Company Reports

While inflation and slow economic growth present near-term demand headwinds, we expect Accor to expand its share in the hotel industry over the next decade as a result of its solid loyalty membership of around 90 million and increasing exposure to the premium, luxury, and lifestyle segments, supporting its intangible brand asset advantage, the source of its narrow moat. Accor's growing room share is being driven by an increased presence in higher-end luxury and premium rooms, which was 23% of its total in 2023. This higher luxury presence diversifies Accor from its core economy/midscale exposure, which more directly competes against narrow-moat Airbnb and other alternative accommodations. Overall, we see Accor posting 3% unit growth on average over the next 10 years, well above the roughly 1% long-term industry rate in its core Europe and North African region (44% of total rooms in 2023).

Following the appointment of railroading legend Hunter Harrison as CEO in 2012, Canadian Pacific embarked on a successful profitability turnaround. Initially upon taking the helm, Harrison closed numerous intermodal terminals and hump yards to rightsize the network.

As a fully integrated waste hauler, Waste Connections leverages its large network of collection routes that bestows significant control over the waste stream, funneling trash from commercial, industrial, and residential end markets into its valuable landfill assets. Waste Connections' secondary and rural market strategy faces less competition and delivers higher profit margins relative to larger, urban-focused competitors Waste Management and Republic Services.

Anhui Yingjia is one of the four “Golden Flowers” in the Anhui local baijiu market, and it produces rich-flavored baijiu with a strong focus on mainstream products. Despite a weaker brand heritage, the company has gained a reputation as one of the few natural and organic baijiu producers in the industry, successfully launching its higher-end flagship product Dongcang Yearly in 2015. This allows the company to upgrade its product mix and capture the solid premiumization trend in Anhui, and generate economic profits well into the future, in our view.

Anhui Gujing is one of the eight national well-known baijiu brands. Thanks to its strong brand heritage and deep-rooted distribution network in the regional market, Gujing has become Anhui’s largest distiller by sales since 2012 and has led the province’s premiumization via sales growth of its flagship premium Gujing Year Puree series, which allows the company to enjoy decent profitability and returns.

From the start of the rail renaissance in 2004 through 2008, Norfolk Southern posted the highest margins among US Class I railroads. Its operating ratio (expenses/revenue) deteriorated in 2009 during the great recession, and remained stuck between 69% and 73% from 2010 to 2015. This fell short of progress made by Union Pacific and Canadian Pacific, which lack Norfolk's exposure to Appalachian coal. However, by 2017 Norfolk was back on track, improving to an adjusted 60.1% OR in 2021 as it bolstered pricing execution and adopted precision railroading principles, which have yielded more efficient use of locomotive assets and labor. Of note, in late 2019, former Canadian National CEO Claude Mongeau (2010-16) joined Norfolk's board of directors to help bolster PSR efforts.

With an 85% digital sales mix, a strong loyalty program, and a quickly growing carryout business, Domino's looks well positioned to navigate a turbulent industry environment. While a shift toward carryout and dine-in options has weighed on recent results, the firm has taken 210 basis points of market share in the quick-service restaurant, or QSR, pizza category since 2018, seeing its share of global sales swell to 20.2% in 2023, according to Euromonitor data and our calculations. While we expect a challenging couple of quarters, with evidence of consumer trade-down and declining industrywide traffic, we view the firm's long-term emphasis on defending franchisee profits, supporting its growing carryout business, strengthening its tech infrastructure, and building store density at the market level (fortressing) as prudent.

Wuliangye Yibin is the second-largest distiller in the premium Chinese baijiu market. Its core product, flagship 52-degree Wuliangye, is widely known as the best strong-aroma liquor, which is a type of distilled liquor that is sweet-tasting, smooth in texture, and mellow, with a gentle, lasting fragrance. The liquor is produced in a unique natural ecological environment, with suitable climate and microbial environment for fermentation. Its premium quality and over 650 years of history have given the company strong pricing power, reflected in its superior profitability and returns on invested capital among its peers.

Hawaiian Electric Industries derives approximately three fourths of consolidated earnings from an electric utility and the remaining from Hawaii-based American Savings Bank, a business mix unique among its utility peers.

Luzhou Laojiao, founded in 1955 from a group of 36 ancient brewing workshops dating back to the Ming and Qing dynasties, is now one of the top three premium baijiu distillers in China. As the original rich-flavored baijiu distiller, the company enjoys a rich legacy that few other baijiu producers have. We believe Laojiao’s hard-to-replicate aged cellars, classic brewing technique, and centuries of history of producing quality products have established a strong competitive advantage in brand strength and pricing power. Its extensive distribution network and deepening cooperation with distributors have also fortressed its competitiveness, allowing it to generate economic profits well into the future.

