Company Reports

BASF is the world’s largest chemical company, producing commodity and specialty chemicals in nearly every major category. The firm maintains a top-three market position in over two thirds of its businesses. Its products are sold to a wide variety of end markets ranging from industrials to transportation to pharmaceuticals to agriculture. The catalysts business generated around 17% of companywide revenue in 2023, while agriculture generated roughly 15%. The remaining 11 business lines accounted for roughly 10% or less.

Garmin specializes in GPS-enabled hardware and software for recreational and defense needs. The company became a household name with the debut of its automotive portable navigation device. However, as smartphone apps have disrupted the PND market, Garmin’s major revenue sources have shifted to its aviation and marine segments as well as its fitness and outdoor segments as the smartwatch market has taken off. We’re confident that Garmin will be able to uphold excess returns on capital in the long term, given the robust operating margins that we think the company will be able to maintain in its moaty segments: aviation, marine, and outdoors.

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, and structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing military aircraft segment and acquired parts of Bombardier's commercial jet business in 2020. Spirit's interim CEO since October 2023, Pat Shanahan, recently stated, "only the OEM can unlock that value" of the manufacturing intellectual property and highly integrated supply chain of large aerostructures production that Spirit offers, which amounted to a pitch for selling the company to Boeing and carving off other parts related to Airbus, which now owns the A220 line pioneered by Bombardier.

Bentley Systems is a moaty engineering software firm that has solid growth opportunities ahead, in our view. Since the 1980s, Bentley Systems has carved out its niche in the fragmented computer assisted design market, targeting public works and utilities needs, covering anything from roadway design to wind analysis. These applications are anything but discretionary in nature, as we see little chance of its users going back to pencil and paper for the design and modeling of infrastructure assets. But beyond these mainstay applications, over the last decade, Bentley has expanded its scope from purely single applications to platforms. Such platforms track project management and assets after the design and simulation phases of its applications, and we think they bode significant growth potential as their markets remain underpenetrated—like digital twin deployment. In addition to its platform approach, small to medium-sized businesses remain a growth avenue for the firm as they make up about half of Bentley’s $30 billion total addressable market but only about one third of revenue. These factors combined have us confident Bentley can achieve top-line growth over 13% over the next five years, with margin expansion in tow.

We think Williams is well positioned to benefit from clean energy investments as well as the need for AI and data centers to rely on gas and gas storage as a back-up to renewables. This is a positive for investors, creating a more stable financial profile and more high-return growth opportunities than most of its midstream peers. Clean energy investments could become a material growth area in the next few years, with the recent Orsted partnership a particularly attractive growth engine for its Northwest portfolio.

TIM, 67%-owned by Telecom Italia, is the smallest of the three major wireless carriers in Brazil, claiming about 24% market share based on customers served. The removal of Oi from the market in 2022 has greatly improved the competitive environment. While we expect TIM will generate steady results in the coming years, we believe the firm’s modest fixed-line footprint leaves it at a disadvantage to both its larger competitors.

We view Rockwell as the highest quality automation player on the west side of the Atlantic based on quality, breadth of offerings, and shrewd strategic partnerships. Today, it is one of the best-in-breed competitors seeking to gain a stronger foothold where technology meets traditional manufacturing, which Rockwell deems the Connected Enterprise.

Vertex Pharmaceuticals was known for discovering blockbuster hepatitis C drug Incivek, which is now overshadowed by the company's robust cystic fibrosis franchise. Vertex's approved cystic fibrosis drugs—Kalydeco, Orkambi, Symdeko, and Trikafta—will make the firm eligible to treat about 90% of the CF population, assuming international and pediatric approvals. We expect Vertex to maintain its dominant position in CF, given the strong efficacy of its therapies, lengthy patents, and lack of competition, while developing pipeline candidates in other rare indications to spur growth.

DHL Group is the leading postal operator in Europe, among the top three international express package carriers, and the world's largest air and ocean forwarder. Its legacy German postal operations (roughly 12% of total revenue) face secular demand declines and are heavily regulated. However, we expect growth in the DHL segments and growth in the German (and international-domestic) parcel delivery operations to continue to offset declines in traditional mail-related activity (on average) over the freight cycle, and despite an overall soft freight and logistics backdrop in 2023 and into first-half 2024.

