Jones Lang LaSalle (JLL) is a leading professional services firm that specializes in real estate and investment management, the world’s second-largest company of its kind. Founded in 1783 and headquartered in Chicago, JLL’s 94,000-person global workforce serves clients in over 80 countries. As of the end of March, the company’s real estate investment management business, LaSalle Investment Management, managed $69.5 billion in private assets and publicly-traded real estate securities for global clients.
Record Operating Results, then COVID-19
Following a year of record-operating results, JLL entered FY20 optimistic and confident in its ability to continue to increase market share and capitalize on long-term secular growth opportunities. When COVID-19 abruptly halted global economic growth, a near shutdown in commercial real estate sales ensued. Adding insult to injury, corporations are rethinking their office space needs as employees continue to work remotely. With many companies having allocated less square footage to individual desks over the past few years, JLL now believes social distancing requirements could reverse this trend and instead lead to less dense office spaces. According to a recent global survey conducted by JLL, participants ranked meetings, socializing and impromptu face-to-face interactions as the top motivations for returning to the office.
Favorable Recurring Revenue Mix
Today, JLL has a more favorable recurring revenue business model, stronger balance sheet, as well as a more diverse business, client and geographical mix compared to the Great Financial Crisis. Led by its growing Property & Facility Management Services business, slightly more than half of JLL’s fee revenue is now recurring. Through this operation, which includes the management and outsourcing of properties and portfolios, JLL helps companies streamline operations and control costs. With approximately 80% of corporations still managing their real estate internally, meaningful growth potential remains.
LaSalle Investment Management
Real estate is no longer an alternative asset. It is now considered a core asset class with continuing capital raising momentum. An increase in this asset class is primarily driven by diversification such as low correlation with other assets, real estate being perceived as an inflation hedge and the opportunity for competitive returns and higher yields relative to equities and fixed income. Due to this secular growth, JLL’s investment management business is now one of the world’s largest and most diverse in real estate.
JLL remains a conservatively run franchise with a track record of generating solid free cash flow with high returns on capital and equity. We expect the company to continue to benefit from accelerating trends of globalization, the outsourcing of real estate services and increased institutional demand for commercial real estate. With the worldwide arrival of COVID-19 and the subsequent shutdown of businesses, however, JLL has traded down to a level where we believe the long-term commercial real estate business fundamentals are substantially discounted in the company’s current valuation. The stock represents a compelling bargain with its shares now trading around 10 times our forward twelve-month cash earnings estimate and at a 39% discount to our private market value estimate.
Madison Square Garden Entertainment Corp. (MSGE) is a New York City based content distribution company that delivers live experiences through its portfolio of celebrated venues, exclusive entertainment production, and other entertainment assets. The world-famous Madison Square Garden, Chicago Theater, Rockettes and TAO are only a few of its well-known proprietaries. The company was spun out of the Madison Square Garden Company in April of 2020, resulting in a separation from the Sports business. The Garden will remain the home of the New York Knicks and New York Rangers through the duration of its long-term lease, which began after the separation was complete.
World-Class Entertainment with Unique Assets
As the owner of iconic live performance venues in some of the largest markets in the United States, MSGE can maximize venue utilization by leaning on relationships and entertainment booking expertise built up over decades. The company’s iconic venues are viewed as “must-stops” for performers, which helps mitigate competition. The additional value of MSGE’s prime real estate holdings provide investors with downside protection throughout periods of economic volatility.
Disruption of a Secular Trend
As many consumers’ preferences continue to shift from the purchase of material items to live experiences, MSGE directly benefits. The onset of COVID-19 dramatically impacted this evolving dynamic and made the previously unthinkable scenario of a zero-revenue business a reality. The pandemic’s timing also coincided with the construction of MSGE’s Las Vegas Sphere—a first-of-its-kind, cutting edge live music and entertainment facility that aims to capitalize on the antiquated Las Vegas venue market. The novelty of the project in an uncertain time has caused unease amongst investors, especially given the near $1.7 billion price tag and plans for a second Sphere in London.
