Discover more from Elevator Pitches
Welcome, subscribers! Today, we share pitches for a microcap contract manufacturer and a publicly traded pawn shop operator — plus 5 more new ideas from a respected growth manager.
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Let’s get to it.
Long Cast Advisers went into three reasons why they are attracted to Pro-Dex (PDEX), a micro-cap (~$68 million) medical devices contract manufacturer. We include their write-up below.
PDEX is a small contract manufacturer in the medical device space. The core product is a battery powered handheld driver used by surgeons to screw implants or plates into bone (think knees, spines, facial reconstruction, et al) with a precise amount of torque to avoid stripping. The company has its own engineering team to develop its own products and works with branded device manufacturers to develop theirs (I believe Stryker is the largest single client).
I don’t normally think of contract manufacturing as a wonderful industry but there are few aspects about this company that make it an unusual, compelling and attractive long-term investment. I elaborate on three of these attributes below.
The Board: Chairman Nick Swenson and Board member Ray Cabillot together own about 40% of the company. They are thoughtful investors who run their own hedge funds (AO Partners and Farnam Street Partners, respectively) and they manage the capital allocation strategy at PDEX. The evidence observed in the growth in book value per share, which I believe have their “fingerprints” suggests a focus on value creation.
New manufacturing facility: The company doubled the size of its manufacturing space by acquiring a new facility four miles from the existing headquarters in Irvine, CA. The build out and validation of the space took much longer than expected, partially impacted by COVID, and partially because this is a tiny company that doesn’t have a lot of experience doubling the size of its manufacturing space. The expansion is now complete. Obviously, the space doesn’t promise additional revenues but it doubles the size of the opportunity.
Backlog: Along with doubling the size of its manufacturing footprint, the company doubled the size of its backlog to $41M through a large order from a leading customer. The inference is that FY24 could be a high growth year.
Alta Fox Capital initiated a new position in pawn shop operator, First Cash Holdings (FCFS). They believe higher interest rates will provide a tailwind for FCFS’s counter-cyclical business.
New Position: First Cash Holdings (“FCFS”)
First Cash Holdings is a new position in the Alta Fox portfolio and is a good example of a business in our counter-cyclical theme. It is a high-quality business with an excellent track record of compounding value for shareholders at a discounted multiple to historical levels despite likely accelerating near-term fundamentals.
FCFS is the largest pawn shop operator in the fragmented US & Mexican markets and well over 2x the size of its closest competitor. At scale, pawn shops tend to be excellent businesses due to limited competition (high regulatory barriers to entry at the local level) and their unique ability to provide fully collateralized short-term financing. Current management has run this business for decades, boasting an impressive total shareholder return since IPO in 1994 of 17.5% per year vs the S&P 500 at 10.0%.2 We believe this is a particularly compelling time to invest in FCFS. The pawn shop industry has faced decade-long cyclical headwinds driven by low interest rates and full employment. Macro is now turning into a tailwind as dwindling consumer savings balances coupled with increasingly restrictive access to credit has significantly improved pawn shop demand. After a decade of approximately flat pawn loans outstanding per store, FCFS’s Q3 23 showed accelerating double-digit y/y growth in this metric, which hit all-time highs in the quarter.
We believe this critical KPI is poised to grow significantly over the coming years and will result in earnings significantly ahead of current sell side estimates. At a historically cheap multiple of <16x NTM PE on consensus numbers that appear too conservative, we believe FCFS is well positioned to deliver attractive shareholder returns for the foreseeable future. Equally as important, the business is very defensive and can outperform in a variety of market environments.
Polen Capital’s Global Growth and Small Company Growth collectively initiated positions in five new companies — Clearwater Analytics (CWAN), Xpel (XPEL), EXL Services (EXLS), MSCI Inc. (MSCI), and Novo Nordisk (NVO). Their buy of Xpel is particularly noteworthy, in light of a recent and lengthy short pitch from Culper Research.
Clearwater Analytics is a leading provider of investment portfolio reporting and analytics solutions. It uses advanced data and analytics to serve as the book of record across many asset classes for investment managers, corporations, insurers, and pension funds. The company analyzes and reports over $6.4 trillion in daily assets across numerous accounts. Their software simplifies operations and ensures accuracy, speed, and scalability—adding significant value for customers while reducing complexity. We believe that the company is poised to sustain its robust growth trajectory, achieving annual top-line growth of 20% with meaningful margin expansion over our five-year investment horizon.
XPEL is a leader in the automotive paint protection film (“PPF”) market. PPF is popular for high-end vehicles and gaining broader traction due to the solid value proposition and XPEL, which drive market growth. XPEL is a notable name brand that has become synonymous with paint protection. It has the most extensive distribution network and exceptional software to aid installation centers. We believe it’s still early for paint protection as the product gains traction with dealers, OEMs (original equipment manufacturers), and a broader set of consumers. While the product may seem simple, the infrastructure cannot be easily replicated. Regarding value-creating reinvestment, XPEL is planting the seeds for many years of growth with early investments in Europe and opening up PPF to new markets such as architectural and Marine. The financial model is also robust, with 20% operating margins, compelling free cash flow conversion, a solid balance sheet, and high returns on capital.
EXL Services is an outsourced businesses services and analytics company with a long track record for driving digital transformation. EXL’s specialization and reputation in the insurance industry has also been a point of differentiation and served as a springboard to grow the business. We previously owned EXL but sold the position when the company navigated a difficult transition. Encouragingly, the company managed very well through that difficult period and upgraded the management team, which has brought more discipline to their capital allocation, as evidenced by increasing returns on invested capital. Looking ahead, we anticipate mid-teens free cash flow growth and capital to be deployed towards share buybacks and small acquisitions.
MSCI helps clients by offering investment decision support tools, including indices, portfolio risk, performance analytics, and corporate governance products and services. We believe that MSCI is one of the most competitively advantaged businesses today. These competitive advantages consist of being an industry “standard” business, serving as a required reference point for asset managers and asset allocators alike and creating powerful network effects. MSCI serves as a 3rd party, independent and objective reference point within an industry that requires one. It also executes a contributory data model whereby the company takes in raw data from the industry, refines and packages it, and sells it back to industry participants. As we see it, CEO Henry Fernandez is an excellent allocator who has expanded the company’s moat. Historically, the company’s share price has kept us on the sidelines. At roughly 32x free cash flow, though, we believe that the company is priced fairly. We expect solid double-digit earnings growth for many years while seeing a path for potentially higher growth through significant optionality from ESG, climate, and private market offerings.
Regarding Novo Nordisk, we’ve covered the company for a long time and owned it many years ago, ultimately selling because of payor pricing pressure on the insulin business. What has changed the investment case for us, though, is the company’s innovation into GLP-1 drugs, which not only help diabetics control bloodsugar levels but have also shown significant efficacy in weight loss. Novo Nordisk’s best-known GLP-1 drugs, Ozempic (for diabetes) and Wegovy (for obesity), are already blockbusters, frequently grabbing headlines in global news publications for their significant results. GLP-1 drugs account for nearly 70% of Novo Nordisk’s sales today.
Obesity has become a global epidemic, creating materially negative knock-on effects for humans that range from an increase in cardiovascular events and, thus, lower mortality to a lower general quality of life. We believe that, over time, payors will recognize the value of these obesity treatments to both patients and the overall healthcare system.
Until next time! - EP