The following is a brief introduction to each of your portfolio companies, with a description of why we believe they deserve a position in the Marlin portfolio.
Abbott Laboratories is a global healthcare company with leading market positions in medical devices, infant formula, adult nutrition, diagnostics and branded generic drugs.
Abbott Laboratories is well placed with market leading positions in a number of growing end markets driven by an aging population and emerging market growth. Abbott Laboratories has a long track record of profitable investment into fast growing healthcare segments and we expect them to continue to reinvest in the business to strengthen its competitive position and drive continued growth over the long term.
Adidas is the largest European and second largest global sportswear manufacturer.
Adidas is one of the world's leading brands and has a strong track record of growth and shareholder return. After going through a difficult period due to factors that are largely outside the company's control, management have turned the business around and are now growing revenues and earnings rapidly. They have started to take market shares in the lucrative US market, and we see many years of strong growth ahead.
Alibaba is the largest e-commerce player in China with an overall online shopping market share of over 70%.
Alibaba is the online marketplace leader in China and is over five times larger than its nearest competitor. It has sustainable competitive advantages through its extensive network and scale. Alibaba is also a major beneficiary of strong online shopping growth in China due to continued urbanisation, increasing incomes and a poor physical retail infrastructure in many Chinese cities. Alibaba is expected to grow in excess of 25% per annum over the next few years.
Alphabet is the holding company which owns the world's leading internet search provider, Google. Google is the world's most visited website and the largest global advertising platform by advertising revenue.
Alphabet has wide moats arising from its dominant position in online search, significant intellectual property and a strong brand. We believe Alphabet is well-positioned to grow strongly as global advertising budgets gradually shift away from television to digital formats.
Amazon is the dominant e-commerce platform in the Western Hemisphere. Alongside the e-commerce platform, the company offers marketing services to vendors and subscriptions to customers, which includes everything from free shipping to music and video. Amazon’s AWS (Amazon Web Services) business is the largest global cloud computing platform, helping clients with data storage and computing power.
Amazon.com sits at the crossroads of powerful megatrends. These include growth in e-commerce, migration of advertising spend online and the increasing adoption of public cloud. The company has significant scale and network advantages. With a long growth runway, Amazon is in a prime position to monetise these opportunities.
Descartes is a logistics software business.
Descartes business moat is centred on its Global Logistics Network (GLN). The GLN connects supply chain participants, in real time, giving visibility and control of movement of goods across increasingly regulated and complex global supply chains.
Dollar General is the leading discount retailer in the US, selling a range of everyday household items including food and cleaning products, as well as toys, stationery, and basic apparel. Dollar General has a talented management team, strong track record, and a scale advantage over its competitors. Its stores offer an attractive proposition to a growing cohort of US households that are financially stretched and are not well served by traditional retailers.
There are currently 15,000 Dollar General stores across the US and it is rolling out approximately 1,000 new stores every year. We believe the company should continue to deliver low double-digit earnings growth as Dollar General expands its store base at attractive returns, takes market share, and repurchases shares. Along with the growth story, we think Dollar General’s business model has defensive qualities. Low price points and value proposition supports its business in difficult economic environments, with sales growth actually accelerating in the last two recessions as consumers traded down.
Within Dollar Tree, there are two banners, Dollar Tree and Family Dollar, with the latter being acquired in 2015. Both banners have around 7,500 stores.
Dollar Tree is a best in class retailer. Over the last 5-years, same-store-sales growth has averaged 3% and 5% over the last decade. Very impressive when you consider everything in store has a fixed price of US$1. Dollar Tree sells a 50/50 mix of everyday and discretionary items with the latter focusing on events like birthdays and back to school or on twelve or so different holidays (Valentine’s Day, St Patricks, Easter, Halloween, Christmas, etc.). The chain’s fast moving assortment creates a treasure hunt experience that results have shown resonates well with consumers.
Family Dollar is slightly different discount store with a multi-price point offering and selling predominantly everyday items (toothpaste, bread, laundry detergent, etc.). Family Dollar customers are financially stretched with an annual household income of US$35,000.
We own Dollar Tree for three reasons. Firstly, when Dollar Tree bought Family Dollar in 2015 the retailer was underperforming due to lack of investment. After three years of paying down debt, Dollar Tree is now in a financial position to ramp up Family Dollar investment through store remodels and customer proposition initiatives, which we expect to flow through into better financial results. Secondly, there is a possibly Dollar Tree could move away from its US$1 fixed price, which if executed well, could be a tailwind for sales growth. Lastly, we think Dollar Tree has counter-cyclical qualities.
Edwards Lifesciences is the global market leader in the treatment of heart valve disease, which impacts millions of people worldwide and carries a poor prognosis if left untreated. Edward’s main product allows for the treatment of this disease without the need for risky open heart surgery.
Edwards Lifesciences continues to lead the industry in innovation, investing in the development of new products which both improve medical outcomes for patients and help doctors treat a wider range of previously untreated patients using a lower risk approach. With a dominant market share and continued investment in research and development, Edwards Lifesciences is well positioned for long term growth.
