Professional Documents
Culture Documents
2019 CSIMA
Yen Liow, Aravt Global
Conference P. 3
Yen Liow is the Managing Partner at Aravt Global LLC. Mr.
Yen Liow P. 5 Liow directs the firm´s research process and actively
researches many of the investments in the portfolio. Mr.
Students´ Liow was previously a Principal at Ziff Brothers Investments
Investment Ideas P. 15 (ZBI) and a Managing Director at ZBI Equities, ZBI´s equity
market-neutral fund in New York. Mr. Liow joined ZBI in
Bill Stewart P. 24 2001 and ran a team that oversaw ZBI Equities´ investments
in the media, telecom, energy, and agriculture sectors.
John Hempton P. 33
Prior to ZBI, Mr. Liow was a Consultant at Bain & Company
in its San Francisco, Sydney, Singapore, and Beijing offices.
Editors:
Ryder Cleary Bill Stewart, Stewart Asset Management
MBA 2019
William P. Stewart is the Executive Chairman and a
Gregory Roberson, Esq. founder of Stewart Asset Management, LLC. He
MBA 2019 began working on Wall Street in 1955 as an
David Zheng employee on the floor of the New York Stock
MBA 2019 Exchange. Subsequently he worked for Spingarn,
Heine & Co. as an Investment Analyst, before going
Frederic Dreyfuss on to Pyne, Kendall & Hollister, later known as Riter,
MBA 2020 Pyne, Kendall & Hollister. He became a Research
Sophie Song, CFA Director at the firm, then President of the
investment banking subsidiary, and finally Chief
MBA 2020 Bill Stewart
Executive officer. Riter, Pyne grew to become the
John Szramiak tenth largest NYSE member firm in the years he was
MBA 2020 (Continued on page 24)
Value Investing Program Class of 2019 Jan Hummel, Paradigm Capital AG, with
Professor Tano Santos, Faculty Director
of the Heilbrunn Center for Graham and
Dodd Investing
Volume I, Issue
Page 23 Page 3
Action-packed annual CSIMA Conference schedule Best Ideas panel with Joseph Fleury ´14, Dennis Hong, and
Adam Wyden ´10, moderated by Kristin Gilbertson
Fireside chat with David Zorub ´03 and Ted Seides Conference attendees have a conversation
Fireside chat with Susan Byrne and Jason Zweig Understanding Management Teams panel with David
Simon ´85, William Thorndike, and Tracy Travis ´86,
moderated by Cheryl Strauss Einhorn
Page 4
29th Annual
Presented by:
The Heilbrunn Center for Graham & Dodd Investing
The Pierre
2 East 61th Street
New York, NY
Mr. Liow earned a I started working when I was to get a summer internship at
Bachelor of Laws (Hons.) 14. I worked every summer Ziff Brothers Investments for
and Bachelor of and took every opportunity I the remainder of the summer.
Commerce from the could find to learn about Ziff Brothers really opened my
University of Melbourne in business. It was mostly a lot of eyes to the professional
1994 and a Masters of manual jobs that eventually led investing world. I thought
Business Administration to professional internships and hedge funds were traders,
(George F. Baker Scholar) opportunities. I bought my first which was not appealing at all
from Harvard Business stock when I was 14 (it was to me. What I found at Ziff
School in 2001. Santos, an Australian Oil & Gas was a great group of people
company) and have been who did deep and creative
Mr. Liow lives in investing ever since. research. Ziff had a learning
Manhattan, New York with culture in which I spent the
Yen Liow his wife and two children. For my undergraduate studies, next 13 years helping to build
Mr. Liow serves on the I did a double degree at the an amazing business. Eventually
Finance and Audit University of Melbourne in I ran their Technology Media
Committee of the Trinity Commerce and Law. I Telecom, Agriculture, and
School (NYC), is a board originally started with a triple Energy groups.
member of the Success degree – I also studied
Charter Network and is a Actuarial Sciences for the first Ian McKinnon was the
board member of We.org few years – but I wised up to portfolio manager there. He
(Tristate area). Mr. Liow is the fact that it was far too was one of the greatest human
an Adjunct Professor at much work and I wanted to beings, coaches and mentors
Columbia Business School have some fun. one could ever wish to work
and guest lectures for. Ian had a huge impact on
regularly at universities After that I went to Bain & my career and remains a close
around the country. Company. I started off in their friend.
Sydney office and then went to
Graham & Doddsville their San Francisco, Singapore While I was with Ziff Brothers,
(G&D): Could you start by and Beijing offices over the I also had the opportunity to
discussing your background course of five years. Bain was spend time with Eddie
and how you got into this an amazing, diverse set of Lampert, who opened my eyes
business? practical experiences. But the to case studies. I asked him
most important part for my how he developed such an
Yen Liow (YL): I´m development was the two incredible business acumen so
Malaysian-Chinese Australian. I years that I spent consulting early in his life, and he shared
was born in Kuala Lumpur, with Dell Computers. Dell´s with me that he spent a
Malaysia, but I immigrated to stock price grew tenfold over substantial part of his twenties
Melbourne, Australia in 1976 that period. I learned an and thirties purposefully
when I was four years old. My unbelievable amount about training by studying the best
dad was a dentist and my mom hyper-growth and what world- investments in history through
was a teacher. They didn´t class execution looks like, a case study methodology. I
know much about business, which had an important impact took that on. We started
but I fell in love with it at a on my focus and philosophy as doing cases internally at Ziff
really young age. My best an investor. After Bain, I went and taught our approach at
friend´s father was a gentleman to Harvard Business School Harvard Business School in
named Peter Gunn; he was a where I graduated as a Baker 2008, and continued the
self-made transportation Scholar in 2001. process at Columbia Business
magnate in Australia and I was School in 2013. The case study
very fortunate that he took me During the summer in between methodology was the most
under his wing and became my first and second year at important part of my personal
one of my key mentors when I business school, right at the development and is one of the
was young. At the age of 15, peak of the dot-com bubble, cornerstones of Aravt Global´s
Peter essentially helped inspire the startup that I was interning creation.
