Investment Pitches

Pitch Summary:
One highlight of our recent trip to London was meeting management at holding London Stock Exchange Group (LSEG). In the near term the business is benefitting from market volatility and delivering strong growth across several key franchises in FX, Fixed Income, Derivatives and Post-Trade. More broadly the proposition is delivering on the promised growth, scale, and profitability improvements from the Refinitiv deal. Growth in the annual subscription value of the Data & Analytics book of business accelerated throughout 2022 with a Q4 exit rate of +6%. Cost synergies as guided of £400mn by 2025 look likely to be realised a year early with EBITDA margins approaching 50%+. A topic discussed extensively during our meeting was the strategic partnership with Microsoft, announced in December. As part of this deal Microsoft will become both LSEG's cloud services provider (migrating LSEG's data platform to Azure) and primary data and analytics partner. A key element will be the integration of Microsoft Teams into LSEG's new Workspace system, combining communication and interoperability with Microsoft 365. In practice for professionals this should allow seamless integration of a raft of functionalities: video calls, chat features, spreadsheet and database tools, cross-asset class trading and analytics. If it works out as promised this represents a far more compelling proposition to users than the old Eikon platform which has been losing share for years. At worst these improvements should help LSEG defend their current subscriber base and at best equip them to close the price gap to Bloomberg (currently ~25% premium). A noteworthy feature of the partnership is Microsoft taking a 4% stake in LSEG, acquiring a block of the outstanding stake held by the Blackstone/Thomson Reuters consortium. Part of the bear case has revolved around the >30% overhang held by this group. The first placement of three equal tranches has now been absorbed into the market and with the Microsoft deal the overhang is less than 25%. With further stake sales and LSEG's own directed £750mn buyback, the consortium's stake will likely be below 18% within a year, at which point we expect the concern around this issue will fade.

BSD Analysis:
Cooper Investors sees LSEG as successfully executing on the transformational Refinitiv acquisition while benefiting from near-term market volatility across key trading franchises. The company is delivering ahead of schedule on cost synergies, with £400 million in savings likely achieved a year early and EBITDA margins approaching 50%. The strategic Microsoft partnership represents a significant competitive upgrade, potentially allowing LSEG to challenge Bloomberg's market dominance through enhanced functionality and seamless integration of communication and analytics tools. The Data & Analytics business shows accelerating momentum with 6% growth in annual subscription value, indicating strong customer retention and expansion. Microsoft's 4% equity stake validates the partnership's strategic value while helping resolve the overhang concern from the Blackstone/Thomson Reuters consortium. With the consortium's stake declining from over 30% to an expected sub-18% level within a year, combined with LSEG's £750 million buyback program, a key technical headwind is being removed. The fund views LSEG as well-positioned to capture market share gains while generating strong cash flows from its diversified financial infrastructure platform.

Pitch Summary:
Fund holding Rentokil Initial announced an excellent set of full year numbers during the quarter. The economic resilience of Pest Control businesses is well known; 'Cockroaches don't read the Wall Street Journal'. That was reaffirmed with the group delivering mid-single digit organic revenue growth in Pest, with management raising medium-term organic growth guidance to 'above 5%' (previously 4-5%). The highlight of the result was the increased synergy targets from Terminix. As a reminder this deal, announced back in December '21, represents the combination of the #2 and #3 US Pest Control players, into what will now be the market leader. Terminix was a poorly managed business with too much executive turnover, ownership change and strategy flip-flopping, yet with a great brand, and loyal network of branches and front-line staff. In other words, ripe for Rentokil's management to plug-in to their operating philosophy and raise standards. Annualised net cost synergies lifted to 'at least $200mn' represent an increase of 33% on the initial $150mn, and we suspect even this may turn out to be conservative. The benefits of combining adjacent route density businesses are beautiful in their simplicity, something we have observed over the years during our historic investments in cash-in-transit businesses like Brinks. The opportunity is to rationalise the US branch footprint from ~600 down to ~400 while increasing revenue per branch at higher drop-through margins. Other attractions are the removal of overlapping brands and the scale benefits of combining technology platforms. In a recent meeting with senior management in London our sense was deep excitement about value creation potential as the integration progresses. While plenty of hard work remains to be done, there are no structural reasons why Rentokil's new enlarged US business cannot keep expanding its current ~17% operating margins up towards the 20%+ they make in densified geographies. Given over 75% of the revenue book is non-discretionary annually renewing contracts, we expect stable revenue growth and accelerating profit and cash flow growth over the next 18 months predominantly from these self-help efforts, irrespective of what happens to the global economy.

BSD Analysis:
Cooper Investors views Rentokil Initial as a compelling defensive growth story centered on the successful integration of the Terminix acquisition. The fund emphasizes the economic resilience of pest control businesses, noting their non-discretionary nature with over 75% of revenue from annually renewing contracts. The Terminix deal creates the market leader in US pest control by combining the #2 and #3 players, with significant synergy potential that has already been increased by 33% to at least $200 million annually. Management's opportunity to rationalize the branch footprint from 600 to 400 locations while increasing revenue per branch demonstrates clear operational leverage. The route density benefits mirror successful models Cooper has observed in other industries like cash-in-transit services. With Rentokil's proven operating philosophy applied to Terminix's strong brand and loyal workforce, the fund expects margin expansion from current 17% levels toward the 20%+ achieved in other geographies. The combination of stable revenue growth, accelerating synergies, and defensive end markets positions Rentokil for strong cash flow generation regardless of broader economic conditions.