Essilor is the leading global manufacturer of corrective lenses, selling to optometrists and other eyewear retailers. More recently, Essilor has expanded into branded sunglasses and online retail, where it owns a number of leading eyewear ecommerce sites.
Essilor is the market leader and continues to drive innovation in corrective lenses. They are well positioned to take advantage of the structurally growing prescription eyewear market, driven by an aging population and increased adoption in emerging markets. Essilor’s proposed merger with Luxottica, the largest manufacturer and retailer of frames and sunglasses, will if approved by regulators, create a dominant industry player from manufacturing through to retail.
Facebook owns four of the most dominant social networking and messaging platforms in the world – the Facebook App, Instagram, Messenger and WhatsApp. It monetises these platforms by selling advertising slots to millions of businesses globally.
The average US user spends over an hour a day on Facebook and Instagram combined. This high user engagement, combined with Facebook’s unparalleled ability to deliver an audience of over 2 billion users to advertisers, has created one of the most valuable advertising platforms in the world. We see significant growth ahead as Facebook captures a significant share of advertising dollars as media budgets move away from TV and towards digital platforms.
First Republic is a founder led bank, providing private banking, business banking and wealth management in Urban, Coastal markets in the US. First Republic offers a high-touch, service orientated model where customers have a single point of contact across all banking needs. This differentiates First Republic from main street peers.
With its superior service offering, First Republic has consistently generated superior loan growth, while maintaining extremely prudent lending standards. Given these characteristics, First Republic offers a high quality investment with attractive earnings growth potential.
Floor and Décor is a leading specialty retailer in the US. The company warehouse format stores, which are roughly the size of a Bunnings, only offer hard surface flooring. The company offers the industry’s broadest in-stock assortment at everyday low prices. Floor and Décor has 123 stores across 30 states.
The company has potential to dominate the niche hard surface flooring category, which has been growing mid-single digits year over year. There is significant runway for future store growth with the potential to quadruple its footprint to around 400 stores. Given the company’s size and scale, Mom and Pop retailers, which have 50% market share, cannot compete on price or service with Floor and Décor.
Gartner is a leading research, consulting, and advisory company. Its information technology research service is seen as a ‘must-have’ at most large corporates and is used by 75% of Fortune 1,000 companies. Gartner provides up-to-date industry research and analysis to help these business leaders make informed decisions around their technology, such as the selection of software vendors or current best practice in cyber-security or cloud infrastructure.
In a world of constant technological change and business model disruption – Gartner’s research and analysis is becoming increasingly important to help companies to navigate this challenging environment. Gartner estimates there are 138,000 businesses globally that could use its service, of which just over 13,000 are current customers – indicating a long growth runway. Gartner is now looking to replicate this model in adjacent business functions including HR, Finance, and Supply Chain, with early progress looking promising.
HEICO is a leading manufacturer of niche parts to the aerospace and defense sectors. Its main focus is on the aftermarket where it has 50% share in PMA parts which are effectively regulator-approved parts that can be used in place of Original Equipment Manufacturer (OEM) components during repairs – but 30% to 50% cheaper. This is obviously an attractive proposition for airlines and has allowed HEICO to outgrow the wider aerospace aftermarket.
HEICO should continue to outgrow the aerospace market longer-term as penetration of PMA parts increases, especially as airlines focus on managing costs and as HEICO continues to expand its catalogue of PMA parts. HEICO has also successfully acquired a large number of smaller niche aerospace manufacturers and we believe they will continue to consolidate this fragmented industry. The company has been led by the founding Mendelson family for almost thirty years, who have created an enviable track-record of consistent growth over this period.
Hexcel is the leading supplier of advanced composite materials (like carbon fibre) for aerospace and other uses including wind turbines and automobiles. Advanced composites are generally lighter and stronger than traditional materials such as aluminum, which has seen the composite content of aircraft and other industrial applications increase significantly over time.
The aerospace composite industry has high barriers to entry due to scale, the close integration of processes with its aerospace manufacturer clients, and the lengthy qualification processes required to be able to supply Airbus and Boeing’s aircraft programmes. Only a few manufacturers are qualified to supply composite parts and materials to these aerospace customers.
Hilton is one of the largest hotel brand owners globally. There are 6,000 hotel properties associated with one of company’s fifteen hotel banners. Hilton is an asset-light franchisor, who takes a percentage of the revenue from hotels that use their brands as opposed to owning the properties.
We see a lot of growth for Hilton over the longer-term as independent hotels increasingly look to join branded chains like Hilton. Being part of a chain allows the hotel owner to charge higher room rates and helps boost occupancy (via loyalty programmes and more marketing clout). Hilton has 5% market share of global hotel rooms, but 20% share of new hotel openings, highlighting that Hilton should continue to outgrow the market as small independent operators lose share.
Known as a contract research organisation (CRO), Icon provides specialised services in clinical trial management for pharmaceutical and biotechnology companies.
The increasing complexity and regulatory requirements of clinical trial management are forcing pharmaceutical and biotechnology companies all over the world to seek the help of specialist CROs such as Icon. Icon’s global footprint and broad strengths in clinical management make it one of only a few companies qualified to provide these services. Growth is being driven by this increased shift to outsourcing, the increase in drugs being tested and larger trials required by regulatory bodies such as the FDA.
