Company Reports

SK Telecom's telecom market position is strong, and we like the free cash flow it generates. SK Telecom was Korea's first wireless operator, and we believe it has done a good job of maintaining a dominant position. The firm continues to claim just under 45% wireless market share, including the leading position among postpaid contract customers, which provides it with the highest average revenue per user among Korean wireless operators. However, this has come at a cost with wireless operating profit nearly halving between 2017 and 2019. More pleasing has been the wireless operating profit growth reported from 2020 to 2023 as competition seems to have stabilized with 5G generating incremental revenue.

Industrial Bank, or CIB, has a strategic focus on green banking, investment banking, and wealth management businesses as a part of its 2021-26 strategy, which we think are the key strengths of CIB. In addition, the bank also aims to reduce funding costs and strengthen its retail banking business, which have been major weaknesses in the past. We expect CIB’s near-term earnings growth to be supported by its funding cost reduction, but it will be challenging to achieve its goal of transforming the retail business given current fragile consumer confidence.

We believe Guidewire is reaping the benefits of years of groundwork in the form of convincing property and casualty insurers to upgrade their aging core legacy systems to Guidewire’s solutions. In our view, the company has used a modern software platform to disrupt a sleepy industry that has been underserved by legacy software vendors, and we still see a long runway for additional growth for Guidewire.

Hewlett Packard Enterprise, or HPE, is a comprehensive IT hardware provider to large enterprises, supplying compute servers, storage arrays, and networking equipment. We don’t view HPE as a technology leader, nor do we see it as holding competitive advantages compared with peers. Nonetheless, HPE is a top-5 player across its core markets, and we expect it to maintain demand as data centers utilize hyperconverged infrastructure and enterprises opt for hybrid cloud approaches. We also believe investors may find its cash generation and subsequent returns to shareholders attractive.

Zip’s business is more diversified than single-product buy now, pay later, or BNPL, players, with varieties in financing options, transaction limits, and repayment schedules.

Donaldson, a leading manufacturer of air and liquid filtration systems, has built a narrow moat around its large installed base of equipment coupled with a razor-and-blade business model that continues to generate a relatively steady and high-margin stream of recurring revenue from aftermarket parts and consumables. The firm generates an increasing portion of its sales from proprietary solutions, which enjoy higher margins and greater customer retention rates. As a result, recurring revenue has steadily increased, from roughly 50% in 2012 to over 60% in fiscal 2022. We expect this trend to continue, as the firm continues to scale their new life sciences segment both through organic investment and acquisitions.

Following years of anemic growth due to operational missteps and underinvestments, management has worked to right PepsiCo’s ship, even amid covid-19-related disruptions and input cost inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (such as energy drinks) and various emerging markets (such as Latin America, Africa, and Asia-Pacific), and an integrated business model facilitating more effective commercialization.

Bank of Montreal is the fourth-largest bank in Canada and one of six Canadian banks that collectively hold almost 90% of the nation's banking deposits. The bank derives roughly 60% of its revenue from Canada and 30% from the United States. BMO has a well-established Canadian banking presence, an established US retail operation in the Midwest, and growing commercial and capital markets capabilities. It is also the second-largest asset manager among the Canadian banks as well as the second-largest ETF provider in Canada.

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and limited cyclicality representing just a handful of alluring structural features in an $144 billion US market (American Pet Products Association). While a slew of players jockey for manufacturing and retail market share, Chewy's service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Ferguson's exposure to the US RMI market (as a percentage of sales) increased from 31% in 2008 to 60% in 2023, while US new construction revenue exposure decreased from 58% to 40% over the same time period.

GE Vernova’s strategy is centered on developing products and services that enable electrification and decarbonization. The company's power segment largely consists of its gas power operations, which has the largest installed gas turbine fleet in the world.