Pitch Summary:
We have re-established an investment in Booking Holdings (BKNG). Longer term investors in the fund may recall we owned this business pre-COVID, over a holding period with mixed success. One benefit of our process (following a focused watchlist of companies through their life cycle) means we sometimes get another bite of the cherry. While there are no guarantees in this business, the second period of ownership can be more rewarding – muscle memory and accumulated scar tissue around management behaviour, industry trends and Value Latency tend toward more discerning judgements of risk and opportunity. As a reminder, BKNG is the world's largest online travel agent, known for its key brand Booking.com. It is an exceptional business. BKNG plays the valuable role of aggregator in a fragmented travel market, particularly in travel accommodation. Customers tend to travel infrequently and often to new places hence the importance of BKNG's wide selection and extensive consumer reviews. Accommodation providers on the other hand have high fixed costs but low variable ones, offering room nights that are perishable in nature. As a result they highly value BKNG's demand generation capabilities. BKNG today is expanding its role in the travel ecosystem, moving from mainly accommodation bookings to all key components of a trip, including flights, car hire and entertainment. This 'Connected Trip' strategy should improve the consumer travel experience by linking up previously fragmented components. It should also create additional sources of revenue for BKNG and increase overall business quality as more consumers interact with the Booking.com app. BKNG is run for the long term by CEO Glenn Fogel, a 20-year veteran of the group. We see Value Latency arising from the COVID impact on travel coupled with historic investor concern on competitive intensity, which has fallen. BKNG today trades on a Free Cash Flow multiple of ~15x for an industry leader with exceptional financial quality. It is well capitalised for growth and the bulk of cash generation comes back to owners via share buybacks – last year BKNG repurchased almost 8% of its share count. We expect this to continue, with an ongoing recovery in travel delivering double digit earnings per share growth.

BSD Analysis:
Cooper Investors has re-established a position in Booking Holdings, leveraging their previous experience with the company to make more informed investment decisions. The fund views BKNG as an exceptional business that serves as a critical aggregator in the fragmented travel accommodation market, benefiting from both customer loyalty and supplier dependence. The company's 'Connected Trip' strategy represents a significant expansion opportunity, moving beyond accommodation to capture the entire travel ecosystem including flights, car rentals, and entertainment. Under CEO Glenn Fogel's experienced leadership, the company is well-positioned for the travel recovery with strong capital allocation discipline. The investment thesis centers on Value Latency created by COVID's impact and reduced competitive concerns, with BKNG trading at an attractive 15x free cash flow multiple despite its market-leading position. The company's aggressive share buyback program (8% of shares repurchased last year) and strong balance sheet support expectations for double-digit earnings per share growth as travel normalizes. Cooper Investors sees this as a compelling risk-adjusted opportunity in a high-quality business with sustainable competitive advantages.

Pitch Summary:
DexCom is a medical device company focused on the design, development and commercialization of continuous glucose monitoring (CGM) systems for people with diabetes. Diabetes is a chronic, life-threatening disease for which there is no known cure. DexCom's CGM system is superior to traditional finger-stick tests because it provides users with continuous data (including glucose trends and time spent in hyper or hypoglycemia) versus a snapshot in time. DexCom's stock traded ~flat in the quarter following a 5 month stretch where the stock doubled trough to peak, likely inducing some investor to take profits.

BSD Analysis:
The manager maintains a neutral stance on DexCom following significant recent outperformance and natural profit-taking activity. The investment thesis recognizes DexCom's superior technology in continuous glucose monitoring, which provides clear advantages over traditional finger-stick testing methods. The CGM system offers diabetic patients continuous real-time data, glucose trend analysis, and hypoglycemia alerts, representing a meaningful improvement in diabetes management. The large addressable market opportunity is driven by the chronic nature of diabetes and lack of a cure, creating sustained demand for monitoring solutions. However, the stock's flat quarterly performance follows a dramatic five-month period where shares doubled from trough to peak. This substantial appreciation likely triggered profit-taking among investors, creating near-term price pressure despite strong fundamentals. The manager appears to view current valuation levels as fairly reflecting the company's growth prospects, suggesting a wait-and-see approach until more attractive entry points emerge.

Pitch Summary:
Snowflake is a dominant player in the Data Warehousing market, offering customers the ability to break down data silos and derive value from rapidly growing data sets through Snowflake's analytical database product, the Data Cloud. The company's base business is benefitting from a number of secular tailwinds, the three most prevalent being: 1) data-driven decision making, 2) cloud adoption, and 3) the exponential growth of corporate data. The company's visionary management team, headed by industry veteran Frank Slootman, plans to capture its fair share of this growth through: 1) executing on its land and expand model, 2) acquiring new customers, 3) growing internationally, and 4) expanding its nascent partner network. The stock's negative contribution in the quarter was due to the timing of Ithaka's purchase (mid-February) and its small portfolio weighting (100bps).