FMC is a pure-play crop chemical producer. It is one of the five largest patented crop protection companies globally. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding its portfolio of crop chemicals. In late 2017, FMC acquired DuPont's crop chemical portfolio, which included the blockbuster diamide insecticides. At the same time, it divested its nonagriculture businesses.

We award a wide moat to Coca-Cola Femsa. We expect brand affinity from its status as wide-moat Coca-Cola's largest bottler by volume, combined with cost advantages from its massive manufacturing and distribution footprint, will reinforce its durable competitive position and maintain excess investment returns for more than 20 years.

Sandoz is one of the largest off-patent pharmaceutical manufacturers in the world. It generates roughly 75% of sales from generic drugs and the remainder from biosimilars and it has a significant presence in Europe, a region that generates around half of its total sales. Generics, on average, suffer low- to mid-single-digit price erosion year over year, but we expect Sandoz to offset cost headwinds through more volume and new product launches. The firm also seeks to dedicate roughly $600 million over the next five years in expanding generics capacity which could help lift margins upon successful integration. We also forecast Sandoz to expand its presence in complex generics, such as injectables. They are more difficult and costly to develop/manufacture but also face less competition which helps to maintain higher price and margins compared with simple generics.

Waters helps clients perform scientific research by providing analytical instruments, services, and supplies. The company specializes in liquid chromatography and mass spectrometry products (nearly 90% of sales), which are used primarily by biopharmaceutical firms to analyze a molecule’s structure during the drug discovery, development, and production processes. These tools can also be used in food and environmental quality testing as well as other industrial applications, though. Also, Waters helps scientists examine the physical properties of various materials through its thermal analysis tools (low-double digits percentage).

International Flavors & Fragrances is a global leader in the flavors, fragrances, and biosciences specialty ingredients space. The company's portfolio has changed in recent years with the acquisition of DuPont's nutrition and biosciences business in 2021 and Frutarom in 2018.

The restaurant industry has changed a lot over the past three years. We remain encouraged by the ability of the largest operators, including Yum Brands, to accelerate critical investments in e-commerce platforms, delivery integration, and technological solutions that meet the demands of the modern restaurant consumer. Recent acquisitions demonstrate the emphasis the firm has placed on digital enhancements, with more than 50% of global systemwide sales now coming through digital channels, which we expect to remain integral to Yum's strategic playbook.

Hexagon, based in Sweden, is a global provider of hardware, software, and services across industries such as construction, manufacturing, oil and gas, agriculture, and mining. Hardware includes sensors, measuring devices, and other equipment typically used in conjunction with its software products. Sensors collect data and positioning information for equipment, which is fed into software that helps manage and optimize operations. Services are typically maintenance contracts on the hardware. Currently, the company’s revenue is around 40% hardware, 40% software, and 20% services. Hexagon generates around 80% of revenue through its direct salesforce, which we think is an advantage versus competitors who typically rely more on partners and distributors.

In recent years, Aecom has transformed its portfolio and focused on expanding its professional services business. It exited several business lines including fixed-price combined-cycle gas power plant construction, at-risk oil and gas construction, and international at-risk construction projects. In January 2020, Aecom completed the sale of its management services business. We view this transformation favorably, as we believe that the strategic shift has resulted in a less volatile and more profitable portfolio.

Wayfair plays in the fragmented home goods market in North America and Western Europe ($800 billion-plus global opportunity), offering more than 30 million products from more than 20,000 suppliers. We think its differentiation comes from its breadth of products and logistics network, which permits faster delivery with fewer touch points and less product damage than its peers. However, we believe Wayfair lacks brand strength, evidenced by its elevated advertising spending relative to peers and customer acquisition costs. Moreover, we think peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base of customers aged 25-54 years with an average household income of $60,000-$175,000 means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies our no moat rating.

Whether through credit ratings, financial indexes, or commodity price reporting, S&P Global has established a wide moat from its data-driven benchmarks. Given the embedded nature of these benchmarks, S&P enjoys a strong competitive position and strong operating margins. In February 2022, S&P completed its $44 billion acquisition of IHS Markit. We believe IHS Markit's recurring revenue model will further diversify S&P's revenue, limiting upside and downside scenarios for the firm.

Subsea 7 specializes in offshore engineering and construction. The firm handles the majority of operations for offshore oil and gas projects, from design to fabrication and installation to maintenance. It’s one of a few firms with the requisite capacity and technological capability to execute the notoriously complex offshore projects.