Waste collection and disposal industry leader WM enjoys leading market share and unmatched dominance in landfill ownership, which is nearly impossible to replicate given immense regulatory hurdles. This leadership position expanded after the firm's October 2020 acquisition of Advanced Disposal, which had been the fourth-largest publicly traded waste collection and disposal company in the United States.

With approximately 95% of its revenue from the defense sector, Saab is well positioned to capitalize on the expected increase in European defense budgets to at least 2% of GDP due to the Russia-Ukraine conflict. This increase, coupled with EU initiatives to enhance defense capabilities through resource pooling and procurement coordination, presents significant growth opportunities for the company. Saab should realize increased demand for its support weapons, sensor systems, airborne early warning, and surface radar systems, with expectations for further growth as European nations replenish their military inventories.

Chipotle's business strategy rests on five pillars: running successful restaurants, attracting and retaining diverse talent, making the brand visible, relevant, and loved, investing heavily in restaurant tech and innovation, and improving access and convenience for customers. In our view, the company has carved out an enduring niche in the US restaurant landscape, with competitive menu prices, extreme convenience, and "food with integrity" allowing it to lure away customers from both casual dining and traditional fast-food competitors.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 12% in 2023. Despite the expectation of little sales growth, we expect Mattel to produce operating margin expansion in 2024, thanks to its $200 million cost-saving program (2024-26). Additionally, the firm's shift to a capital-light strategy has provided lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), but profits could be hurt by tactical investments in dolls and vehicles as well as logistics and input cost inflation.

Despite near-term macroeconomic challenges for the consumer—still-elevated inflation, depleted consumer savings, we expect Wyndham Hotels & Resorts to gradually expand room share in the hotel industry and maintain a brand intangible asset and switching cost advantage. This view is supported by the company's roughly 40% share of all US economy and midscale branded hotels (where Wyndham has a handful of the top 10 brands based on guest satisfaction, according to J.D. Power) and the industry’s fourth-largest loyalty program by membership (108 million as of March 31, 2024), which encourages third-party hotel owners to join the platform. Also, Wyndham has around 10% and 5% share of existing US and global hotel rooms, respectively, with a pipeline that represents around 28% of its current unit base. As a result, we see room growth averaging over 3%-4% during the next 10 years (2024-33), above the 1%-2% lift we model for the US hotel industry. Further, we forecast around 3% annual revenue per available room growth through the rest of this decade, aided by further price and occupancy increases, as well as incremental demand from increased US infrastructure build out.

As a “fabless manufacturer,” Keyence outsources its production in a highly effective manner that minimizes risk of potential competition by suppliers. With its consistently high gross margins over the long term, even with an outsourcing model, we believe Keyence has some negotiating leverage regarding cost with its network of suppliers. The company buys raw materials in bulk, which are then sent to the suppliers of its products’ components. It then collects the finished components before sending them to the assemblers. This way, the assemblers do not know the component suppliers, and this prevents Keyence’s suppliers from being aware of the entire production process of the end product, thus preventing them from becoming competitors.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

Kyocera is a Japanese conglomerate that manufactures an array of ceramic components and electronic devices. The company has repeatedly made bolt-on acquisitions to prop up tepid organic growth, but with approximately 300 subsidiaries and three major reporting segments, we think Kyocera has been unable to realize meaningful synergies from them. With its hand in so many different businesses, many of which are unrelated to its core business, the firm has been unable to focus its resources on its most profitable segments.

Unlike its two main, yet smaller, competitors Sinopharm is a pure-play medical distributor that does not have a sizable portion of revenue from the manufacturing business. As the largest medical distributor, Sinopharm has been growing at a 10-year compound annual growth rate, or CAGR, of 10.7%, with both industry expansion and industry consolidation. It aims to further increase distribution market share by deepening its network coverage and focusing on industry policies.

LyondellBasell is one of the largest petrochemical producers in the world, manufacturing ethylene and propylene and a myriad of chemical derivatives, including propylene oxide, or PO. These products form the building blocks for downstream chemicals and plastics that are used in industrial and consumer markets alike. About 70% of LyondellBasell’s ethylene and polyethylene production capacity sits in North America. Its total ethylene and propylene capacity is fairly evenly split between North American and international markets.