BSD Analysis:
The manager presents a bullish thesis on Snowflake based on its dominant position in cloud data warehousing and exposure to powerful secular trends. The investment case centers on three key growth drivers: increasing data-driven decision making, accelerating cloud adoption, and exponential corporate data growth. Snowflake's Data Cloud platform addresses critical enterprise needs by breaking down data silos and enabling advanced analytics capabilities. The company's land-and-expand business model provides strong revenue visibility and expansion opportunities within existing customers. Under CEO Frank Slootman's leadership, Snowflake is executing a multi-pronged growth strategy including customer acquisition, international expansion, and partner ecosystem development. The negative quarterly contribution was purely timing-related due to the mid-February purchase date and small initial position size. The manager views Snowflake as well-positioned to capture significant market share in the large and growing data analytics market. This represents a high-quality SaaS company with strong competitive positioning and multiple growth vectors.

Pitch Summary:
Intuitive Surgical is a medical device company that sells the da Vinci robotic surgical system. This system is primarily used for hysterectomy, prostatectomy, cholecystectomy, and hernia repair surgeries. The da Vinci systems are designed for minimally invasive surgery, which has the benefits of reduced pain, blood loss, and recovery time compared to traditional laparoscopic surgery. The company's revenues are generated from three main areas: 1) system sales, 2) instruments & accessories (scalpels, cauterization instruments, graspers, etc.), and 3) maintenance, repair, training and support. The stock's first quarter underperformance followed the company's earnings release in late January, where despite delivering a healthy 18% y/y procedure growth, investors were disappointed by management's commentary that: there will not be a new surgical system released in 2023, and for the second year in a row margins would experience some deterioration.

BSD Analysis:
The manager takes a neutral stance on Intuitive Surgical despite the company's strong fundamentals and market leadership in robotic surgery. While the da Vinci system maintains clear competitive advantages through minimally invasive surgical benefits, near-term headwinds are creating investor concerns. The company delivered solid 18% year-over-year procedure growth, demonstrating continued adoption of robotic surgery across key specialties. However, management's guidance disappointed investors on two fronts: no new surgical system launch in 2023 and continued margin pressure for the second consecutive year. The three-pronged revenue model (systems, instruments, and services) provides recurring income streams, but the lack of new product innovation may limit growth acceleration. Margin deterioration suggests either competitive pressures or investment spending that hasn't yet translated to returns. The stock's underperformance reflects investor impatience with the innovation timeline and profitability trajectory, creating a wait-and-see investment dynamic.

Pitch Summary:
Microsoft builds best-in-class platforms and provides services that help drive small business productivity, large business competitiveness, and public-sector efficiency. Microsoft's products include operating systems, cross-device productivity applications, server applications, software development tools, video games, and business-solution applications. The company also designs, manufactures, and sells devices, including PCs, tablets, and gaming/entertainment consoles that all integrate with Azure, its cloud computing service. In the quarter Microsoft's stock appreciated on the back of excitement surrounding the company's investments in OpenAI and the potential opportunities to take search market share away from its dominant competitor, Google.

BSD Analysis:
The manager presents a bullish case for Microsoft based on its diversified technology platform and strategic positioning in artificial intelligence. The investment thesis highlights Microsoft's comprehensive ecosystem spanning productivity software, cloud computing, gaming, and enterprise solutions. The company's Azure cloud platform serves as the integration hub for its device and software portfolio, creating significant competitive moats. Microsoft's strategic investment in OpenAI represents a transformational opportunity to disrupt Google's search dominance and monetize AI capabilities across its product suite. The potential to integrate advanced AI into Office 365, Azure, and Bing creates multiple revenue streams and competitive advantages. Microsoft's established enterprise relationships and productivity software leadership provide natural distribution channels for AI-powered solutions. The company's strong balance sheet and cash generation enable continued investment in emerging technologies while maintaining shareholder returns. This positions Microsoft as a key beneficiary of the AI revolution with multiple avenues for growth acceleration.

Pitch Summary:
Salesforce is the largest pure-play cloud software company, holding a leading market share in customer relationship management applications and a top-five market share position in the company's other clouds (Marketing, Service, Platform, Analytics, Integration, and Commerce). The company's software subscription term-license model differs from the traditional perpetual-license software model in two respects: (1) the software is hosted on centralized servers and delivered over the internet, as opposed to traditional enterprise software that is loaded directly onto customers' hard drives or servers; and (2) the revenue model is subscription-based, typically charging monthly fees per user as opposed to charging one-time licensing fees. The stock's strong relative performance followed a strong F4Q23 earnings release that easily beat Street expectations on the top- and bottom-lines. In addition to the beat, management announced a number of initiatives that activist investors have been clamoring for, specifically a halt to large M&A transactions and a focus on operating profitability.

BSD Analysis:
The manager maintains a bullish stance on Salesforce based on its dominant market position in cloud-based CRM solutions and diversified cloud portfolio. The investment thesis centers on Salesforce's subscription-based SaaS model, which provides recurring revenue visibility and superior economics compared to traditional perpetual licensing. The company's market leadership across multiple cloud verticals (Marketing, Service, Platform, Analytics) creates significant cross-selling opportunities and customer stickiness. Recent strong Q4 earnings performance, beating both revenue and profit expectations, demonstrates operational momentum. Importantly, management's strategic pivot toward profitability focus and M&A discipline addresses key activist investor concerns and should drive margin expansion. The halt to large acquisitions signals capital allocation discipline, while the emphasis on operating leverage should unlock significant earnings power. This represents a quality SaaS leader transitioning from growth-at-all-costs to profitable growth.