the next 25 years of my life. at shut down. I was fortunate
(Continued on page 6)
Page 6
Harvey Sawikin
Yen Liow, Aravt Global
In 2013, I was a bit over 40 briskly than the broader by competition. We focus on
and I had to scratch the itch - market. the small percentage of stocks
to find out what it would be that resist those forces,
like running my own Over ten years ago, my team primarily economic
investment firm. So, in did a deep empirical study on monopolies and functional
February 2014, we launched stocks that compounded at oligopolies. That is where we
Aravt Global. north of 20% on five- and ten- spend all our time and
year rolling periods over the resources. The inefficiency we
G&D: What´s the inspiration last three decades to try to exploit is the absence of mean
behind the name? understand what drove reversion.
performance. We wanted to
YL: Aravt means the number deeply understand the patterns When I started my career, I
“ten” in Mongolian, which was and if they could be repeated. thought I needed the largest
the smallest unit in Genghis possible investment universe
Khan´s army and represent to find opportunities. We have
our humble beginnings. “We just don´t back learned that in fact the
Genghis Khan´s army had opposite is true. We needed
200,000 cavalrymen who situations where the to find a rich vein of repeatable
conquered 10 million square inefficiency in a finite universe
win rate is even. You
miles of the Earth over 30 that we could focus on, so
years in the 13th century. This can´t compound capital when price dislocation occurs
is relevant to investing because we could exploit it. When the
you can´t do something of that if the odds are not well universe is too big, that is an
scale by picking fair fights. You unachievable goal. At least it
can´t just do common things. in your favor. We´re was for me.
The central premise of
Genghis Khan´s strategy was looking for unfair fights What we focus on is durable
unfair fights. Genghis Khan was where a company´s growth businesses that can
successful because he hated compound free cash flow or
putting his men in harm´s way, advantage is substantial earnings per share at a healthy
and that is the first principle of rate, which we describe as
Aravt Global. We just don´t and repeatable.” between 15% and 25%.
back situations where the win Durable growth businesses are
rate is even. You can´t more predictable businesses.
compound capital if the odds This led to over a decade of As investors, we are studying
are not well in your favor. examination and dissection history to try to predict the
We´re looking for unfair fights, through the case study future. In situations that are
where a company´s advantage methodology. Over the past highly dynamic, which I would
is substantial and repeatable. few years, we have integrated define as lower quality
that knowledge into the businesses or lower quality
G&D: Can you talk a little bit processes and culture that industry structures, there is a
about the other principles that define how we approach our loose link between history and
guide Aravt Global? business. Let me share a few of the future. As such, your ability
the elements with you. to predict is low, regardless of
YL: Albert Einstein said that how many hours you spend
compound interest is the most The first and most important researching.
powerful force in the universe. element is game selection. We
We agree – we think had to decide where to focus When you spend your time in
compounding is the most our efforts. durable businesses that are
important framework in highly moated, the opposite is
investing. Our business model, Most of the market will revert true. Our job is to find
portfolio and structure is built to the mean over time. That is situations where history does
around it. We focus on horses, one of the most important hold, and to constantly ensure
a sub-genre of durable laws of economics – that that new dynamics do not
compounders that grow more excess profits get eroded away jeopardize the durability of
(Continued on page 7)
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Harvey Sawikin
Yen Liow, Aravt Global
that moat. When the moat outsourced trader, in and be patient in deploying our
breaks down, our ability to Vancouver. We don´t generally work.
predict breaks down. When trade the same day we make
our ability to predict breaks decisions. These are culturally G&D: How does valuation
down, it is hard to know what important factors. We have play into your approach?
to do with volatility. Is it four analysts on our team, plus
opportunity or is it risk? Our me as the portfolio manager. YL: Valuation discipline is the
portfolio is highly durable and We only need a few great fourth element. We don´t
easier (but still not easy) to ideas each year for our invest in all types of growth
predict. When volatility hits, at portfolio to stay healthy and stocks, but in a specific type
worst we hold through, and at well-stocked. There is no need that we call 20/20s: 20x
best we exploit it. It´s a for immediate reactions on forward earnings for 20%
profoundly different place, and anything that we do. There intrinsic value per share
that is all about game selection. was a 20 month period where growth. Now, obviously
Simply put, our stocks may be we only bought one stock. It is valuation is not as simple as
volatile at times, but our really hard to build a culture that and 20/20s is not all that
businesses, in general, are not. and process where the whole we do, but it is the central
team deeply understands the tendency of our portfolio. One
In game selection, we also important distinction between central premise we believe is
focus on the replication phase intense research activity and that over time, the
of a business life cycle. There value-added portfolio activity. compounding of our long
are three stages we view as portfolio will revert to the
the life cycle of a normal After another detailed study of underlying earnings power
business: proof of concept, market returns three years growth of the businesses we
replication and maturation. ago, we cut off both tails in our own. If we have done our
The first phase has explosive portfolio. Specifically, we don´t underwriting well, the 20/20s
outcomes, both up and down. pursue the extreme upside will not only give us downside
It is very hard to predict one-year stocks, because we protection into volatile
however, with very wide don´t need to - we found that markets, but also the room to
outcomes. We focus on the tremendous short-term stay deeply engaged with our
second phase: on businesses downside risk exists there, and large investments for many
that have won their niche and it usually doesn´t let us size years, which I believe is the
can replicate over long periods and stay well-invested for long hardest part of riding horses.
of time. periods of time. We adjusted
our focus to the compounders While valuation multiples
The second element is systems that can still compound at 20%, matter a lot in the short-term
design. We´ve created a firm, a 30% or 40%, and where we – they drive stock
culture and a process to can be bigger for many years. performance tremendously in
support our game selection. We still get the occasional up years one through three – in
Great systems design allows 75% to 100% stock in a year, years three and beyond, the
for engineering tolerance. but our performance is not impact of a change in multiples,
When we are dealing with dependent on it. unless extreme, fades when it
capital markets, we need to comes to long-term capital
have tolerance for a lot of This brings us to the third compounding.