Financial Stability to Weather the Storm
While we don’t believe the future will fully revert to pre-pandemic levels, once a vaccine is found, we are confident people will want to continue to experience live concerts, theatrical productions, sports and more. In the interim, MSGE has halted its Sphere construction and removed unnecessary costs to reduce its cash burn. With approximately $1.4 billion of net cash on its balance sheet, the company has enough liquidity to endure the challenging environment through at least the end of CY2022. Over the long term, we take comfort in the Dolan family’s track record of creating continued shareholder value and expect the resumption of event attendance as well as the Sphere project to deliver excess returns. With the stock trading at just above a 40% discount to our PMV, we believe MSGE provides us with an attractive risk/reward opportunity over the next three to five years.
Founded in 1843 and based in New Britain, Connecticut, Stanley Black & Decker, Inc. (SWK) is the world’s largest tools and storage provider. The company’s Dewalt, Black+Decker, Craftsman, and Stanley brands are among the most recognized in the industry. In addition to its well-known tools franchise, Stanley holds a leading portfolio of industrial fasteners and security access applications. Unbeknownst to many observers, Stanley is a leader online, with over $1 billion of e-Commerce sales growing at high double-digit rates.
Competitive Advantage Driven by Brands, Scale, and Technology
Stanley’s brand recognition is the core of its competitive advantage. Its products drive substantial traffic to home centers, distributors and online vendors, given the company’s tools are preferred by professionals, purchase managers and do-it-yourself customers alike. Strong brand recognition provides Stanley license to innovate thoughtfully, manufacture at scale, and distribute widely. Over the last 8 years, Stanley’s battery technology led the industry’s transition to cordless power tools. This has taken its ubiquitous Dewalt brand from $1 billion to nearly $5 billion in annual sales. The company has also been able to leverage its scale to grow acquired brands. For example, Craftsman sales increased from $100 million when acquired in 2017 to $600 million in 2019, after Stanley brought Craftsman onto its vast distribution platform. Craftsman is now on track to reach $1 billion in annual sales by 2021.
Strength Amidst Uncertainty
The share price of Stanley increased approximately 40% during the second quarter. In April, lockdowns in response to COVID-19 caused the company to accelerate cost cutting efforts and set guidance for a 35-45% organic sales decline in the second quarter. However, as the situation progressed, the company’s tools and storage franchise demonstrated strength in the face of adversity. Strong home center and e-commerce demand, particularly in do-it-yourself retail categories, caused Stanley to increase its guidance in mid-May (to negative 20-30%) and again in early June (to negative 15-20%). More recently, signs of pent-up demand from professional tools customers have emerged. The company has kept its cost cutting actions in place, which should lead to greater profitability. Also, Stanley’s Dewalt was recently selected by 3M and Ford to provide the battery system in air-purifying respirators for healthcare workers, demonstrating the importance of Stanley’s technological innovation and reputation for reliability.
Many Catalysts for Growth and Margin Expansion
In addition to better-than-expected demand this year, Stanley has a number of important catalysts for growth and margin expansion over the longer term. First, the company has a long runway of potential growth in the Lawn & Garden category. With an estimated addressable market of $20 billion annually, strong existing brands, and an attractive option to acquire the remaining 80% of MTD Products, owner of the Troy-Bilt and Cub Cadet brands, Stanley believes that Lawn & Garden could comprise 15-20% of consolidated revenue within a few years. Second, Stanley’s electrification and battery technology has become the industry’s next generation standard, establishing Stanley as the leader in the industry’s transition to cleaner and safer power tools. Third, Stanley is expanding manufacturing in North America, which will reduce tariffs. Finally, the company is increasing productivity through automation and advanced analytics. Taken together, we believe these catalysts for growth and margin expansion are likely to result in strong returns for long-term shareholders.
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.