Pitch Summary:
NVIDIA is the market leader in visual computing through the production of high-performance graphics processing units (GPUs). The company targets four large and growing markets: Gaming, Professional Visualization, Data Center, and Automotive. NVIDIA's products have the potential to lead and disrupt some of the most exciting areas of computing, including: data center acceleration, artificial intelligence, machine learning, and autonomous driving. The stock's appreciation in the quarter was twofold. First, the stock benefited from tremendous excitement surrounding the release of more advanced chatbots, specifically ChatGPT, and the likelihood this would necessitate the purchase of a large number of Nvidia's products far into the future. Second, Nvidia posted a clean beat and raise quarter in mid-February, with investors becoming increasingly convinced the company and its suppliers are adequately working through the build up in channel inventories, which is reducing overall fears of ongoing inventory write-offs.

BSD Analysis:
The manager presents a bullish thesis on NVIDIA centered on the company's dominant position in visual computing and GPU technology. The investment case is driven by NVIDIA's exposure to four high-growth markets, particularly data center acceleration and artificial intelligence applications. The recent surge in AI enthusiasm, specifically around ChatGPT and advanced chatbots, has created significant demand visibility for NVIDIA's products. The company's strong Q4 earnings performance, which beat expectations and raised guidance, demonstrates operational execution amid inventory normalization concerns. NVIDIA's technology leadership in AI, machine learning, and autonomous driving positions it as a key beneficiary of the ongoing digital transformation. The manager views the current AI boom as a structural tailwind that will drive sustained demand for NVIDIA's specialized computing solutions. This represents a high-conviction position in a market leader with significant secular growth drivers.

Pitch Summary:
Sonos began as one of the largest longs at my last shop. We entered the position in September 2020 and exited the majority of the position in Q4 2021. The high level long thesis at the time was that Sonos' lumpy growth, low margins, and one time nature of its purchases coupled with loss-leader big tech competition was incorrect. Instead, the company's focus on premium home theatre (where it faced no big tech competition) and seamless and easy connection of its devices afforded the company a long runway to grow its installed base in high-income US households and cross sell complimentary audio products at much higher incremental EBITDA margins. In addition, new product refreshes with higher ASPs and a focus on the home would be a tailwind during COVID as consumers looked to trade up their home audio experience. In addition, short term supply chain issues affecting margins and ability to deliver product weighed on sentiment as short interest was 8% at the time and sell side ratings were unfavorable. Transitioning to Sandbrook, I took a 3% short position in the company a little over $18/share during 1Q given a negative view on the Q2 and FY revenue and EBITDA guides. Specifically, street was mismodeling the unit comps in Q2 and on a FY basis, idiosyncratic headwinds concerning margins (unusual discounting, high inventory levels, and OpEx delverage), and there were obvious ASP headwinds. Furthermore, the company's CFO departed for a private company right before the company's large holiday quarter. The new CFO is also the company's Chief Legal Officer. The high level numbers to the thesis were: A 2Q guidance miss (revenue $300-$305mn vs street at $377; EBITDA -$23mn vs street +$27mn) and guide down for the FY (revenue $1.64bn vs $1.75bn; EBITDA $84mn vs street $160mn) would send the stock into the low teens as investors questioned how big the pandemic pull forward was, the duration of the gulley, and whether the company's new product launches were big enough to drive LT growth therefore reigniting pre-COVID bear narratives and a corresponding multiple. Traditionally, the company only discounts its entry-level One speaker during the holiday shopping season. However, during C4Q22, the company discounted their high end home theatre soundbars, subwoofers, and speakers 20%. I believed this would put GMs in the high 30s vs street at 45% (actuals were 42.4% driven by said promotional activity). I arrived at my estimates for Q2 and the FY through a bottom up build of the various segments. Sonos provides units sold per quarter as well as revenue for its Speaker, System, and Partner & Other business lines. When backing out ASPs for Sonos' System products (where ASPs and mix is relatively constant given this is mostly professional installer demand) and Partner & Other lines, you can get a rough estimate of Sonos' Speaker Units and ASPs. Given y/y, 2yr, and preCOVID stacked unit sales for the Speaker line, I estimate fiscal Q2 speaker units come in at ~735k units vs my rough math of ~600k in FY18 and FY19, 450k in the COVID quarter (March 2020 ending), 750k in FY21, and 1.05mn in FY22. I believed the company was backfilling the channel throughout FY21 and 1H FY22 which created difficult unit comps specifically in 2QFY23. In addition, Sonos was lapping price increases this fiscal Q1, which provided no tailwind to ASPs or margins. Speaker ASPs also faced a headwind from mix of newer product introductions such as the Roam, Ray, and Sub Mini which are offered at a lower price than Sonos' flagship products (the company's premium AMP @ $699 and Arc @ $899 were a higher share of mix during '20-'21). I saw a similar unit and revenue story playing out in the Systems segment. Units of 80k in 2QFY23 will be ahead of the ~70k pre COVID but below the 90-110k level during the following 3 years. The biggest risk was a 1Q beat which I had in my model (also, since the company was just starting its federal GOOGL trial in May, there was little ST convexity risk to an IP announcement). The alt data on Sonos called for a 1Q beat but it is noisy given the company's higher mix of channel sales where sell through is captured by Google Analytics accounts of distributors and BBY where share of spend is captured by email receipt data which is not indicative of Sonos sell-in. My numbers for Q1 revenue were ahead of street ($625-$635mn vs actual $678mn vs street at $578mn) reflecting easy 1yr and 2yr comps in the Speakers segment. The revenue beat vs my numbers was a $30mn beat in System revenue (these are components popular with installers that allow a customer to connect other speakers into the Sonos app/system). The stock performed well on this 1Q revenue and EBITDA beat accompanied by unrevised FY guidance. Other positive highlights included a strong selldown of inventory, strong performance of bundled sets, stable OpEx growth going forward, no air freight costs, and a new category entry this year. While no formal 2Q guidance was provided, the new CFO gave rough guidance for 2Q revenue down 50-60% q/q on more normalized seasonality. As of mid-April, the street is currently at $297mn in revenue for 2Q. I felt comfortable holding the short as I continued to believe that FY estimates on revenue and EBITDA remained too high and consumer discretionary broadly remained a good place to have negative net exposure. I covered the short at a loss on March 10th in conjunction with most the fund's other single name shorts.