imponderables – mistakes, area, which is portfolio
randomness, stress – but still concentration. We developed a The fifth element is duration
be able to perform. Our search algorithm that narrows and capture. All of what I´ve
organization is built around our universe of 3,000 or so described allows us to hold
purposeful preparation and stocks into a far more defined our investments for long
error minimization. universe of 200-300 companies periods of time. We focus on
that qualify for what we do. growth stories that can
Built into that systems design is We then deploy capital into replicate for many years on
having a purposeful culture. the best 15-20 of those ideas. end. Roughly a third of our
None of us have a Bloomberg This concentrated portfolio portfolio is almost five years
terminal. We have an allows us to hold the bar high old (the age of our fund), a
(Continued on page 8)
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Harvey Sawikin
Yen Liow, Aravt Global
third is two-and-a-half to five Contrast that with a high G&D: How do you evaluate
years old and a third is velocity portfolio, where the management and how does it
younger than two-and-a-half work that you do becomes fit into your investment
years. The 20/20s combined obsolete quickly. Our insights process?
with our game selection allow compound and can stay fresh
us to be sized bigger in our in our actionable inventory for YL: Management is very
names and stay big for long many years on end. That builds important to us, because
periods of time. Four of our patience into our process, but management is the allocator of
five oldest investments are still it also permits us to spend a all of a firm´s resources and,
in our top five largest holdings, tremendous amount of time over a five- or ten-year holding
and all five are within our top on our research. period, they´ve allocated the
ten. majority of the capital of a
“We compare firm. We look for specific
One of the important benefits factors in assessing
of duration is tax-efficiency, investing to a management, with the simplest
which really adds to our test being ethics. Are we
limited partner´s total return professional full- dealing with an ethical
over time. It also allows us to management team? Do they
have tremendous return on contact sport, and all have a reputation for doing
time, which is my next point. shareholder unfriendly things?
professional sports The term we use is: is the
Once you pull all of this have a high training-to management team handshake
together, we´re given a lot worthy or not?
more time to do our work in -playing ratio.”
the diligence process, which is One mistake I made earlier in
area number six. Our portfolio my career was investing in
construction allows us to The final element is training. questionable management
spend many months on We train deeply, as investing is teams, believing that a cheap
individual ideas. Our process is a game that never ends or valuation more than made up
both quantitative and stops adapting. We compare for management. We just
qualitative. The quantitative investing to a professional full- don´t expose ourselves to that
components involve breaking contact sport, and all risk anymore and seek to
down all our theses into clear professional sports have a high invest in and support high
articulations of growth drivers training-to-playing ratio. We quality people.
and what we´re playing for think it´s absolutely critical to
over long periods of time. have a high training-to-playing G&D: Do you hedge your
ratio. We train a tremendous long portfolio with shorts?
Qualitative research involves a amount, and I still think it´s not
tremendous amount of enough. YL: Our long and short
primary research. We do our portfolios are each designed to
own primary research in The case studies I mentioned be standalone portfolios and
house, are supplemented by are an integral part of our not hedges, pair-trades, or
investigative journalists and training. We generally don´t specific offsets. We look to
have an in-house forensic do investment case studies on create a portfolio of high-
accountant. We are a single case basis. We´re quality ideas on both sides.
comfortable spending a lot of looking for patterns, not single Indeed, we are in the early
time on our research as we idiosyncratic outcomes. stages of launching a long only
believe if we´ve selected the Clusters of cases are very strategy.
ideas well upfront in our important, and we generally do
process, then it´s a question of them in batches of three to six. G&D: How does the broader
when – not if – our inventory Contrast learning is also very economy factor into the
gets deployed into our live important, as understanding investment decision process?
portfolio. the counter case will highlight
even more what the YL: I think the first and most
differences were. important rule in risk
(Continued on page 9)
Page 9
Harvey Sawikin
Yen Liow, Aravt Global
management is awareness. it opportunity or is it risk? The balance etc. – it may be a Bank
Macro tells us what kind of more explicit you make of America loan, but it´s
environment we are currently implicit insights, the better you operating on Black Knight´s
in, but it´s difficult to predict will be able to take appropriate software. The business was
macro outcomes and a low action and think clearly during originally formed in the 1960s,
return on effort. However, times of stress. Trust me, it is but was fully spun off from
trying to understand where we still really hard at those Fidelity National Financial
are in the cycle informs broad moments, but at least you have (NYSE: FNF) in 2017.
risk positioning and tells us a fighting chance.
how much of our balance We believe Black Knight has a
sheet we should deploy at the G&D: With the market now near monopolistic position in
edges. But we are back around all-time highs, do mortgage servicing software,
fundamentally bottoms-up in you find the current landscape which is over 80% of total
filling our portfolio. for finding long ideas much EBITDA. It has three basic
tougher than it was maybe business lines. The first is
G&D: Does your process three or four months ago? mortgage servicing software, in
change at all in environments which it has 62% market share
like Q4 of last year? Is there YL: Well, three or four in first-lien mortgages, going to
more of an added incentive or months ago it was amazing. But 70% and 19% market share in
rush to get into names when we´re still finding interesting second-lien mortgages, going
you see that the market´s ideas, and frankly the best part to 30%. There is a runway for
down 10%, 12% in a quarter? about what we do, again going continued market share gains
back to our systems, is that we in both segments, but
YL: Absolutely. We bought don´t need to find many. As especially in second-lien. It also
three stocks in one day. We long as there´s durable growth has mortgage origination
did not put the entire positions at reasonable prices, we can software where it´s the second
on in one day, but we started engage – or not at all. We are largest third-party platform
slowly loading positions as happy owning what we´ve got. after Ellie Mae. The final
soon as we saw the market get We don´t have to buy a single business line is a solid data and
emotional and the IRRs stock. There´s nothing forcing analytics business that
becoming attractive. So, yes, our hand; our portfolio should competes against CoreLogic.
we bought a lot of stocks in continue to compound
the fourth quarter last year. healthily. We´re comfortable We love subscription-based
This was unusual for us and, with our visibility of it. Will it business models. Why?
again, we don´t really need to. get hit in a recession? Of Because they are generally
But software went on sale, so course, it´ll get hit in a easier to predict and project.
