Company Reports

Agco is a pure-play agricultural equipment company that has traditionally been focused on tractors. We believe it will continue to be a top-three player in the ag industry. The company has been successful in emerging markets, where customers typically look for reasonably priced equipment. In developed markets, it faces competition from industry leaders Deere and CNH, which provide customers high-quality and strong-performing products, making it difficult for Agco to gain ground. The company’s peers help customers reduce the total cost of ownership through improved fuel efficiency, limited machine downtime, and consistent parts availability.

Dentsply Sirona is one of the world’s largest manufacturers of dental equipment and supplies. It has a strong presence in dental CAD/CAM (computer-aided design/computer-aided manufacturing) and has long reaped the benefits as a first-mover in the space. However lucrative economics and rising appetite for cosmetic procedures has attracted a large number of competitors over the last decade and put the company on a defensive footing. To adopt and compete in an increasingly fragmented market, Dentsply Sirona has invested more into its CEREC system, the firm’s flagship chairside workflow solutions. Since 2019, it has launched a new scanner, milling machine, 3D printer, as well as a new cloud solution that integrates different parts of the workflow together. The firm also recently expanded its partnership with 3Shape, an intraoral scanner and dental CAD/CAM software manufacturer, by allowing scans from 3Shape’s Trios scanner to be integrated with Dentsply Sirona’s workflow. We appreciate this strategic move because CEREC has historically been a closed system and we believe opening up its workflow could expand Dentsply Sirona’s end markets and allow doctors who use third-party equipment to adopt the firm’s offerings more easily.

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of US construction spending. We forecast strengthening demand growth for the public sector and modest growth for the private sector. Accounting for roughly 40% of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty but did not solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totaling $1.2 trillion.

Roughly 74% of Air Canada's 2023 passenger revenue came from trips that began or ended outside of Canada, with just over 21% from flights to or from the US Air Canada capitalizes on so-called sixth freedom traffic, which connects long-haul international routes to the US via layover in a Canadian airport. While we think Air Canada came into the covid crisis in better financial shape than many of its US-based peers, its international exposure and extensive travel restrictions in the Canadian market placed it under comparably more financial stress.

Following several years of rampant oversupply, the US rig market has spent the past several quarters operating near maximum capacity utilization, supporting significantly increased day rates. Drillers generally start to command pricing power at around 80% utilization, and the current operating environment has pushed average rig rates well over $30,000 per day. Elevated demand will preserve the status quo over the near to medium term, but we expect fierce competition among drillers will prevail in the long run. Improved rig technologies have increased drilling efficiency, ultimately requiring fewer rigs to meet demand.

We believe Apple has cemented a long-term position atop the consumer electronics industry with a focus on a premium ecosystem of tightly integrated hardware, software, and services. We see the flagship iPhone as the linchpin of this ecosystem, from which Apple derives pricing power, switching costs, and a network effect. In our view, every other Apple device and service sees its greatest value from further locking in customers to this walled garden. This approach earns the firm a wide economic moat rating.

CNH Industrial provides customers with an extensive portfolio of off-highway products. We believe it will continue to be a top-two player in the agriculture industry. For generations, the company’s agriculture equipment has garnered intense brand loyalty among farmers. Customers value CNH’s high-quality and strong-performing products, in addition to its robust dealer network. In developed markets, CNH helps customers reduce the total cost of ownership through improved fuel efficiency, limited machine downtime, and consistent parts availability.

CF Industries is the largest nitrogen producer in North America, with production based in the United States and Canada. CF's plants, which benefit from low-cost North American natural gas, are connected to its main customers in the US Corn Belt by an extensive distribution network of pipelines, rail, and barge, giving the company a transportation cost advantage over foreign competition without pipeline access.

We believe Caterpillar will continue to be the leader in the global heavy machinery market with an extensive portfolio of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. High-quality, extremely reliable, and efficient products underpin the strong brand. Customers also value Caterpillar’s ability to lower the total cost of ownership.

Appian is a leading provider of low-code enterprise software for business process management, or BPM, specializing in process automation. We expect digitization tailwinds to fuel demand for low-code BPM software over the coming decade, as businesses seek to drive operating efficiencies and automate manual processes. However, while we’re encouraged by the firm’s ongoing investments to support top-line growth, we expect this will be at the expense of profitability for the foreseeable future.