Host Hotels & Resorts, the largest lodging real estate investment trust in the United States, has entered an unprecedented mature stage of its growth cycle. Hotels have one of the highest betas among all REITs and trade up or down on any indication that the U.S. economy is picking up or slowing down, respectively. People need to travel for business when the economy is expanding and want to travel when jobs and income are steady, but travel is one of the first things cut as confidence in the economy falls. Since hotel lease terms are for a single night, occupancy and rates get reset each day and quickly reflect changes in the economy. Prior economic cycles have seen two to three years of falling revenue per available room during a recession followed by five to six years of high-single- to low-double-digit revPAR growth. Typically, as growth slows, the economy enters a new recession and the pattern repeats.

Pebblebrook Hotel Trust is the largest US lodging REIT focused on owning independent and boutique hotels. After Pebblebrook merged with LaSalle Hotel Properties in November 2018, the company owns 46 upper upscale hotels with more than 11,900 rooms, located primarily in urban gateway markets. Historically, Pebblebrook's combined portfolio has had a higher revenue per available room price point and EBITDA margin than its hotel REIT peers.

The luxury apparel resale space has been chronically underserved, with an inefficient network of brick-and-mortar boutiques capturing the bulk of sales over the last decade. The market that arose from that model was heavily fragmented, bound by retail catchment area, and featured high frictional costs, high commissions, and slow turnover—a far cry from other asset classes like cars, homes, and collectibles, which have long enjoyed more effective used marketplaces. The RealReal exists to serve this end market more efficiently, with white-glove inventory sourcing, faithful authentication protocols, and an online platform leading to step-change improvements in platform depth, turnover, and vibrancy. We view the company's strategy as relatively sound, and appreciate its efforts to restructure its looming 2025 debt to assuage bankruptcy concerns.

Park Hotels & Resorts is the second-largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all its international hotels and 23 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper-upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

Enbridge stands out among North American midstream operators with a utilitylike earnings profile. Its most important asset, the Mainline system, controls over 70% of Canada's takeaway capacity and is linked to highly complex US refineries that value heavy oil, so demand remains secure in the near to medium term despite the increase in US light oil production. Over 80% of Enbridge's EBITDA is protected against inflation.

As the second-largest off-price retailer in the US with about 30% market share, we believe Ross Stores’ unique inventory procurement method and scale positions the firm to comfortably expand its top line at a mid-single-digit pace while fending off competition from online channels in future. We suggest that Ross’ standing as a reliable sales outlet for product manufacturers and traditional (or full-price) retailers looking to discreetly liquidate excess inventory should provide the firm with an abundant assortment of buying opportunities. Ross consistently stocks its more than 2,100 stores with a wide assortment of branded merchandise at bargain prices due to its plentiful vendor relationships and meticulous inventory management.

While already boasting a leading position in the domestic off-price retail industry via its T.J. Maxx and Marshalls banners, we believe TJX Companies is well positioned to continue leveraging its procurement scale and existing footprint to drive growth. The company’s go-to-market strategy is difficult to replicate, in our view, as its network of over 21,000 global vendors and decades of procurement expertise serve as barriers to entry. Unlike traditional retailers that obtain inventory via defined purchase orders and replenishment deals, TJX opportunistically procures excess inventory made available from manufacturing overruns and retail closeout sales at prices 20%-60% lower than conventional outlets. With an ever-changing assortment of brand-name merchandise and minimal depth per stock-keeping unit, the retailer’s stores embody a treasure-hunt shopping experience for consumers searching for bargains. As such, we view TJX’s brick-and-mortar model as well insulated from digital competition.

The London Stock Exchange Group, or LSEG, has doubled down on its market data and analytics strategy. After the Refinitiv acquisition, the new group is now vertically integrated from pretrading data and analytics over trading venues down to post-trade clearing and reporting, albeit dominated by its data business. Importantly, its assets form a strong symbiotic relationship wherein intellectual property generated within one strengthens the offering of the other, inducing demand for the group’s services.

Humm is restructuring where it is simplifying and improving products and systems, streamlining finance applications and narrowing its addressable market. From competing via a diversified product set, it now intends to focus on a select few product lines.