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Company Spotlights: 3Q20



Peru’s banking sector has a very attractive oligopolistic market structure, with the top five banks enjoying nearly 90% market share in loans and deposits. Credicorp is the local market leader with 37% market share. Its universal banking model includes commercial lending, investment banking, asset management and insurance. Such breadth and diversity of business exposure has enabled the bank’s non-interest income (in the form of fees) to account for almost half its revenues.

Attractive Returns at an Attractive Valuation

While we have long admired the bank’s tenured management team, dominant market position, astute underwriting discipline and superior business model of generating 16% to 18% Returns on Equity, the stock had been trading at a substantial premium. However, a dramatic worldwide sell off in banking stocks during Covid has cut Credicorp’s share price in half, thereby providing an attractive entry point. While we acknowledge that near-term headwinds—from a protracted economic shutdown and rising non-performing loans—will depress earnings in 2020, we believe the self-help measures to reduce costs and achieve a best in class cost-income ratio in the mid-30% will gradually alleviate the profit pressures.

Product Innovation

Credicorp has been at the forefront of making technology investments to drive better customer experience and cross-sell opportunities, while also lowering costs and securing a sustainable competitive advantage. To-date, these investments have enabled the launch of a wide array of products that should generate fees and reduce expenses, including Smartcred, the American Express credit card, the ViaBCP card, Telecredito, and PagoNet. Credicorp’s debit card, Credimas, with more than two million cardholders, is increasingly used to make purchases at points of sale, thereby reducing in person teller visits. In late 2017 BCP launched Yape, a Venmo/Zelle-like platform for money transfer, which now has nearly four million users up from 1.7 million at the end of 2019.

Underpenetrated Market

Accelerated investments in business transformation, back-office optimization and the development of new distribution channels will also enable the bank to reduce the number of branches over the next decade, even if the loan book were to double over that period. We believe the bank has a long runway for growth as loans to GDP in Peru amounts to around 42% of GDP while in developed markets such as the UK and the US this ratio is at roughly four times that level. In addition, the insurance market remains highly underpenetrated, especially in the lower income segments of the population, providing another avenue for profitable growth. The bank has developed more client-centric insurance products, such as flexible annuities, pay-per-use auto insurance products, and voluntary goal-oriented savings products.

Our investment in Credicorp epitomizes the kind of idea we like to own—a long term quality franchise with secular growth facing temporary headwinds. When the shares of such businesses experience sharp selloffs by short term investors, we are able to accumulate our position on what we view as attractive risk-reward terms.


FLIR Systems

Headquartered in Arlington, Virginia, FLIR Systems is a global leader in advanced sensors and integrated sensor systems for government, commercial and industrial customers. Founded in 1978, the company pioneered the use of thermal imaging technology to detect potential failure points in critical infrastructure. Today, its products’ use cases have broadened considerably, enhancing perception and awareness to help detect people, objects and substances that may not be perceived by human senses. While the global pandemic and the upcoming election have heightened investor uncertainty over the company’s near-term growth prospects, we view FLIR as extremely well positioned for the long-term, driven by both industrial automation and defense modernization.

Sensing Opportunity Amidst a Pandemic

When the pandemic essentially shut down the global economy earlier this year, FLIR’s stock price came under significant pressure. As one of the leading providers of thermal cameras in the world, investors feared that demand for FLIR’s products—used in various applications ranging from gas leak detection to industrial automation—would be put on indefinite hold. However, we believe it has only strengthened demand in a post-coronavirus world. For example, in April, Amazon announced it would start deploying thermal cameras to detect employee fevers. FLIR has since reported heightened demand for its elevated skin temperature products, totaling $170 million in bookings so far this year. Longer term, we believe this is just the tip of the iceberg, as these types of autonomous sensing capabilities will be required across more industries and use cases than ever before.

The Best Defense is a Modern Defense

With approximately 40% of FLIR’s revenues tied to defense applications, investors are also fearful that a Democratic sweep in November may pressure future defense budgets. Fortunately, FLIR had the foresight several years ago to shift its business more towards defense modernization, which should remain a top priority. Recently, even Hillary Clinton wrote an op-ed in Foreign Affairs calling for a cut to the overall defense budget, but emphasizing that those cuts should come in areas like tank and ship production, while being reinvested in modernization efforts. FLIR’s recent wins in unmanned reconnaissance, like the Black Hornet, or robotic hazard detection, like the Centaur, are prime examples of the company’s essential positioning for tomorrow’s military.

Refocusing On Growth

CEO James Cannon came to FLIR three years ago with a mandate to reposition the company for growth. He quickly refocused the business on wider moat industrial businesses by shedding more competitive, lower margin commercial businesses. At the same time, he aggressively shifted the defense business away from fading legacy military programs and more towards defense modernization. Over the past three years, FLIR has leveraged its strong balance sheet to make several acquisitions, primarily in unmanned drones and autonomous ground vehicles, which have already resulted in several new program wins.

A Long Term View

At current levels, investors are distracted by the near-term uncertainty of the pandemic and an upcoming election. Looking forward, we believe these disruptions have only heightened the importance of FLIR’s solutions. At this historically cheap valuation, we see a rare example of a wide moat1 franchise that stands to benefit from growing demand for autonomous sensing in both industrial and defense applications. As of September 30th, shares traded at $35.85, a 36% discount to our private market value of $55.60.