we picked up a few stocks that recession. But can we hold We love subscription growth
came into our strike zone. Our through in a recession? We businesses and this is one of
process allows us to act if we can hold through in a the best we have seen. Black
are provoked. recession. Knight is also the lowest churn
subscription business we own,
That´s also why we focus so G&D: Do you have any new which is also a very strong
much on training. It´s one thing positions in your portfolio that indicator of business quality. In
to have implicit gut instincts, you think are really good the last 10 years, only one
but it´s another thing to have examples of “horses” – significant customer left its
explicit knowledge. Case durable compounders that you platform (post GFC), and that
studies and deep pattern think can grow 20% or 30%? customer recently came back
recognition let you take the to Black Knight after years of
implicit and make it explicit. In YL: One investment that we trying to do it internally. It also
our business, the toughest made last year is Black Knight has strong pricing power, high
moments happen at the (NYSE: BKI), which is a SaaS returns on capital and an
bottom of the Nike swoosh, company in the U.S. mortgage amazing management team.
when the stock price of one of servicing industry. When you
our investments is under a lot get a statement with what you One of the reasons we
of pressure. In that moment, is owe on your mortgage, your invested now is that we´re in
(Continued on page 10)
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Harvey Sawikin
Yen Liow, Aravt Global
the midst of a once-in-a- YL: In general, yes, we try to Black Knight´s revenue is
generation regulatory change. take a first-person look at the based on the number of
Post-GFC, the government software. But frankly, we´re mortgages (i.e. stock) which is
significantly increased not making judgments on the very consistent and normally
regulations for mortgage quality of the software. We grows 1-2% per year. Even into
servicing and originations. This don´t believe that´s an edge. deep cyclical troughs, like
increased compliance cost and Even if we got the most today, the negative revenue
increased risk of immense fines experienced software impact on Black Knight is quite
for non-compliance actually developer to tell us if it´s a minimal. Even on the mortgage
increased Black Knight´s good or bad design, that´s only origination side, which is 6% of
competitive advantage. part of the equation in revenue, Black Knight has
software businesses. Sales and contractual minimums. The
Additionally, Black Knight´s distribution is equally as balance sheet is levered
software is regarded as the important as the product itself. around three times, which
heart and lungs of many banks´ enhances equity returns, but
mortgage operations. It´s very it´s a business that can handle
painful, if not nearly impossible, “We love subscription- leverage.
to rip it out and replace. We
love businesses that are deeply based business models. G&D: Any other recent
embedded in its customers´ Why? Because they are additions that you´re excited
businesses. about?
generally easier to
All of this is being combined YL: GoDaddy (NYSE: GDDY)
under a new leader, Anthony predict and project. We is a really fun one. This is
Jabbour. Anthony was another subscription, high-
previously the COO at Fidelity love subscription recurring revenue business.
National Information Services And it has a dominant position
(NYSE: FIS) and has the growth businesses and in their market – it has about
experience of running a [Black Knight] is one of ~23% of all domain
business multiple times the size registrations and roughly half
of Black Knight. We think the the best we have seen.” of new domain registrations in
world of him. He´s ethical, the U.S. Its competitive
aligned, capable and hungry. advantage comes from its
Moreover, the chairman of Black Knight´s software is name recognition and superior
Black Knight is Bill Foley, relatively older than some of organic search ranking, which
who´s a legendary capital its peers – it´s one of the gives GoDaddy the lowest
allocator who has original SaaS companies, customer acquisition cost in
compounded capital at high- actually – but it´s just so the industry.
teens for over three decades. sticky… it´s not something
We think the combination of that banks can easily change. The industry doesn´t really
Bill and Anthony puts us in a We´re trying to understand compete on price when it
position of tremendous software from the client´s comes to domain registration,
stewardship at a reasonable perspective which gives us since it´s a fraction of the cost
valuation. insight into its pricing power, of running a business. While
stickiness and distribution domain registration is a lower
Black Knight trades at 24x model. margin business, it´s an
2020 EPS, compounding its extremely important on-ramp
value per share at high teens. G&D: How dependent is this that allows GoDaddy to upsell
We think that endures for business on the housing cycle? and cross-sell higher margin
many years to come. products. Once GoDaddy has
YL: Black Knight has almost its foot in the door with a
G&D: When you are looking no correlation with the small-medium business
at a software company, do you housing cycle. While mortgage (“SMB”), it then sells services
sit down and actually test the originations obviously move up such as website content
software out? and down, the vast majority of management software, hosting
(Continued on page 11)
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Harvey Sawikin
Yen Liow, Aravt Global
services, productivity tools and stock has a reasonable the house. It´s a great asset.
telephony. GoDaddy has world valuation. It is currently trading We think it should grow free
-class customer care that is at 20x current FCF. We see cash flow per share at 30% for
extremely good at managing this company compounding years.
customer relationships and free cash flow per share
upselling products that actually comfortably in the 20s for Content is at an interesting
help customers succeed. many years to come. juncture. Content is both niche
GoDaddy´s so good at this and scale; Fox is niche and
that its customer care team is G&D: We noticed that you Netflix is scale. I think content
actually a profit center, not a recently added Fox. What are is completely shifting to one of
cost center. your thoughts on linear vs. those extremes, with nothing
OTT content creators vs. pure in between. Netflix is currently
We think GoDaddy has distributors, and how do you spending $13 billion a year on
tremendous secular tailwinds see that landscape unfolding? content. Practically no one else
behind it. The internet and the can spend at that level, with
need for businesses to have an maybe Disney and Amazon
online presence is growing “Content is at an being the exception. But it´s a
robustly domestically and really expensive game to take
internationally. GoDaddy interesting juncture. on.
operates in both jurisdictions
and its opportunity to continue Content is both niche The other option is to go in
to expand internationally is the exact opposite direction.
enormous. There are about and scale; Fox is niche Fox has must-watch TV: Fox
500 million independent SMBs News is its most important
and Netflix is scale. I
in the world. GoDaddy has property with its broadcast
only 18.5 million customer think content is network being number two.
relationships today, meaning This is the whole reason why
there´s a huge opportunity to completely shifting to Rupert Murdoch sold most of
grow the number of customers Fox´s assets to Disney. By the
it serves. On top of that, its one of those extremes, way, not many business titans
customers are only spending build and break up their
$150 per year at the moment with nothing in empires in their lifetime. I have
with GoDaddy, so there is also between. Netflix is to tell you, a sell decision at
opportunity for further that scale is truly amazing. That
penetration with existing currently spending $13 takes extraordinary discipline.