BSD Analysis:
The manager presents a detailed bear case on Sonos, transitioning from a previous long position to a short thesis based on deteriorating fundamentals. The core short thesis centers on margin compression from unusual promotional activity, difficult unit comparisons, and ASP headwinds from product mix shifts toward lower-priced offerings. The manager conducted bottom-up segment analysis, projecting Q2 speaker units at 735k versus historical ranges, and identified channel inventory backfilling as creating challenging year-over-year comparisons. Key concerns include CFO departure timing, excessive discounting of premium products (20% off soundbars vs. traditional entry-level discounts), and OpEx deleverage. The manager expected significant guidance misses with Q2 revenue at $300-305mn vs. street $377mn and EBITDA turning negative. Despite covering at a loss during March volatility, the fundamental thesis remained intact with continued skepticism on full-year estimates and consumer discretionary exposure.

Pitch Summary:
We initiated a position in Charles River Labs in Q3. CRL is a high-quality company in the drug discovery and development outsourcing space with a broad range of services from basic research to contract manufacturing. The company has operating margins of 20% or more and generates substantial free cash flow. The past few years have been challenging for companies in the drug development space, as capital has become increasingly constrained and research and development spending has remained stagnant. However, CRL has the operating history and mix of businesses to be successful over the long term. The customer base is diverse and CRL benefits from the increased dynamics of outsourcing by its biopharmaceutical clients. The company's top line has grown at a 12% compound annual rate over the last 10 years, even with the recent downturn. Management is solid, and we've known them for decades. We believe Charles River's earnings power can reach approximately $15 in 2028, assuming modest growth. We also use a sum of the parts at ~12x EBITDA (earnings before interest, taxes, depreciation, and amortization) to assess the attractiveness of CRL. This implies an intrinsic value of $228. Importantly, we think we are being conservative, as we don't build in a resumption of double-digit revenue growth in our valuation framework. However, we anticipate revenue growth of 4% from 2024 to 2028 and a modest margin recovery, aided by restructuring and cost-outs.

BSD Analysis:
Madison initiated Charles River Laboratories as a high-quality play in the drug discovery outsourcing space, attracted by the company's 20%+ operating margins and substantial free cash flow generation. Despite recent challenges from constrained biotech capital and stagnant R&D spending, the fund believes CRL's diversified customer base and comprehensive service offering position it well for long-term success. The company has demonstrated resilience with 12% compound annual revenue growth over the past decade, even through the current downturn. Madison's long-standing relationship with management provides additional confidence in execution capabilities. The $228 intrinsic value target is based on conservative assumptions of $15 earnings power by 2028 and 12x EBITDA valuation, with only 4% annual revenue growth projected. The fund explicitly notes this conservative framework excludes a return to double-digit growth, suggesting potential upside if biotech funding conditions improve. The investment thesis centers on CRL's market-leading position benefiting from continued outsourcing trends in drug development.

Pitch Summary:
Small cap initiated on Eagle Materials, a leading U.S. manufacturer of heavy construction materials such as Portland cement, concrete, and aggregates, and light building materials such as wallboard and recycled paperboard. We view Eagle as an excellent company with very attractive financial traits. EXP aligns well with our preference for high-quality holdings, given its strong margins, high return on invested capital (ROIC), and return on equity (ROE). With the residential construction cycle in a prolonged downturn, we see this as a timely opportunity to invest in Eagle. Demand for wallboard has been declining for several years, and operating rates for the industry are in the 70s, which means they have a lot of excess capacity. Investors, while somewhat mollified by the resiliency of the business, have lost patience with many construction-exposed names. During the downturn, Eagle has gained market share due to its geographical footprint and cost-competitive wallboard assets. Further, we believe we are close to a bottom in residential construction demand, and at this price, we are willing to be patient for the cycle to turn. Management is excellent and allocates capital very judiciously with copious share buybacks. Our current intrinsic value estimate does not assume meaningful margin expansion and has relatively conservative buyback assumptions. We calculate intrinsic value at $269/share.