1 An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces.

National Oilwell Varco

National Oilwell Varco

National Oilwell Varco (NOV) is a leading independent provider of equipment and technology for drilling, completion, and production in the upstream oil and gas industry with operations in 63 countries. Founded in 1862 and headquartered in Houston, Texas, NOV’s 35,000-person workforce serves most of the world’s major oil and gas service companies, contractors and operators. As of this past June, nearly three quarters of NOV’s revenues were generated outside of North America, and half were derived from offshore applications.

Demand Visibility Has Never Been So Uncertain

A confluence of factors has made demand visibility less certain than ever. As Covid spread across the globe, and significant energy demand disruptions became inevitable, OPEC+ members became embroiled in a price war, increasing production to win market share despite global storage reaching full capacity. Oil and gas industry budgets, already substantially reduced by financial controls insisted upon by capital providers prior to the pandemic, have been even more substantially reduced. The pandemic has also accelerated the digitization of society, and, in all likelihood, future governmental support for the transition to cleaner energy.

NOV’S Balance Sheet Strength Provides Flexibility

While many companies would like to take advantage of ever growing opportunities, few have the balance sheet to actually do so without meaningfully diluting existing shareholders. While NOV’s optionality company is difficult to quantify, the company’s reputation for conservative leverage and cash management will enable management to make appropriate decisions in the face of the uncertain oil and gas outlook. Not only does NOV’s balance sheet strength help reassure markets of its own long-term viability, it limits dependence on non-core operations the company would like to rationalize, allowing management to lower its structural costs. This cost discipline frees up capital for NOV to reinvest in the most promising core operations and acquisitions.

Significant Pessimism

The demand uncertainty caused directly by the Covid pandemic, as well as existing demand trends that have been catalyzed indirectly by the pandemic, means many won’t even research companies in the oil and gas industry. While NOV’s large equipment business has become impaired, its remaining maintenance businesses are still needed. While we do not know whether or not we have reached the “time of maximum pessimism” famously cited by Sir John Templeton as the best time to buy equities, the pessimism is significant enough that we believe NOV shares now offer a substantial discount to our estimate of intrinsic value.

Attractive Valuation

Traditionally, NOV’s business model derives an annuity-like stream of aftermarket revenues over many years following large one-time equipment sales. New large equipment orders are unlikely at least over the medium-term. However, recurring aftermarket maintenance-related sales should continue throughout the pandemic, albeit negatively impacted by cannibalization of spare parts stripped from idle equipment. Once the pandemic subsides, these sales should accelerate. NOV is also well-suited to service the industry’s ongoing push toward data gathering and analysis. Finally, although many observers may not yet realize it, NOV has quietly become one of the world’s largest installers of offshore wind towers and turbines. With fewer and fewer market participants taking the time to look deeply at NOV, patient investors can own one of the industry’s best franchises at what we believe to be a substantial discount to intrinsic value.

Vail Resorts

Vail Resorts

Vail Resorts is an industry leader in the snow ski resort business in North America and Australia. The company owns and operates seventeen world-class mountain resort properties and three urban ski schools including: Vail Mountain Resort, Beaver Creek Resort, Whistler Blackcomb, Breckenridge Ski Resort, Park City Resort, Stowe Mountain Resort, Crested Butte Mountain Resort and Keystone Resort among others. During last year’s ski season, the company hosted over 13 million skier visits, representing more than 17% of such visits in North America.

Unique Assets

Vail Resorts controls some of the most iconic ski destinations in North America. Few locations offer the same experience and potential new entrants face high barriers to entry, mostly due to the challenges of getting government approvals. To this point, almost no new destination ski resorts have been established in North America for over 35 years. The combination of these assets and the company’s focus on providing the widest offering to its customer base makes Vail Resorts a truly unique business with a formidable moat.1

Rare Buying Opportunity

Companies with such a dominant market position rarely trade at a significant discount to intrinsic value. However, Covid’s impact on the global economy provided a rare buying opportunity earlier this year. Social distancing and travel concerns weighed on the stock. Investors feared the pandemic would impair Vail’s business. The stock traded down sharply from over $250 a share to under $150. Wall Street’s short-term focus gave us a unique buying opportunity.

Balance Sheet Stability

The company’s management has remained focused on maintaining a stable balance sheet that gives the business the flexibility to handle unexpected challenges. That conservative approach proved valuable to shareholders as the company was able to manage cash flows and avoid dilutive equity raises. Management made the prudent decision to cut the dividend to maintain additional liquidity and recently commented that they believe the business has the ability to withstand the next two ski seasons, even if there were to be limited activity due to Covid.

Intriguing Valuation

The market has begun to recognize the tremendous value in Vail Resorts shares. However, we believe Wall Street continues to underestimate the intrinsic value of these unique assets and the conservative balance sheet. In our view, these advantages combined with the impressive historical free cash flow ability of the business provides a solid opportunity for investors going forward.

As of September 30, 2020, shares traded at $213.97, a 15% discount to our steadily growing private market value of $250.47.

1 An economic moat is a perceived competitive advantage that acts as a barrier to entry for other companies in the same industry. This perceived advantage cannot protect investors from the volatility associated with stocks, incorrect assumptions or estimations, declining fundamentals or external forces.

Investing in small cap and mid cap stocks is more risky and more volatile than investing in large cap stocks. The intrinsic value of the stocks in which the Funds invest may never be recognized by the broader market.

On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds, one of which was a top performer for the quarter, one was a new addition to a Fund, and the other was, in our view, undervalued by the market. The information and our opinions were current as of December 31, 2018, but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased, sold, or recommended to investors during the period. Investors that were not invested in a Fund that held each stock for the entire holding period shown will not have experienced the performance shown. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.

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