Transcript Notes: March 2023
Fresenius Medical Care — February 22, 2023
Due to continued inflationary pressures, Fresenius is exploring closing underperforming dialysis centers, continuing the rational approach to the duopoly with Davita in the dialysis industry.
In terms of potential disposals, we've taken a hard look at the portfolio. And I guess all I would say right now is we're looking at what really is too far removed from the core, and also what maybe isn't performing at the kind of margin level we would expect. So that does include noncore dialysis services assets, as I mentioned, and we're also looking at international service markets where either the reimbursement or profitability or scale is maybe no longer viable for us.
As sub-scale dialysis centers close due to poor economics, it is likely to benefit Davita and Fresenius
I guess the hypothesis here is that it could put stress on the smaller operators and maybe that becomes a benefit for us if we're able to pick up those patients
Fresenius and Davita are able to recoup inflationary costs, but with a lag.
Our expectation is that, that will increase in '24 and '25 in line with the kind of the increased costs that will get submitted. We'll get the benefit of that.
Chinese spending on cloud and IT projects has a long way to grow to catch up to the U.S. Alibaba stands to benefit it the gap starts to close.
This is an industry where China is really just getting started, and you can look a few figures to support that. First of all, if you look at the proportion of IT spending within total GDP in China, it's only 1%. In the U.S., it's as high as 5%. And if you look at the proportion of cloud within IT spending numbers, it's 15% in China today, 21% in the United States.
Berkshire Hathaway — February 25, 2023
Berkshire has paid 1/10th of 1% of all the countries aggregate taxes over the past decade.
had there been roughly 1,000 taxpayers in the U.S. matching Berkshire’s payments, no other businesses nor any of the country’s 131 million households would have needed to pay any taxes to the federal government. Not a dime.
Warren is not worried about America going to hell any time soon.
I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.
Despite the slowdown in housing, the historical business drivers for Lowe’s business are well intact. It helps that 2/3rds of Lowe’s revenue is due to non-discretionary purchases.
I'll kind of go back to what I said in some of the prepared comments. When we take a look at what our demand drivers are for home improvement -- and just to be specific, these are historical demand drivers that have held up over time. They still remain supportive. And things like disposable personal income, which I mentioned, is roughly $1.5 trillion in savings above pre-pandemic levels. the average equity in U.S. homes, roughly $330,000 on average, the age of homes, and a reminder, 2/3 of everything we sell is non-discretionary. And there are other tailwinds, millennial household formation trend, baby boomers aging in place and more widespread sustainable remote work, so all of these things give us some confidence that the backdrop remains supportive.
Perimeter Solutions — February 28, 2023
The U.S. has experienced two mild fire seasons in a row, but when the next on-trend season arrives Perimeter expects to generate mid-teens compounded growth over and above the last on-trend fire season (2021).
We've stated that we expect to grow consolidated adjusted EBITDA in the roughly mid-teens range annually over the long term when comparing one on-trend fire season to another. We consider the 2021 fire season fairly on trend. Assuming the 2023 fire season is also on trend, it's reasonable to apply this mid-teens CAGR to the $141 million of adjusted EBITDA we recorded in 2021 from pounded over 2 years to imply a 2023 consolidated adjusted EBITDA.
Allison Transmission — March 7, 2023
Allison Transmission has an extraordinary wide moat in automatic transmissions, which we explained this post. The company recently explained how it plans to flex its pricing power in response to inflation.
If we think about how we price, we have the vast majority of our North American On-Highway business under long-term supply agreements and we've honored those agreements while we face inflationary pressures. But as those come off and the cadence is off, we're in a position where we're definitely able to garner higher than historical pricing. And we need to do that because we continue to see cost inflation. We're running the business as if inflation is going to be sticky and providing ourselves optionality from a pricing standpoint. You think about last year, when we were at this conference, we were talking about 275 basis points of price for 2022. We ended up with 425 basis points of price.
And let me start with what we do with our suppliers. And we've done this for multiple years, where we allow pass-throughs on commodities real-time within the quarter. And the reason we implemented that is, what we found is when raw material would go up, the supply chain would be screaming for increases. And then when it would come back down, they were very quiet, right? So we set up a mechanism so it's a clean pass-through. We negotiate with them just on the value add.
