⁠Value Spotlight (Andrew Sather)
Small Cap Opportunity with Rising Economic Earnings

ROIC, Economic Earnings and WACC (Tutorial)

$CNXN https://t.co/dX0eadPQju
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⁠Stock Analysis Compilation
Hedge funds' best ideas #19 is in your inbox 🔥
(link below)

Includes links to the Q3 letters from Alger / Ariel Investments / Clearbridge / Deep Sail Capital / Ennismore / Gator Capital / Harding Loevner / Longriver Partners Fund / Maran Partners / Miller Value Fund / Munro / Oakmark / Vulcan Value Partners
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⁠Stock Analysis Compilation
Alger on MercadoLibre $MELI US

Thesis: MercadoLibre’s strong network effects, expanding fintech services, and robust market leadership make it a formidable player in Latin America’s digital economy, driving significant growth potential.

(Extract from their Q3 letter) https://t.co/cIwbNSAVfe
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⁠Startup Archive
Legendary VC Bill Gurley on why “TAM conservatism” often hurts investors

“I’ve found that TAM conservatism hurts you more than it helps you as an investor. If you feel like something is super disruptive and it’s unlocking things, your optionality to build on top of that is going to be pretty spectacular.”

Bill recalls NYU professor Aswath Damodaran’s conclusion that Uber was worth only $5.9 billion given the size of the taxi market.

Bill responded in a blog post titled “How to Miss By a Mile”:

“There are multiple reasons why this is a flawed assumption. When you materially improve an offering, and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process. The past can be a poor guide for the future if the future offering is materially different than the past.”

To be fair to Aswath, Bill already knew that Uber was 20x the size of the taxi market in San Francisco at the time.

But Bill cites a McKinsey study as another classic example. In 1980, they predicted that cell phone penetration in the U.S. by 2000 would be 900,000 units. This turned out to be less than 1% of the actual figure, 109 million.

As Box CEO Aaron Levie put it:

“Sizing the market for a disruptor based on an incumbent’s market is like sizing the car industry off how many horses there were in 1910.”

Today Uber’s market capitalization is north of $150 billion—almost 30x Aswath’s estimate.

Video source: @tferriss (2023)
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⁠Startup Archive
RT @mikemcg0: "When you materially improve an offering and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process. The past can be a poor guide for the future if the future offering is materially different than the past."

Legendary VC Bill Gurley on why “TAM conservatism” often hurts investors

“I’ve found that TAM conservatism hurts you more than it helps you as an investor. If you feel like something is super disruptive and it’s unlocking things, your optionality to build on top of that is going to be pretty spectacular.”

Bill recalls NYU professor Aswath Damodaran’s conclusion that Uber was worth only $5.9 billion given the size of the taxi market.

Bill responded in a blog post titled “How to Miss By a Mile”:

“There are multiple reasons why this is a flawed assumption. When you materially improve an offering, and create new features, functions, experiences, price points, and even enable new use cases, you can materially expand the market in the process. The past can be a poor guide for the future if the future offering is materially different than the past.”

To be fair to Aswath, Bill already knew that Uber was 20x the size of the taxi market in San Francisco at the time.

But Bill cites a McKinsey study as another classic example. In 1980, they predicted that cell phone penetration in the U.S. by 2000 would be 900,000 units. This turned out to be less than 1% of the actual figure, 109 million.

As Box CEO Aaron Levie put it:

“Sizing the market for a disruptor based on an incumbent’s market is like sizing the car industry off how many horses there were in 1910.”

Today Uber’s market capitalization is north of $150 billion—almost 30x Aswath’s estimate.