customers. But Rupert clearly saw how
billion a year on the strategic context was
GoDaddy is led by one of the unfolding. You have to be one
most capable management content. Practically no or the other, scale or niche,
teams we´ve seen. Scott and if you´re neither you´re
Wagner, who is the former one else can spend at dead, so he repositioned his
CEO of KKR Capstone, that level, with maybe company. The Fox broadcast
decided to leave KKR to run network pivoted from general
GoDaddy. He recruited top Disney and Amazon entertainment to mostly live
notch talent and brought sports, and Fox News
several members of his KKR being the exception.” continues to be one of the
team over with him, which most important channels in any
makes the management team YL: Charter Communications cable bundle. Both are
bench very deep. Scott also (NASDAQ: CHTR) is one of absolute must-watch live TV.
owns over $130 million of our oldest and largest holdings. They´re at risk of linear
stock, so he´s well aligned with The beautiful part about subscriber decline, sure, but
shareholders. Charter is that it´s content these are among the last men
agnostic. Charter is a pipe – standing and they have
We think Scott is a fantastic the most valuable, hard to tremendous pricing power.
allocator of capital and that the replicate, fastest pipe – into
(Continued on page 12)
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Mingming is a 1st year MBA 52 Week High / Low 54.00/ 30.70 Net Profit 385 446 519 549 00 00 o
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Plan Investment Board in Toron-
to, covering global consumer Recommendation
and health care equities, and We are recommending a long in Dollarama (“DOL”) with friendly activism. Our 4-year price target is C$81.5,
later at the endowment of
Memorial Sloan Kettering Can-
representing +97% upside and 18% IRR.
cer Center in New York.
Business Description
Founded in 1992, DOL is Canada´s largest dollar store chain with 1,225 stores and 71% market share. It sells
general merchandise (46%), consumer products (39%), and seasonal products (15%), with 8 fixed price points
from $1 to $4. The company is still managed by the founding family (Rossy), which holds a 7% ownership.
There is no superior class voting structure and the shareholder base is diverse.
Industry Overview
The Canadian dollar store market started in the 1990´s, decades after the US dollar industry (started by Dol-
lar General in 1939). It is therefore relatively unpenetrated and has been growing at a 5.9% CAGR over the
past 7 years. Major players are DOL (1,225 stores), Dollar Tree Canada (225), Your Dollar Store with More
(112), Great Canadian (121), and Buck or Two (50), totaling 1,733 stores. Alongside industry growth, DOL
Laurent Liu ´19 has taken market share from its smaller peers. Its market share among dollar store chains has grown from
Laurent is a 2nd year MBA 59% in 2011 to 71% in 2019.
student at CBS. He started his
career with BCG covering
consumer retail and telecommu- Recent Development
nication clients, and eventually DOL recently missed sales and EPS consensus by 2%, and revised down its SSSG guidance from 4% - 5% to
co-launched a US$125M growth 2.5% - 3.5% in Sep 2018. Share price experienced further weakness after Spruce Point published a short re-
stage equity boutique fund
port in Oct 2018, which claimed “Our analysis shows that this target (i.e management´s guided runway to 1,700
investing in FinTech and EdTech.
stores) is unrealistic, and that the market is already bordering on oversaturation.”
Our Variant View
We disagree with Spruce Point. Using US dollar stores to benchmark with DOL, Spruce Point used ei-
ther Dollar Tree or Dollar General to estimate DOL´s runway and ignored that DOL is a market leader
with 71% market share (much higher than DLTR / DG´s individual market share). Under our Activist
Proposal #1, we use the overall US market to estimate the Canadian market potential, and then use the
71% market share to estimate DOL´s potential runway.
We have identified two additional value creation drivers - implementing a zone pricing strategy and build-
ing a distribution center. We believe DOL could realize our estimated runway if it adopts Proposal #2
and #3.
K.Y. Wong ´20
K.Y. is a 1st year MBA student Activist Proposal
at CBS. Prior to CBS, he worked 1) Accelerate store opening from 65 to 130 per year.
at buyout PE firm EmergeVest
focusing on the industrial sector
Current situation: in 2017, the management guided a runway to 1,700 stores through opening 60 - 70
in Europe and Asia. In the stores per year until 2027. This suggests that expansion speed would be lower than previous years´.
coming summer, he will intern at
APG Asset Management and
Robeco, covering global emerg- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
ing markets equities. Historical store no. 463 521 564 603 652 704 785 874 955 1,030 1,095 1,160 1,225
Net growth rate 16.3% 12.5% 8.3% 6.9% 8.1% 8.0% 11.5% 11.3% 9.3% 7.9% 6.3% 5.9% 5.6%
Net stores opening 65 58 43 39 49 52 81 89 81 75 65 65 65
Our analysis shows that management has underestimated the TAM and the runway could be beyond
1,700 stores. As the US dollar store industry started 5 decades in advance, we use the current penetra-
tion rate of the US as a proxy of the CA industry´s potential. The US has 8x more residents than Canada,
but 17x more dollar stores. Using US as a benchmark, Canada could harbor 3,443 stores and Dollarama
could grow to 2,437 stores, assuming its 71% market share remains constant.
We propose that Dollarama should accelerate store openings from 65 to 130 per year to dominate the
best retail locations before peers do, particularly Dollar Tree Canada. In 2017, DLTR claimed it saw the
potential to grow its store base in Canada from 225 to 1,000. Per our conversation with DLTR IR, the
Page 16
savings of C$2mm in transportation costs if the sales in the 4 western provinces are #1: New Stores 20 65 130 140
held constant. Factoring in store expansion and assuming sales in the 4 provinces dou- #2: Change in Avg
Trans. Size 19’ – 23’
0.0% 3.0% 3.7% 4.0%
ble, the net annual savings could be C$17mm (after C$40mm capex). Change in Volume of 0.0% 0.0% 0.0% 0.5%
Trans.