With our long-term agreements and I think North America, over 90% of our volumes on long-term agreements North America On-Highway. We don't do 100% pass-through, but typically, it's in sort of a 75% pass-through range. So within the total book of business, about 60% of the raw that we take from our supply chain is passed through to our end users. But to your point, there's a lag. Real-time pass-through from the supply chain in the quarter 6 to 12-month lag with the -- with our end users.
The question is whether Allison’s moat will be as wide in the future. EVs don’t need transmission, so Allison may not be in replication mode. The company is optimistic, however.
So our thoughts on EV for us are a little bit that it's more of a medium to long-term opportunity for Allison… We believe that OEMs are going to continue to partner with trusted suppliers such as Allison that are really known for delivering quality, reliability, durability in those products.
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Tractor Supply — March 7, 2023
Tractor Supply has been one of the few Covid winners that hasn’t given back its gains since the world reopened. The company thinks its TAM is significantly higher today than in 2020.
So in the, let's see, October of 2020, we communicated that we estimated our TAM to be -- total addressable market to be $110 billion. We updated that at the beginning of last year to $180 billion. So a $70 billion growth -- $70 billion in growth on our TAM. There was 2 main drivers of that growth. We went from $110 billion to $140 billion in growth. So $30 billion of that was just core market growth. And so that goes back to earlier, what I was saying about half of our growth rate that we've seen over the last 3 years has been market driven. The other $40 billion was because we -- as we are building up these garden centers, we're entering the live goods space. And so we added that to our TAM as well.
Unlike most retailers, Tractor Supply has reduced its promotional activity and thereby expanded gross margins.
And our gross margin rate, a big driver of that increase has been due to reduced promotion activity. And we -- different than some other retailers who saw their promotional clearance activity increased last year, we actually had lesser promotional activity last year than we did in 2021 and lesser promotional activity in 2021 than we did '20. And the reason to that was we've eliminated print ads. Print ads are a fundamental driver of promotion activity. We used to do about 30 a year. Now we're doing 1 a year for Black Friday.
And so because we have less promotional activity, it allows us to then have a partnership with our vendors. It's all about driving growth through innovation, through tailored marketing, through new products and assortment. And we spend a lot less time on promotions. And so to your point, the Neighbor's Club data is gold for our vendors, working with them to get tailored relevant offerings to stimulate the right behavior at a customer-specific level, has been a big win-win for us and our vendors.
Davita’s labor pressures are beginning to ease and Covid won’t linger forever. The company does not believe its growth trajectory has been permanently impaired. Growth is a question of when, not if, according to management.
Timing remains a question. But we don't see any reason we can't get back to that 3% to 7% operating growth.
Alimentation Couche-Tard — March 16, 2023
After acquiring more than 2,000 locations from Total Energy (essentially a forced seller) Couche-Tard finally bagged a big acquisition in Europe, one that has been two years in the making.
We've been working on this for approaching 2 years. As we've said in our strategy, we've been -- we intend to be opportunistic in Europe and be very selective. This is a network that has really strong positions in each of the 4 countries that we're entering and also leaves room for growth in all 4 countries, and particularly Germany, by far the largest economy in Europe. So, excited about those opportunities. And we just feel, again, these are winning assets. They're doing a lot of things right. There's 1,000 car washes in the network. And I look at our offer that we have in Europe, I think it's one of the best in the industry and combining those 2 brands and concepts, we think we can have a winning formula in these 4 countries.
Couche-Tard’s competitive position compared to smaller C-Store operators is widening thanks to persistent cost inflation.
look at the bottom quartile of the industry in terms of smaller same-store smaller box sales, lower volume, they've had the same inflationary pressures around credit card fees, energy and labor that the industry has. Their cost, their breakeven needs have gone up materially. And so our goal is to continue to widen our gap versus the industry. That's our focus.
American Water — March 27, 2023
American Water is about as deep into replication mode as it gets.
Now, when I first joined American Water, four years ago, somebody told me that statistic and I said, there's got to be a decimal in the wrong place. Don't you mean 20 years? And no, the answer is 200, and American Water, we're leading the industry and we're roughly at 115 year replacement cycle.