Video source: @tferriss (2023) - Startup Archive
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⁠Stock Analysis Compilation
TAMIM Fund on MDU Resources Group $MDU US

Thesis: MDU’s strategic divestitures and focus on regulated energy services, coupled with strong tailwinds from infrastructure investments, position it well for stable growth and enhanced shareholder value

(Extract from their Q3 letter) https://t.co/vEX6XxJLj5
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⁠Dimitry Nakhla | Babylon Capital®
RT @DimitryNakhla: A sober valuation analysis on $AMAT 🧘🏽‍♂️

•NTM P/E Ratio: 17.69x
•5-Year Mean: 17.81x

•NTM FCF Yield: 4.60%
•5-Year Mean: 5.88%

As you can see, $AMAT appears to be trading near fair value

Going forward, investors can receive ~1% MORE in earnings per share & ~21% LESS in FCF per share 🧠***

Before we get into valuation, let’s take a look at why $AMAT is a quality business

BALANCE SHEET✅
•Cash & Short-Term Inv: $9.47B
•Long-Term Debt: $5.46B

$AMAT has a great balance sheet, an A S&P Credit Rating, & 35x FFO Interest Coverage Ratio

RETURN ON CAPITAL✅
•2019: 24.9%
•2020: 27.4%
•2021: 40.0%
•2022: 43.2%
•2023: 34.2%
•LTM: 31.1%

RETURN ON EQUITY✅
•2019: 35.9%
•2020: 38.5%
•2021: 51.6%
•2022: 53.4%
•2023: 48.0%
•LTM: 40.6%

$AMAT has strong return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2014: $9.07B
•2024: $27.18B
•CAGR: 11.60%

FREE CASH FLOW✅
•2014: $1.56B
•2024: $7.49B
•CAGR: 16.98%

NORMALIZED EPS✅
•2014: $1.07
•2024: $8.65
•CAGR: 23.24%

SHARE BUYBACKS✅
•2014 Shares Outstanding: 1.23B
•LTM Shares Outstanding: 0.83B

By reducing its shares outstanding 32%, $AMAT increased its EPS by 47% (assuming 0 growth)

MARGINS✅
•LTM Gross Margins: 47.5%
•LTM Operating Margins: 28.9%
•LTM Net Income Margins: 26.4%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~1% MORE in EPS & ~21% LESS in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $AMAT has to grow earnings at an 8.85% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2025 - 2027 EPS growth over the next few years to be slightly more than the (8.85%) required growth rate:

2025E: $9.54 (10.3% YoY) *FY Oct
2026E: $10.77 (12.8% YoY)
2027E: $11.94 (10.9% YoY)

$AMAT has a decent track record of meeting analyst estimates ~2 years out, but let’s assume $AMAT ends 2027 with $11.94 in EPS & see its CAGR potential assuming different multiples

22x P/E: $238.80💵 … ~17.1% CAGR

20x P/E: $214.92💵 … ~13.2% CAGR

18x P/E: $191.04💵 … ~9.3% CAGR

16x P/E: $199.62💵 … ~5.1% CAGR

As you can see, $AMAT appears to have attractive return potential if we assume >20z earnings, a multiple well above its 10-year mean & on the higher end of its historical range

Of course demand for semiconductor equipment & materials is expected to see a huge increase over the next several years & this has gotten priced in, to an extent

So $AMAT could justify its current multiple if estimates continue to be fairly aggressive & the company executes (as they have over the last few quarters)

However, those looking to accumulate today leave themselves with no margin of safety — and we know how volatile semiconductors can be during times of uncertainty

Today at $169💵 $AMAT appears to be fully valued

I’d consider $AMAT a great opportunity closer to $150💵 or ~11% below today’s price .. where I can reasonably expect double-digit CAGR while assuming 17x earnings

#stocks #investing
___

𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.

𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲.
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⁠Stock Analysis Compilation
TCW on AT&T $T US

Thesis: AT&T’s strategic refocus on its core telecom business, combined with strong leadership and significant investments in digital infrastructure, positions it for improved profitability and shareholder value

(Extract from their Q3 letter) https://t.co/OtGo68DviZ
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AkhenOsiris
Something about OPEC and Gen AI

OPEC Sec Gen Al Ghais: Oil And Gas Are A Gift Of God - LiveSquawk
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