bank's loan book and provided a foothold in the larger and faster growing London region. The bank's loan book is split 80% mortgages, 12% business loans, and 8% personal (including cards). We estimate Virgin has under 5% of the mortgage market, with its market share in Scotland and Yorkshire, closer to 10%. In cards, market share is higher at around 8%.

BOC Aviation’s role as an aircraft leasing firm is mainly to provide liquidity to global airlines, either through operating leases or financing arrangements, in their access to aircraft. Rather than lock up their capital in fixed assets, airlines increasingly opt to lease aircraft. Based on data from Ascend Analytics and BOC Aviation, the proportion of the global airline fleet on operating leases has risen to 52% in 2023 from 23% in 1990. We expect BOC Aviation’s market share to be stable, so its volume of leases should at least track global commercial fleet growth of about a 2.9% compound annual growth rate through 2033, based on Oliver Wyman data.

Etsy has carved out an interesting competitive niche, jockeying for e-commerce wallet share across a variety of heterogeneous verticals in the long tail of unbranded products. The firm’s marketplace properties—Etsy, Reverb, and Depop—all target non-commoditized inventories, generate commissions on third-party, peer to peer sales, and strive to create a “treasure hunt” experience around a unique, customizable, and consequently less price elastic product suite. The firm's core "Etsy" marketplace accounts for roughly 90% of consolidated gross merchandise volume, or GMV.

Kraft Heinz benefited from consumers’ penchant for eating at home during the pandemic, with 85% of its sales driven through the retail channel. But we attribute recent performance to its revamped road map, as evidenced by its share position and recent shelf space gains, rather than being merely a byproduct of the macro and competitive backdrop. Since mid-2019, Kraft Heinz has prioritized the pursuit of efficiencies that prove lasting, brand spending elevation (marketing and product innovation), enhancement of its capabilities (category management and e-commerce), and scale leverage to more nimbly respond to changing market conditions, which we perceive as prudent.

Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers built their leading positions through a roll-up strategy and both have expanded their operations into new areas, Jack Henry continues to build out its competitive position organically and remains squarely focused on the bank tech space. Overall, we think this approach has allowed Jack Henry to develop a wide moat, and we think the company will continue to modestly outperform its larger peers.

We think Ulta Beauty’s brand strength provides a narrow moat and has allowed the company to thrive despite economic conditions and other external challenges. Over the past decade, Ulta has become the largest specialty beauty retailer in the United States through store openings, product and brand introductions, improved marketing, and—with more than 43 million active members—an enhanced loyalty program. Sales increased to $11.2 billion in 2023 from $912 million in 2007 as Ulta opened more than 1,000 stores, its shops became more productive, and its e-commerce developed. This success has made Ulta a desirable partner for prestige, mass, and emerging beauty brands. While the firm faces intense competition and is affected by innovation and product cycles in cosmetics, we think it has developed a following that has allowed it to take share from mall-based stores while competing effectively against wide-moat Amazon and other e-commerce. We believe teen girls and women like to sample products in Ulta’s stores and that its salons, selection, promotions, and service encourage frequent visitation.

Visa is a longtime, established market leader that still enjoys strong growth prospects. Despite the ongoing evolution of the payment industry, we think that a wide moat surrounds the business and that Visa’s position in the global electronic payment infrastructure is essentially unassailable.

OGE Energy completed its long transition to a fully regulated all-electric utility in late 2022 when it finished divesting its midstream gas business. Investors can now focus on electricity demand growth and rate regulation primarily in Oklahoma, which represents 90% of earnings.

Halma’s industry-leading profitability is underpinned by acquiring small to medium-size businesses in niche markets with relatively small total addressable markets. Consequently, Halma enjoys a leading market share in many of the group’s product categories and may only have a handful of competitors in other areas. We believe the group’s strong emphasis on research and development, which accounts for 5% of sales, will allow Halma to maintain its market position through a combination of new product releases and product differentiation.

Capri has agreed to be sold to narrow-moat Tapestry for $57 per share, but the US Federal Trade Commission has blocked the deal on antitrust concerns. We believe that Tapestry and Capri remain motivated to close the acquisition and that it will eventually happen, but the government’s action adds considerable risk that it will not.