Assuming a forward P/E multiple of 22x, we derive a 4-year target price of C$81 under #3: Gross Margin (with
DC Savings)
37.6% 38.7% 39.7% 40.8%
the activist base case. Even without activism, an investment in DOL represents 11% IRR. 2023E EPS $2.00 $2.88 $3.62 $4.02
Under a bear case scenario in which new stores are well under management guidance, Forward P/E 16.0x 22.5x 22.5x 24.0x
SSSG becomes 0%, and multiple contracts to 16x, then the IRR is –6%. This suggests an Stock Price $32.0 $64.8 $81.5 $96.5
Investment Return -27.1% 55.7% 96.9% 132.6%
attractive risk/reward profile, with 4x active-to-passive return ratio. IRR (4-year) -6.2% 11.5% 18.0% 23.0%
Michael Wooten,
CFA ´19
ANATOMY OF A GREAT BUSINESS: (Attractive Unit Economics + Large TAM) x Durable Moat =
Great Business
- Attractive Unit Economics – ALGN has 75% gross margins, getting close to 80% on Invisalign
products. Now that the company has reached scale and is almost fully automated, the SG&A leverage
means for every $1.00 revenue earned, $0.20 can be reinvested into the business or returned to share-
holders. As a capital-light business, its ROIC is very attractive. Adjusting for excess cash, the ROICs are
>40%. If ALGN is able to use machine learning/AI to eventually replace doctors in the treatment process,
or even some portion of cases, then ALGN would be able to eat part of orthodontists´ 75%+ margin while
reducing the treatment cost to end-consumers.
- Large TAM – provides a runway for the company to continue reinvesting in the business at high re-
turns on incremental invested capital (i.e. ROIC x Retention Ratio = Sustainable Growth Rate). ~60%-75%
of the global population suffers from malocclusion (misaligned teeth). ALGN is the largest provider of clear
aligners, with ~70-80%+ market share, yet clear aligners only represent 15% of orthodontic case starts.
With recent innovation, ALGN can now treat 75-85% of cases. There are 300M people who could benefit
from Invisalign in markets that ALGN is already in. Currently ~12M actively seek annual treatment.
- Durable Moat – this is the most important characteristic of a great business because it allows a compa-
ny to tap the full potential of the Large TAM without losing its Attractive Unit Economics. ALGN´s moat is
more than a patent (or 894 patents). It´s comprised of a bunch of small things that, when added up, will be
very difficult for competitors to overcome. See below for more details on competition.
Page 18
8,000K 1,500K
Annual vs. Cumulative Case Starts
6,000K
1,000K
Volume
4,000K
500K
2,000K
0K 0K
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Cumulative Case Volume Annual Invisalign Case Volume International Domestic
VALUATION:
My ~$630 5-year price target is based on a probability-
weighted average of 5 scenarios: 1) Blue Sky ($3,000 PT, 2.5% weight); 2)
Bull ($1,000, 22.5%); 3) Base ($650, 40%); 4) Bear ($250, 20%); and 5) Super
Bear ($150, 15%). ALGN currently trades at an eye-popping 58x 2019E P/E,
39x EV/2019E EBITDA, and 10x forward EV/Sales. As a long-term investor
with a 5Y+ time horizon, stock price volatility does not bother me. True risk
is permanent loss of capital when you sell.
My Base Case assumes there will be 13.7M case starts in 5 years,
with clear aligners used in 50% and ALGN serving 40% with an ASP of
$1,200. The valuation equates to a 32x P/E or 7.0x EV/Revenue multiple.
In my Bear Case scenario of 15% 5Y EPS CAGR, ALGN´s P/E multiple would have to be cut in half (i.e. 30x) in order
for this investment to lose money over 5 years. If ALGN´s EPS compounds at 20% and the P/E multiple is reduced by 30%, ALGN´s
stock will generate an 8% annualized return, likely outperforming the S&P 500.
The Blue Sky scenario has ALGN displacing Orthos & GPs by using A.I. and digital automation to dominate the market. ALGN
recently added Microsoft´s Corporate VP of A.I. and Intelligent Cloud Business Development to its board. Eventually the DTC market will
take hold, and when it does, ALGN is perfectly positioned to benefit. I estimated ALGN would have 80% of clear aligner market share
and ~70% of total orthodontic case starts, while also increasing ASP by eating some of the doctors´ 75%+ margin. The $3,000 PT repre-
sents a 7.5x EV/Revenue multiple and 25x P/E multiple.
My margin of safety is rooted in: A) my belief that ALGN´s durable competitive advantage is intact despite patent expirations;
B) the size and underpenetrated nature of the TAM despite increasing levels of industry adoption, and C) the fact that ALGN has histori-
cally compounded revenue in excess of 13% in every 5Y period despite periods that include the Great Recession, intense competition (e.g.
2006), and initial technology that could only service a small fraction (25-35%) of the overall TAM. ALGN is a much stronger business today
than it has ever been.
Page 20
linked to cyclical conditions within the broader Australian economy which will eventually reverse.
Declining Australian home prices has led to weakness in the rest of the economy, including new car sales
which recorded a full-year decline for the first time since 2014. Economic weakness has flowed through to ad
spend which was down 7% in 1Q19. Auto OEMs and new car dealerships have reduced their marketing budg-
ets, directly impacting CAR´s high incremental margin Display revenues. At the same time, Australian credit
conditions have tightened, particularly in auto lending where YoY originations have been negative YoY since
mid-2017. CAR´s unique competitive position in Australian online auto sales will allow it to continue to generate an
increasing number of finance leads and capture a high share of Australian auto-related ad spend as the economy turns.
2) CAR´s core Australian auto classifieds business remains a dominant, capital-light marketplace
which can compound earnings in the HSDs.
(i) Highly attractive metrics: CAR´s core domestic business generates 55%+ EBITDA margins and >300%
returns on tangible capital.
(ii) Established network effects: On the supply-side of its marketplace, 95% of Australian dealers list on
Carsales.com, and the company has the largest pool of dealer inventory in the country. On the demand-
Page 21
3) The value of CAR´s stakes in rapidly scaling international auto marketplaces is underappreciated by investors.