BSD Analysis:
Madison initiated Eagle Materials as a cyclical recovery play in construction materials, believing the residential construction downturn presents an attractive entry point. The fund values Eagle's high-quality financial metrics including strong margins, high ROIC, and ROE, which align with their quality-focused investment criteria. The company has gained market share during the downturn through its geographical footprint and cost-competitive wallboard assets, despite industry operating rates in the 70s indicating significant excess capacity. Madison believes residential construction demand is nearing a bottom, making this a timely contrarian investment. Management's disciplined capital allocation through share buybacks provides additional value creation potential. The $269 intrinsic value target represents substantial upside and notably excludes meaningful margin expansion assumptions, suggesting conservative valuation methodology. This investment reflects Madison's willingness to be patient for cyclical recovery in a quality company trading at attractive valuations.

Pitch Summary:
The small cap team initiated a new investment position in Hexcel Corporation. Hexcel is a global leader in advanced composite materials, specializing in the production of carbon fiber reinforcements, resin systems, and honeycomb structures. These materials are critical for lightweight, high-performance applications, particularly in the commercial aerospace, space, and defense sectors. Hexcel's products are used in aircraft frames, wings, engines, and other structural components, offering strength and durability while significantly reducing weight. Major clients include aerospace giants like Airbus and Boeing. We like the duopoly market structure and deep moats of Hexcel's business. The cycle has been in a prolonged downtrend due to the COVID supply chain shocks, creating bottlenecks in engines and the struggles of Boeing and Spirit Aerosystems. We believe these headwinds are now largely behind us. The competitive moats in this business are significant. Capital intensity is relatively high, while incumbency and vertical integration provide a huge competitive advantage. Certification in wing and fuselage requires massive regulatory approval, which leads to even higher switching costs. Furthermore, the industry has a benign competitive structure, with Japanese firm Toray being the only other direct, scaled composite material competitor, having a combined share in wing and fuselage that approaches 90% and holding sole-sourced positions with original equipment manufacturers (OEMs). We believe the intrinsic value for this franchise is $85.

BSD Analysis:
Madison initiated a position in Hexcel Corporation, viewing it as an attractive entry point into a duopoly market structure with significant competitive moats. The fund manager believes the prolonged aerospace downturn from COVID supply chain disruptions and Boeing's struggles has created an opportunity, with these headwinds now largely behind the company. Hexcel's competitive advantages include high capital intensity requirements, vertical integration, and massive regulatory approval processes that create substantial switching costs for customers. The company operates in a concentrated market with only Japanese firm Toray as a scaled competitor, together holding approximately 90% market share in wing and fuselage applications. Madison's $85 intrinsic value target suggests meaningful upside potential from current levels. The investment thesis centers on the recovery of aerospace demand and Hexcel's entrenched position with major OEMs like Airbus and Boeing.

Pitch Summary:
ChatGPT is part owned by Microsoft, which owns the search engine Bing. After ChatGPT's launch in November, investors worried that Bing could take market share from Google, causing Alphabet stock to fall. Alphabet is our largest holding because we believe its Google search business deserves a premium multiple, and after adjusting for cash and other assets it currently sells at a discount. We believe a higher multiple is deserved because of Google's dominant market share (which has still grown post-ChatGPT) in an above-average growth business. We believe investors incorrectly interpreted the launch of ChatGPT as showing that Google was behind on AI. However, we believe the many years of high R&D spending on AI at Alphabet makes it likely Alphabet is the leader and is just being more cautious. Alphabet has more to lose with 89% control of the search market compared to Microsoft's 6%. When reports surfaced of errors and other odd behavior from ChatGPT, fears that Google would lose share diminished. Then, last month Alphabet released a test version of its own AI chatbot, Bard, further calming investors. One of the advantages Bard has over ChatGPT is that it has access to current information, whereas ChatGPT cannot access information from the past year.

BSD Analysis:
Nygren presents a compelling bull case for Alphabet, positioning it as their largest holding despite AI-related market concerns. The manager argues that investor fears about ChatGPT threatening Google's search dominance are overblown, noting that Google's market share has actually grown post-ChatGPT launch. He emphasizes Alphabet's years of AI R&D investment, suggesting the company is an AI leader exercising appropriate caution rather than lagging behind competitors. The 89% search market share versus Microsoft's 6% creates asymmetric risk dynamics favoring Google's defensive positioning. Nygren views the stock as attractively valued, trading at a discount after adjusting for cash and other assets, while deserving a premium multiple for its dominant position in an above-average growth business. The launch of Bard with superior real-time information access capabilities further validates the investment thesis and has helped calm market concerns.