So if you think about that from two perspectives, you can say, well, gee whiz, that's a long time. It's over a century before we have this system fully refreshed, if you will. But the other side of that is from an investor standpoint, we're going to be doing this for the next 115 years, spending 3 billion a year, investing in the systems, going through the regulatory process, getting recovery and earning that roughly 10% return on that investment.
So from an investor perspective, this is the best game going in terms of stability and just long term view and predictability of results.
American Water expects 7-9% long-term earnings growth, which is below the 11% CAGR they produced over the last ten years. Adding the stock’s 2.0% dividend yield brings prospective total returns to 9-11%.
American Water has publicly stated out there, investors are looking forward to a long-term earnings growth rate of seven to nine percent, which is best in class.
Alibaba is decentralizing. This will likely appease regulators and may unlock the stock’s discount to its sum of the parts.
Alibaba Group will be in the nature of a holding company that is the controlling shareholder of the business group companies. And as the controlling shareholder, the Alibaba Board will continue to have control over the boards of these new companies, in particular in the initial phase. However, the nature of the relationship will change. Alibaba will be more in the nature of an asset and capital operator than a business operator in relation to the business group companies.
Each business group company will have its own corporate entity. In addition, they'll also have their own Board of Directors and their own governance structures, and of course, perhaps of most interest to the market, each of these companies will be set up to enable financing from third parties. So when conditions are right, these companies can indeed go to the market to seek financing from third parties or IPO.
Home Depot’s CFO thinks the medium to long-term conditions for home improvement have never been better.
And I think the conditions right now, and I'll put an asterisk on 2023, the conditions for home improvement over the medium to long term have never been this attractive. And just to give a few highlights around that, the buildup of housing wealth in the United States, if you look at the equity position that homeowners have built up, not just over the last 3 years, but over the last 12 years, you've seen home value -- aggregate home value of housing stock in the United States go from, call it, $20 trillion back in 2012 to almost $50 trillion now. And so those are round numbers. But -- and in that, mortgage debt has remained stable.
So you have a much healthier homeowner than we've ever seen before. At the same time, you can -- we could talk for a long time about short-term housing turnover, short-term home price appreciation. But the statistic that has really stuck with me is the vacancy rate in the United States. It is at its all-time low. This is post World War II. That rate has hovered somewhere between 1% and 2% of housing stock being vacant in the United States for decades. It shot up to 3% just before the GFC, when we vastly overbuilt. And then since then, since 2010, we have built ourselves into a chronic condition of lack of housing. And so vacancy right now is less than 1%. I think it's 0.6% in the last reading.
Gain in market share should should offset temporary weakness as the market digests higher rates.
Home Depot has a long history of taking market share in any environment.
Carmax generally loses share during tough markets and prioritizes profitability, while gaining share during strong used car markets. The net result has been increasing share over long periods of time.
For context, we have lost some market share during prior down cycles. In those cases, we recovered the market share and then continue to grow to new heights as economic conditions improved. We remain focused on achieving profitable market share gains that can be sustained for the long-term and plan to continue running extensive price elasticity tests. The results from our most recent tests confirmed that holding margins during the quarter was the right profitability play.
Wells isn’t seeing major CRE stress yet but expects some down the road.
Look, in the office space right now, as many others have said, too, like this is going to play out over an extended period of time. We're not seeing a lot of near-term stress in terms of what -- whether clients are current or seeing very big issues on a property-by-property basis at this point, but we do expect some of that to come. And I think it will be for all of the reasons that everyone is reporting on, right? And in particular, it will be in cities that you see weakness in places like San Francisco and L.A., a little bit in Seattle. And so it's all the places where either lease rates are already lower than the national average or the secular changes around back to office are changing a little bit more of a bigger way. And -- but it's going to take time. And we just haven't seen it translate into lost content here, and we're going very granular property by property.
Certain small banks are much more heavily exposed to CRE than the large diversified money center banks.
Since banks are so highly levered, with collective equity capital of just $2.2 trillion (roughly 9% of total assets), the estimated amount the average bank has in CRE loans is equal to approximately 100% of its capital. Thus, losses on CRE mortgages in the average loan book could wipe out an equivalent percentage of the average bank’s capital, leaving the bank undercapitalized. As the BofA report notes, the average large bank has 50% of its risk-based capital in CRE loans, while for smaller banks that figure is 167%.
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