Mosaic is a leading producer of potash and phosphate fertilizers. In 2023, potash generated around 57% of total gross profits, with phosphates around 33%. The balance is derived from the Brazilian fertilizer business. Mosaic’s U.S. phosphate rock mines and Canadian potash assets provide the company with a stable input base for its products. Over the long run, Mosaic should benefit from growing global demand for fertilizer.

C.H. Robinson dominates the $90 billion-plus asset-light truck brokerage market, and its immense network of shippers and asset-based truckers supports a wide economic moat, in our view. Although the company is by no means immune to freight pullbacks, its variable-cost model historically helps shield profitability during periods of lackluster volume and pricing, as evidenced by a long history of above-average operating margins. The firm's ownership of transportation equipment is minimal, and a large swath of operating expenses are tied to performance-based variable compensation, which moves with net revenue. We think the company remains well positioned to capitalize on gradual truck brokerage industry consolidation (including market share gains) despite intensifying competition.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow defense contractors to deliver a lot of cash to shareholders, which makes up for slow growth in this industry. Defense budgets usually ebb and flow with a nation's wealth and its perception of danger: in the U.S. and among its allies both have been on the rise, and geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to Huntington Ingalls and its peers shrank in 2012-17 by 2.6% while they grew in 2018-23 by 6.5%, annualized. We think the contracting budget will continue to grow, but more moderately, averaging around 2.5%-3.0% over the next five years.

Xylem is one of the leading water technology companies in the world. Its extensive portfolio spans a wide range of equipment and solutions for the water industry, including the transport, treatment, testing, and efficient use of water for public utilities as well as industrial, commercial, and residential customers. Xylem operates four business segments: water infrastructure, applied water, measurement and control solutions, and water solutions and services.

For most of the 2010s, Thomson Reuters was a laggard relative to its information services peers, in our view. Since deciding to spin off its Refinitiv financial and risk operations to London-based LSE Group, we believe the firm has gained more focus. Some of its past offerings have been clunky, and we believe efforts to streamline its businesses should lead to meaningful margin expansion and higher retention in the years ahead.

WestRock manufactures corrugated packaging and consumer packaging products, such as folding cartons and paperboard. It accounts for roughly 20% of the North American containerboard market and is the second-largest producer. WestRock was formed from the 2015 merger of RockTenn and MeadWestvaco, which combined two of the largest containerboard and paper companies in North America. WestRock’s formation is a result of a decade of consolidation in the containerboard industry, where four players now account for over 70% of the previously fragmented market. During this time of consolidation, producers were able to raise prices and expand margins, but increased competitive intensity and rising input costs have weighed on profitability in recent years.

Marathon has comprehensively reshuffled its portfolio in the past 10 years, discarding most of the conventional projects it historically focused on and doubling down on US shale. The international assets it has retained, in Equatorial Guinea, will be harvested for cash flows that can be redeployed in the US or returned to shareholders.

While we don't quite foresee Wingstop achieving management's target of becoming a top-10 restaurant brand in the upcoming decade, we do see a meaningful development runway for the chicken chain, with our estimates calling for midteens systemwide sales growth over that period. Our forecasts are underpinned by best-in-class unit economics and a sizable development pipeline, validating management's target for more than 10% annual unit growth over the long term. We believe that management's strategy is cogent, with priorities falling into three key buckets: improving unit economics, driving brand awareness, and expanding into international markets.

Albemarle is one of the world's largest producers of lithium, which generates the majority of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison (Greenbushes) and Wodgina. The Chilean operation is among the world's lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. Wodgina is another high-quality spodumene asset that provides Albemarle with a third low-cost resource, though not as high quality as Talison's. Albemarle also owns resources in the US and Argentina that are still in the early development phase, which should allow it to boost its lithium volumes through the development of new projects.

Sealed Air produces a wide variety of flexible resin packaging, protective shipping materials, and integrated packaging systems. The company operates 97 manufacturing facilities and serves customers in over 100 countries, with the America’s accounting for roughly two thirds of the company's sales. Sealed Air’s two segments, food and protective, supply customers with both protective packaging materials and the equipment needed to apply it in a manufacturing facility. Customers with Sealed Air equipment on-site would find it costly and time-consuming to switch from Sealed Air consumables. As a result, Sealed Air enjoys more pricing power on consumables than its more traditional peers.