Carsales is unique among the global auto marketplaces (more akin to the general classifieds “Big Three,” Schibsted, Naspers and eBay) in
owning a portfolio of #1 market position, international busi-
nesses. Webmotors, CAR´s 30% owned Brazilian marketplace
(accounted for under the equity-method), is Brazil´s #1 auto
vertical, grows revenue 30%+ annually, and is generating 60%+
incremental EBITDA margins. SK Encar, CAR´s 100%-owned
South Korean marketplace (Carsales only recently consolidat-
ed SK Encar´s results after acquiring the remaining 50.1%
stake it did not already own), continues to grow ~20% annually
while producing ~50% EBITDA margins. In total, CAR´s interna-
tional auto marketplaces operate in economies which are 4x
the size of the Australian market. These international subsidi-
aries are likely to grow revenue and EBITDA at a 20% and
30% CAGR, respectively, and represent 30% of CAR´s value
by 2022.
Investment Playbook
Negative Australian cyclical conditions will normalize at some point. In the meantime, CAR´s core Australian marketplace compounds
earnings at HSDs while its international marketplaces grow at a 20%+ CAGR. High growth international assets contribute to 25%+ of
EBITDA by FY2023 which generates a modest valuation re-rating for the total company.
Valuation
I utilize a sum-of-the-parts analysis incorporating NTM metrics (FY2023) to arrive at a 6/30/2022 base case price target. A 15x multiple
on Core Domestic EBITDA is at the lower range of the
multiples of mature global peers. 18x and 25x multiples on % of Total
SK Encar and WebMotors 2023 EBITDA are below the (Look through metrics, $Ms AUD) FY2023 Multiple Value Value
valuations of rapidly growing peers such as Schibsted´s Core Domestic EBITDA $ 242 15.0x $ 3,628 64%
recent spin. As a sanity check, the 6/30/22 price target of Domestic Investments + Finance EBITDA 27 7.0x 189 3%
AUD $22.62/share represents a 25x multiple on my Total Value of Domestic Businesses $ 3,817 68%
FY2023 EPS estimate of AUD$0.90. SK Encar EBITDA (Korea) 61 18.0x 1,105 20%
WebMotors EBITDA (Brazil) 24 25.0x 608 11%
Key Risks
(i) Shifts towards programmatic ad spend may hurt CAR´s Other International Revenue 38 3.0x 113 2%
ad pricing. I model lower growth than historically Total Value of International Businesses $ 1,826 32%
Enterprise Value $ 5,643 100%
experienced.
(ii) CarGurus announcing they will enter Australia would FY2022 Net Debt (59)
be a negative ST for CAR´s stock. However, Auto Market Capitalization $ 5,584
Trader UK has shown just how difficult it is to unseat 6/30/22 Target Price per Share $ 22.62
Total Return (Including Dividends) 74%
a dominant #1.
(iii) Gumtree (Australia´s largest horizontal) has had suc- IRR 21%
Recommendation
Mitchel Aulds-Stier ´20 We recommend buying DF 6.50% 2023 Senior Unsecured bonds at the current price of $66. The bond offers
Mitchell is a 1st year MBA student a compelling risk versus reward profile due to the following: i) Dean Foods is accelerating progress on cost
at CBS. He was previously an
Associate with PNC Mezzanine cutting initiatives, ii) long-term industry demand and cost stabilization, iii) the market has overlooked actiona-
Capital. Mitchell will be interning ble growth opportunities, and iv) DF is cash flow positive, has ample liquidity for the near-term, and strong
with DG Capital Management and
Sycale Advisors. liquidation value.
Business Description
Dean Foods is the second largest US-based processor and distributor of dairy products. Its products include
branded and private label fluid milk (68% of 2018 sales), ice creams (14%), and creamers, etc. DF operates 58
production plants around the country and a fleet of 5,000 trucks. DF´s 2018 revenue was $7.7bn, and adjusted
EBITDA was $136mm. Recent updates: on February 26, 2019, DF did the following: i) engaged Evercore to
explore strategic alternatives, ii) announced dismal Q4 earnings primarily driven by increases in transitory,
fuel, and resin costs, and iii) suspended its dividend to preserve cash to affect turnaround initiatives. The bond
price fell 6% on the news.
Investment Thesis:
Karthik Kasibhatia ´20 i) DF is Accelerating Progress on Cost-Cutting
Karthik is a 1st year MBA student
at CBS and was at the Fixed Efforts
Income Prime Brokerage at Bar- Dean Foods started implementing $150 million in cost
clays in New York prior to Busi- cuts in 2018 and aims to finish the initiative by 2020. The
ness School.
initiatives include: 1) facility rationalizations, 2) implement-
ing a flatter, leaner and more agile organizational struc-
ture, and 3) optimization of spend management. The mar-
ket may have priced in a worst-case scenario given the
sharp decline in margins (23% in 2017 to 21% in 2018) and
EBITDA decline. However, DF´s cost-cutting initiatives
have accelerated in Q3 as DF closed down plants (7 plant
closures in 6 weeks (3Q18); 14 total facility closures in the past 18 months). Given its improved cost-cutting
efficiency, DF is expected to generate 100bps improvement in gross margin and 40bp in G&A margin improve-
ment, which should improve EBITDA and cash flow.
Angela Qin ´20
Angela is a 1st year MBA student ii) Long-Term Industry Demand & Cost Stabiliza-
at CBS. Previously she worked at tion
Mizuho Securities Asia in the Fixed
Income Trading department. While DF´s volume softness has continued (private label
Angela will be interning at TCW declined by ~3% and branded by ~5%), DF´s pricing of
over the summer. both branded and private label as well as margins over
milk all appear to have stabilized since October per IRI
data. This indicates that the pricing battle among large
grocers has at least temporarily subsided. Additionally,
margins over milk have stabilized. On the cost front, oil
price stabilization should help control transportation, lo-
gistics, and resin costs. Moreover, US farmers have over-
supplied milk for the past few years. The supply of milk
has been rising at 1% vs. demand shrinking by 2% YOY.
The improvement in milk production per cow should
mitigate the inflationary impact and stabilize future milk
prices.
