Core Laboratories is a global provider of geological analysis and drilling techniques to major oil and gas companies. The company offers two proprietary and patented services: Reservoir Description and Production Enhancement. Together, Core Labs’ two services maximize the production and total recovery of hydrocarbons, enabling oil and gas companies to exceed average oilfield recovery. Reservoir Description services provide customers with a complete understanding of the reservoir rocks and fluids that permeate oilfields. Core Labs is the only global provider capable of analyzing all these materials. The company’s Production Enhancement services maximize yield.
Core Labs is a leader in its category due to its long history, unparalleled customer base, unique product offerings and global footprint spanning every major oil-producing province in the world.
An 84-Year-Old Track Record
Since 1936, Core Labs has served as a trusted third-party service provider to oil and gas exploration companies. In this industry, a company’s track record is critical to its success. Many oil and gas companies will not even consider engaging with new entrants. Core Labs has continued to gain market share over the years by providing services that exceed the internal capabilities of their customer base. Instead of retaining geologists on staff or investing in lab work, oil and gas companies outsource these critical yet costly tasks to Core Labs. This is not only more efficient, but more effective, as Core Labs consistently shows improvement in yields from reserves. These competitive advantages help the company maintain long-term customer relationships.
Customer Base is a Competitive Edge
Throughout the company’s storied history, it has partnered with the world’s largest oil and gas companies. Core Labs’ customer base includes the “who’s who” of the sector. Some of its clients are the largest integrated oil and gas companies (e.g., ExxonMobil, BP, Chevron, Royal Dutch Shell and Total) and major national oil companies (e.g., Saudi Aramco). The fact that these industry powerhouses turn to Core Labs for analysis of their reserves helps the company win new business mandates. Additionally, Core Labs’ global presence allows it to participate in successful exploration activities around the world, where its peers cannot compete.
Improving Demand & Increasing Energy Prices Will Create Opportunity
The combination of the demand impact from COVID-19 and the increased supply of oil and natural gas from Saudi Arabia and Russia resulted in a significant decline in energy prices in early 2020, which had a domino effect on the entire industry. Energy price declines led to capital expenditure cuts at many of the world’s largest oil and gas producers, which resulted in lower drilling activity and well completion activity for oil service companies. However, we are beginning to see a recovery in energy prices, as the global economy begins to reopen, and vaccines become available. Core Labs is well positioned to benefit from increasing demand for hydrocarbons, and as a result, its services.
We have closely followed this company for many years—cautiously yet optimistically assessing its trajectory, as it continued to generate significant free cash flow despite industry headwinds. It is clear Core Labs has a durable business model and the right leadership in place. These attributes, combined with its numerous competitive advantages, provide the company with a solid economic moat.1 Although the market has started to recognize the advantageous position of the company, we believe there is additional upside to the investment from current levels.
As of December 31, 2020, shares traded at $26.51, a 14% discount to our steadily growing private market value of $30.99.
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.
Based in El Segundo, CA and founded in 1945, Mattel is one of the largest and most recognized toy makers in the world. Its portfolio of iconic brands includes Barbie, Fisher-Price, Hot Wheels and American Girl. Mattel is also the licensee of choice for reputable intellectual property-owners, such as Disney, WWE and DC Comics. While the toy industry is fragmented and competitive, Mattel has the scale and breadth that its competitors lack. Its growth has outpaced the sector, and we believe there is even more opportunity ahead as the company continues to grow shareholder value.
Ariel has remained familiar with Mattel over several decades. In 2015, we initiated a position after a collapse in its share price, a leadership change and consecutive holiday season sales disappointments. Although the company exhibited flickers of improvement through executive hires, multiple CEO changes impeded true stabilization. Since the appointment of Ynon Kreiz as Chief Executive Officer in 2018, Mattel has continually articulated to shareholders their short-to-mid-to-long-term plan to transform into an intellectual property (IP)-driven, high-performing company. The company has made meaningful progress in reshaping operations, growing their most powerful brands and expanding their portfolio.
A New Chapter
Mattel’s transformation plan is aimed at maximizing the value of its rich IP portfolio over the long term. The company’s management team initially focused on restoring profitability by shoring up its balance sheet, right-sizing its cost structure, optimizing its manufacturing footprint and reorganizing its business units. Despite various macro and idiosyncratic headwinds, they have made significant progress on this vision. The company expanded its diligent cost savings program in 2020 due to COVID-19. These programs were successful and the company is expected to report $1 billion of cumulative savings in their year-end results, which will be released in February.1 While some of these savings have fallen to the bottom line, freed-up dollars have also been reinvested to support key brands, with the intention of stabilizing and accelerating overall sales growth.