Pitch Summary:
We were shareholders in Credit Suisse for more than two decades. We sold down much of our position prior to the GFC after the share price appreciated significantly and then rebuilt the position after the GFC. The second holding period was troubled and full of controversy as Credit Suisse's investment bank experienced repeated lapses in risk management concurrent with its attempts to compete with more scaled peers. Despite this, we, in hindsight, incorrectly remained focused on our sum-of-the-parts valuation and gained comfort in the strong performance of its wealth management, asset management and Swiss Universal Bank businesses as they continued to generate better than average returns. We believed that the three better businesses represented good value and that the investment bank was repairable. Despite numerous attempts by multiple leadership teams at Credit Suisse, our thesis was proven wrong. Finally, after the last investment banking restructuring plan and capital raise released last October, we determined it was time to reevaluate our investment thesis as we do whenever there is a fundamental change in one of our holdings. The release of the plan provided us with NO insight into the proceeds from the asset sales as well as the costs of restructuring the investment bank. As such, we concluded that an accurate business valuation was indeterminable and compounded by inevitable years of cash outflows. In addition, Credit Suisse's key wealth management franchise experienced elevated client withdrawals and risks of reputational damage to its wealth franchise brand grew. As such, we made the decision to exit our position in the fall of 2022 and completed our exit in early March of this year.

BSD Analysis:
Herro's exit from Credit Suisse represents a clear admission of investment thesis failure after more than two decades of ownership. The manager initially maintained conviction based on sum-of-the-parts valuation, believing the wealth management, asset management, and Swiss Universal Bank divisions provided value while the troubled investment bank could be repaired. However, repeated risk management failures and unsuccessful restructuring attempts by multiple leadership teams proved this thesis wrong. The final catalyst for exit was the October 2022 restructuring plan that provided no visibility into asset sale proceeds or restructuring costs, making accurate valuation impossible. Compounding the problem were inevitable years of cash outflows and elevated client withdrawals from the key wealth management franchise, creating reputational damage risks. The manager's decision to exit in fall 2022 and complete the sale by March 2023 proved prescient given the bank's subsequent collapse. This case study highlights the importance of recognizing when fundamental business deterioration makes a turnaround thesis untenable.

Pitch Summary:
In contrast, our European bank holdings have securities portfolios that are much smaller as a percentage of assets than their U.S. counterparts. This results in our select European bank holdings having significantly less potential for unrealized losses in their securities portfolios than their U.S. peers. In fact, marking to market the securities portfolios of our European bank holdings would have an immaterial impact on their net worth and regulatory capital. Moreover, our European bank holdings possess strong and diversified deposit bases that should benefit from a flight to quality during periods of uncertainty. Furthermore, given banks now have higher amounts of capital on their balance sheets and higher quality assets, we believe they are poised to benefit from what we view as a triple positive: interest rate spreads increasing, resilient economies, and the ability to use earnings to grow their businesses or return capital to shareholders. Some of the highest quality banks we own, such as Intesa Sanpaolo, Lloyds Banking Group and BNP Paribas, are trading at low price-to-book and price-to-earnings ratios with high-dividend yields, 10%+ free cash flow yields, and excess capital to use toward increasing dividends or buying back stock.

BSD Analysis:
Herro presents a strong bull case for Lloyds Banking Group based on superior balance sheet positioning and compelling valuation metrics. The manager highlights that European banks like Lloyds maintain smaller securities portfolios as a percentage of assets compared to U.S. peers, dramatically reducing exposure to unrealized losses that devastated U.S. regional banks. Lloyds trades at attractive low price-to-book and price-to-earnings ratios while generating high dividend yields and over 10% free cash flow yields. The bank's strong diversified deposit base should benefit from flight-to-quality dynamics during periods of market uncertainty. Herro expects Lloyds to capitalize on a favorable operating environment characterized by widening interest rate spreads, economic resilience, and enhanced capital deployment flexibility. Higher regulatory capital requirements implemented post-2008 have strengthened the bank's balance sheet with higher quality assets. This positions Lloyds to grow earnings and return substantial capital to shareholders through increased dividends and share repurchases.

Pitch Summary:
In contrast, our European bank holdings have securities portfolios that are much smaller as a percentage of assets than their U.S. counterparts. This results in our select European bank holdings having significantly less potential for unrealized losses in their securities portfolios than their U.S. peers. In fact, marking to market the securities portfolios of our European bank holdings would have an immaterial impact on their net worth and regulatory capital. Moreover, our European bank holdings possess strong and diversified deposit bases that should benefit from a flight to quality during periods of uncertainty. Furthermore, given banks now have higher amounts of capital on their balance sheets and higher quality assets, we believe they are poised to benefit from what we view as a triple positive: interest rate spreads increasing, resilient economies, and the ability to use earnings to grow their businesses or return capital to shareholders. Some of the highest quality banks we own, such as Intesa Sanpaolo, Lloyds Banking Group and BNP Paribas, are trading at low price-to-book and price-to-earnings ratios with high-dividend yields, 10%+ free cash flow yields, and excess capital to use toward increasing dividends or buying back stock.