MasterCard is the second largest payment network in the world, operating in 210 countries and supporting more than 2 billion cards across its network.
MasterCard's growth outlook is underpinned by the secular shift to electronic payments and away from cash, particularly in emerging markets where MasterCard has significant presence. These structural growth drivers combined with increasing margins and high cash flow generation (allowing for substantial share buybacks) supports a strong growth outlook over the medium to long term.
PayPal is a global leader in online payments.
We are attracted to PayPal due to its broad based and sustainable competitive advantages and strong growth prospects. PayPal has technology, scale and global network advantages which give it a considerable advantage over its competitors. Furthermore, PayPal benefits from continued growth in e-commerce.
Signature Bank is a specialist regional bank, lending largely to wealthy families and private businesses in and around New York. They have a sticky deposit base that comes from managing transactional business accounts for businesses like law firms, accounting firms, and property management companies, a long track record of profitable growth and a very strong history of credit control.
Signature Bank has an uncomplicated relationship driven business model and industry profitability. Its ability to attract and retain senior bankers from other firms through an attractive profit sharing compensation model has allowed them to grow loans and deposits at over 20% pa over the last 10 years. It is still a small bank in a very large market and we see many more years of growth ahead.
Starbucks is the undisputed global leader in specialty coffee with over 30,000 coffee stores globally. Starbucks benefits from a strong brand, high customer loyalty, and repeat purchase behaviour. The company has a multi-decade track record of new store openings, revenue, and profit growth.
Out of home coffee consumption continues to grow steadily around the world, and despite being a 50-year-old chain, Starbucks continues to steadily roll out new stores globally. Its new stores have extremely compelling economics - with high-profit margins and returns on capital. Starbucks also has a compelling growth story in China, where they currently have 4,000 stores but believe they can ultimately have as many stores as they do in the US (15,000).
Stone Co is a rapidly growing payment service provider in Brazil that allows small merchants to accept digital payments in-store and online. Stone was founded in 2012 in response to deregulation in the Brazilian payments market, which allowed competition with the two bank-owned payment providers for the first time. Stone’s technology, service, and unique business model has proven disruptive and enabled them to gain significant market share.
Digital payment penetration is still low in Brazil, but is increasing rapidly due to the shift away from cash and growth in e-commerce. We believe Stone will benefit from this strong industry growth, but also continue to take market share from the banks-owned incumbents. All considered we believe Stone is an attractive founder-led business with many years of growth ahead.
Tencent is China’s largest online gaming company with over 50% market share and also owns WeChat, the leading social network and messaging platform with over a billion users. The WeChat app is deeply ingrained into daily life in China with the average user spending an hour a day on the platform doing everything from messaging, social feeds, news feeds, e-commerce, hailing cabs, ordering food, booking travel, paying utility bills and watching videos. Tencent also has leading positions in a range of adjacencies including digital payments (WeChat Pay), music & video streaming, and cloud computing.
While Tencent’s core business is its gaming business, the WeChat platform is allowing it to create significant value in adjacent areas such as advertising and payments which we do not think is fairly reflected in the current share price. The digital advertising opportunity in China is large and rapidly growing, and WeChat is ideally placed to capitalise given it share of online time and ability to connect businesses with users. Payments is also a large opportunity in a market where credit and debit cards aren’t widely used and cash is rapidly being displaced by WeChat Pay and AliPay.
TJX Companies (TJX) is an off-price retailer in the US, which also has stores in Canada, Europe and Australia. The company sells branded clothing, such as Nike and Ralph Lauren, as well as some homeware at a 20%-60% discount to a full-price retailer (think Briscoe’s, but predominantly for apparel). TJX can sell inventory cheaper than other retailers as it sources stock from store closures, order cancellations and manufacturer overruns – allowing them to sell at a significantly lower price.
The company has a longstanding management team with a strong track record. TJX has a good growth runway for new stores openings and growing sales at existing stores. TJX should grow its earnings at close to 10% per annum, while paying a steady and increasing dividend. Despite having solid growth prospects, TJX’s valuation has been depressed given market concerns about the broader US retail sector, combined with a couple of company specific headwinds that we believe are transitory.
Tyler Technologies is the leading provider of software to the local government sector in the US. The specialised nature of this software has resulted in hundreds of regional software players that provide some solutions, but none with the broad coverage and scale of Tyler (ERP, finance, billing and collection, HR, payroll, justice/courts, public safety, appraisal, and tax). Tyler is the only company that can offer a full suite of products and it continues to extend its lead through both research & development and bolt-on acquisitions.
Local authorities are well behind the software adoption curve in the US and two-thirds of local authorities are still maintaining old in-house systems or using legacy systems that are no longer supported by competitive vendors. Most of these government entities will need to upgrade over the next 10-20 years. Despite being the industry leader, Tyler only has around 15% market share and we see continued market share gains and margin expansion over the long term. Tyler has a longstanding management team and a great track record. We see Tyler delivering mid-teens earnings growth over an extended period, with the potential for upside from a faster than expected shift of clients to Tyler’s hosted software offering.