Mattel is now well-positioned to maintain this momentum and focus on top-line growth. The company has appointed leaders with critical subject matter expertise at the helm of its beloved brands. Chief Operating Officer, Richard Dickson, has focused his efforts on Barbie, Hot Wheels, Fisher-Price and American Girl, which comprise the bulk of Mattel’s revenues. Barbie and Hot Wheels are now category leaders, with exceptional performance driven by Barbie’s focus on diversity and empowerment, and Hot Wheels’ product innovation.
Mattel has also introduced new leaders of its remaining core brands, including Chuck Scothon, who returned to Fisher-Price in 2018, and Jamie Cygielman, who joined American Girl in 2019. Both brands have shown signs of progress but have not reached their full potential, which offers more upside going forward.
Longer term, Mattel aims to further monetize its IP through franchise management and ecommerce. The company has several new feature films, TV shows and digital game projects underway, which should enhance the value of its library and product offering. Mattel has also optimized its supply and distribution infrastructure, which will improve its ability to meet the demands of its retail partners, while also supporting its direct-to-consumer offering for toy collectors.
While Mattel certainly benefited from the derivative effects of the 2020 stay-at-home mandates, much of its success can be attributed to the strategic plan management previously announced. The company is expected to demonstrate revenue stabilization and meaningful year-over-year improvements in profitability. The stock is already up approximately 30% compared to pre-pandemic trading levels, and we believe there is further potential.
1 This commentary was written before the company reported fourth quarter results.
Walgreens Boots Alliance Inc. is a global pharmacy-led health and wellness enterprise. The company has more than 9,200 locations in the United States under the Walgreens brand and 4,400 retail stores internationally under Boots. Within the United States, Walgreens stores are beginning to offer primary care and laboratory services under a single roof. In the United Kingdom, Boots stores range from local community pharmacies to large destination health and beauty stores. While the pandemic environment significantly dampened front-end retail sales for the entire industry, Walgreens Boots Alliance quickly evolved and adapted to meet the dynamic needs of its customers. By refocusing on COVID-19 testing and vaccinations, the company has remained stable throughout the pandemic.
Incoming Chief Executive Officer, Roz Brewer, will bring tremendous experience and leadership at a pivotal time for the business. As Chief Operating Officer at Starbucks, she helped lead the company through the pandemic and grew its digital presence. Brewer’s experience as Chief Executive Officer of Sam’s Club, a subsidiary of Walmart Inc. that also operates pharmacies, offers another advantage. This appointment heightens the company’s ESG profile and is an important indication that Walgreens Boots Alliance is committed to prioritizing diversity at the highest levels of the organization.
The Pharmacy of the Future
Over time, the healthcare sector has become more consumer driven, with a focus on bringing convenience to the customer. The company has developed a model that delivers multiple essential consumer health needs under one roof. The company’s partnerships with VillageMD and LabCorp are prime examples of their nimble approach to navigating the current environment. VillageMD is a new form of patient care delivery offering both physical and virtual visits through a fully integrated customer service experience. For example, after receiving a laboratory prescription from a VillageMD physician, virtually or at a “Village Medical at Walgreens” location, the patient can conveniently have the test performed at that same location through LabCorp. Afterwards, the patient can stock up on vitamins and other consumer healthcare needs, all in one trip. Additionally, Walgreens is well positioned to continue adapting to the pandemic with its customer pick-up and drive-thru services.
Strong Asset Portfolio is Underappreciated
As part of its strategic plan to grow and transform its core retail pharmacy and healthcare business, Walgreens Boots Alliance is accelerating investments in healthcare and divesting its wholesale assets. Over the past several years, the company has completed minority investments of $10-$11 billion, which we believe are underappreciated by Wall Street. These investments include AmerisourceBergen, Option Care Health, BrightSpring Health Services, RxAdvance, Shields Health Solutions and SeekMedicare. We expect more complementary healthcare services investments, given the company’s solid balance sheet.
Ariel Revisits this Family of Brands
Walgreens is not a new name to Ariel. In July 2010, we initiated a position when the company was under a cloud of mixed investor sentiment, contract negotiation uncertainty, competitive concerns and growing debt levels stemming from the acquisition of Alliance Boots. As investors received clarity on these concerns, the stock recovered, and we exited in 2013. We believe the market has once again provided us with an opportunity to invest in a company with strong brand equity, scale and focus on the consumer-driven healthcare marketplace. The company will manage through its current threats from Amazon’s recently launched online pharmacy, economic weakness and reimbursement pressures. It has a solid balance sheet and a strategic vision for its consumers. Revenue should rebound as foot traffic increases, the economy recovers, prescriptions increase, patients return to elective surgeries and well-visit appointments, and new healthcare services are offered. At 8x forward-twelve-month cash earnings per share and a 50% discount to our private market valuation as of December 31, 2020, we believe the company’s shares offer significant upside.
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On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds. The information and our opinions were current as of January 29, 2021, 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. 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.