James Shen, CFA ´20
James is a 1st year MBA student at
CBS. Previously he worked at iii) The Market Has Overlooked Actionable
HSBC in the fixed income trading Growth Opportunities
team and balance sheet investment Dean Foods has a track record of growing nascent brands. For example, DF rapidly scaled its 2002 acquisition
team. James will be interning at
Cornerstone Research over the of Silk from $30mm to $350mm of revenue over the course of three years. Silk eventually became a $2bn
summer. revenue brand before it was sold in 2013. DF acquired multiple similar scale, emerging brands last year amid a
shift in consumer preference, including: 1) Good Karma Foods: Flaxseed-based milk alternatives ($18mm an-
nual sales), 2) Uncle Matt´s: Organic Juice Maker ($10mm annual sales). Market share of milk alternatives was
approaching 10% in 2018 and CAGR is expected to be 5-10% over the next several years as alternatives take
share from dairy milk.
Page 23
Dean Foods 6.50% Senior Unsecured – Long (Continued from previous page)
iv) CF Positive, Ample Liquidity & Liquidation Value
DF was cash flow positive in FY2018 and, as of February 22, 2019, DF had over
$144M of liquidity. Additionally, DF owns critical milk processing infrastructure
given that it controls 1/3 of the U.S. milk capacity (58 processing facilities and
5,000 refrigerated trucks, of which it owns the majority); as such, there is a high
probability that DF will be maintained as a going concern OR most of its assets
will remain in use, irrespective of which corporate entity owns the assets. Primary
research indicates that DF´s truck fleet, which is principally comprised of high
mileage 28-foot refrigerated trucks (i.e. ´Reefers´ w/ mileage of roughly 250-300k
and approx. 5-7 years of
age), would yield between
$40k and $55k in a Ch. 7
liquidation. Also, over
50% of the liquidation
value comes from
cash and A/R. As a going
concern, even with a 50%
valuation discount to
peers (5.0x EBITDA),
DF´s bondholders would
likely recover close to
market value of the bonds.
Lastly, the Company has
$83M in NOL´s and tax-loss carryforwards that would enhance bids in a dis-
tressed sale.
2) Continued Price Competition Among Retailers and Private Label Risk: While pricing has stabilized in recent months ac-
cording to IRI data, with retailers challenged by online and grocery delivery competitors, such retailers may resume their pricing war for foot-
traffic drivers such as bread, eggs, and milk. This could drive increased penetration of DF and non-DF private label, further deteriorating DF´s
branded product offering (primary research indicates that DF breaks even on private label).
Page 24
there. The firm was sold have now more than hence I figured I ought to learn
in 1973. He joined Ruane doubled their investment. something about this industry.
Cunniff and Stires as Vice
Chairman. Graham & Doddsville I started going to night school
(G&D): Could you tell us in the city instead of attending
In 1974 he founded W.P. about your background and the University of Maine. I went
Stewart & Company as a how you got into investing? through various floor positions
Bill Stewart broker dealer and at the Exchange, started
investment advisor, which Bill Stewart (BS): I got into developing a business, and
became a publicly traded investment management by became a broker on my 21st
company on the New York accident. I initially took a birthday. I learned enough
Stock Exchange in 2000. temporary job on the floor of about research to go out and
At the time it went public, the New York Stock Exchange start seeing companies, visiting
the firm had $12 billion in as a page boy in 1955 while I management, doing
assets under management was waiting to start college at spreadsheets, and writing up
in separate accounts, as the University of Maine. It reports on stocks I liked. I was
well as US and European turned out that I liked what I selling these ideas to dentists,
registered mutual funds. saw on the floor and I decided pharmacists and furniture
From the firm´s founding that I should learn that dealers.
in 1974 to 2013, the year in business. At the time, I was
which the firm was planning to be a Forest Ranger The market environment was
acquired by and had no interest in relatively quiet. IBM was the
AllianceBernstein L.P., investing. But after watching stock of the decade, growing
W.P. Stewart & Co. the money being made by at 14% a year and trading at 50
outperformed the S&P 500 smart investors, I decided that times earnings, the average
Index by an average of 430 if I played it right, I could buy ratio for good quality growth
basis points annually, net my own forest. In time, along at the time. Many companies
of fees. with others, I was eventually were growing at 7% per annum
able to buy several of them as and trading at around 25 times
After the sale of W.P. well as a farm and turn them earnings, much higher than
Stewart & Co. to over to conservation groups to today. IBM was at the top of
AllianceBernstein in 2013, manage in perpetuity. the list of what we considered
Bill formed WPS Advisors high-quality growth companies,
Ltd., a Bermuda company. G&D: What was it about your along with National Cash
A group of analysts was time as a page that made you Register, American Home
assembled to pursue an realize this was the industry Products, Merck, Pfizer,
investment philosophy you wanted to be in? Abbott and General Foods.
similar to the one that
earned Bill´s clients over BS: It was a time you probably This was around the time
16% a year after fees for can´t even imagine. There when Ben Graham said that he
the 38-year history of W.P. were no phones on the open would only invest in high-
Stewart and Co. The new floor, let alone cell phones, quality growth companies if he
business was domesticated because no electronic could, but generally speaking
to the US in 2017, as communication was permitted. they were too expensive, and
Stewart Asset There were telephones around he´d have to amortize a lot of
Management, LLC, an SEC the rim of the floor, but P/E ratio. He took a 7-year
Registered Investment nothing in the middle, nothing look, and if he envisioned a
Advisor. Over the four and at the posts. If you wanted to market multiple of 17 in the
a half years since its do serious trading, you had to terminal year and was paying
inception, the new firm has physically be on the floor to 50 times up front, amortizing
continued to grow its see your counterparts and deal that was too big a headwind.
clients´ portfolios at a rate with them directly. I saw some So, he concentrated on what
slightly faster than its smart guys doing things I came to be called value stocks.
predecessor did. Initial thought were interesting, while
clients of the new firm making a lot of money at it;
(Continued on page 25)
Page 25
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Graham & Doddsville Editors 2018-2019
Ryder Cleary ´19
Ryder is a second-year MBA student. During the summer, he worked in Equity Re-
search at JP Morgan. Prior to Columbia, he was a Captain in the Infantry branch of
the US Army. Ryder graduated from the United States Military Academy at West
Point with a BS in Systems Engineering with a mathematics concentration. He can be
reached at RCleary19@gsb.columbia.edu.