BSD Analysis:
Herro's bull thesis on Intesa Sanpaolo centers on the bank's superior balance sheet structure and attractive valuation metrics compared to global peers. The manager emphasizes that European banks like Intesa have smaller securities portfolios relative to assets, significantly reducing exposure to unrealized losses that impacted U.S. regional banks. Intesa trades at compelling low price-to-book and price-to-earnings ratios while offering high dividend yields and over 10% free cash flow yields. The bank maintains strong diversified deposit bases that should benefit from flight-to-quality dynamics during market stress. Herro expects the bank to capitalize on a "triple positive" environment of widening interest rate spreads, economic resilience, and enhanced capital deployment flexibility. Higher regulatory capital levels and improved asset quality position Intesa to grow earnings and return capital to shareholders through dividends and buybacks. The investment case combines defensive balance sheet characteristics with attractive income generation and capital return potential.

Pitch Summary:
In contrast, our European bank holdings have securities portfolios that are much smaller as a percentage of assets than their U.S. counterparts. This results in our select European bank holdings having significantly less potential for unrealized losses in their securities portfolios than their U.S. peers. In fact, marking to market the securities portfolios of our European bank holdings would have an immaterial impact on their net worth and regulatory capital. Moreover, our European bank holdings possess strong and diversified deposit bases that should benefit from a flight to quality during periods of uncertainty. Furthermore, given banks now have higher amounts of capital on their balance sheets and higher quality assets, we believe they are poised to benefit from what we view as a triple positive: interest rate spreads increasing, resilient economies, and the ability to use earnings to grow their businesses or return capital to shareholders. Some of the highest quality banks we own, such as Intesa Sanpaolo, Lloyds Banking Group and BNP Paribas, are trading at low price-to-book and price-to-earnings ratios with high-dividend yields, 10%+ free cash flow yields, and excess capital to use toward increasing dividends or buying back stock. In the case of BNP Paribas, it sold Bank of the West in January for $16 billion, or 1.75-times book value, and it can use proceeds to repurchase its own shares at around half of book value, which is very value accretive.

BSD Analysis:
Herro presents a compelling bull case for BNP Paribas based on superior balance sheet positioning relative to U.S. peers and attractive valuation metrics. The manager highlights that European banks, including BNP, have smaller securities portfolios as a percentage of assets, reducing exposure to unrealized losses that plagued U.S. regional banks. BNP trades at attractive low price-to-book and price-to-earnings ratios while offering high dividend yields and 10%+ free cash flow yields. A key catalyst is the bank's recent sale of Bank of the West for $16 billion at 1.75x book value, providing capital for share repurchases at approximately 0.5x book value - a highly accretive transaction. The manager expects banks to benefit from a "triple positive" of widening interest rate spreads, economic resilience, and capital deployment flexibility. Strong diversified deposit bases should benefit from flight-to-quality dynamics during uncertain periods. The thesis centers on superior capital positioning, attractive valuations, and strategic capital allocation opportunities.

Pitch Summary:
Liberty Broadband's operating entity, Charter Communications, has faced negative headlines, too, but there are important differences. Importantly, connectivity at home and on the go has become a non-discretionary expense for most households, underpinning the durability of Charter's cash flows in a way that selling used cars does not. Charter's mobile service continues to win in the market, creating a converged bundled product that competes well for the limited number of customers available. And while Charter still has work to do on its network upgrade program, 2025 is expected to mark the peak year of spending. As this investment moderates, free cash flow should improve, supporting continued share repurchases at today's depressed prices. With the benefit of hindsight, the early phase of this investment cycle was painful, but we believe the setup is improving and chose to maintain our position.

BSD Analysis:
The managers maintain conviction in Liberty Broadband despite near-term headwinds, viewing connectivity as essential infrastructure. Charter's mobile service success demonstrates competitive positioning in converged services, creating bundled offerings that enhance customer retention. The key catalyst is the expected peak in network upgrade capital expenditures during 2025, which should drive meaningful free cash flow improvement thereafter. Management's aggressive share repurchase program at depressed valuations provides additional value creation potential. The investment thesis centers on the non-discretionary nature of broadband services, differentiating it from cyclical businesses like used car retail. While acknowledging execution challenges in the network upgrade cycle, the managers view current positioning as attractive for long-term value creation. The contrarian stance reflects confidence in Charter's competitive moat and cash generation capabilities.

Pitch Summary:
For example, CarMax faces a challenging operating environment. Availability and affordability of late model used vehicles (CarMax's strongest category) remain constrained, while online competitor Carvana has taken share. At the same time, CarMax's own investments in its omni-channel capabilities have yet to deliver improvements, prompting strategic changes and the CEO's ousting. While we continue to respect CarMax's brand and scale advantages, the near-term path to improved fundamentals became less visible, leading us to step aside and monitor developments from the sidelines.

BSD Analysis:
The fund managers exited their CarMax position due to deteriorating fundamentals and competitive pressures. The company faces significant headwinds including constrained availability and affordability of late-model used vehicles, which represents CarMax's core strength. Market share losses to online competitor Carvana highlight the competitive threat from digital-first players. Management's inability to deliver on omni-channel investments, coupled with the CEO's departure, signals execution challenges. Despite acknowledging CarMax's brand recognition and scale advantages, the managers determined that the path to operational improvement had become unclear. The exit reflects a disciplined approach to cutting losses when investment thesis deteriorates. This represents a classic value trap scenario where statistical cheapness wasn't sufficient to overcome fundamental deterioration.