Investment Pitches

Pitch Summary:
Helen of Troy (ticker: HELE) was the only new purchase made during Q3. It is a diversified consumer products roll-up. The company's top brands include OXO, Hydro Flask, Osprey, PUR, Hot Tools, and Dry Bar. Helen also has leading market positions through the licensed brands Braun, Vicks, Honeywell, and Revlon. The company's operating performance peaked during the pandemic, but sales have contracted in the last two years as consumer demand for Helen's products has normalized post-stimulus. The firm's stock is heavily shorted, with short sellers arguing that Helen is an overleveraged and broken roll-up with second tier brands and meager cash flow. We believe this is wrong. Most of the company's brands command leading shares in their markets. Helen has a long-term licensing relationship with Procter & Gamble, serving as a steward for several of its brands and benefiting from P&G's marketing muscle. While Helen is highly acquisitive, its asset-light model provides significant cash generation that has allowed the firm to maintain a reasonable leverage profile, even after major deals. Helen's products are discretionary, which has pressured recent financial performance. Shares have been massacred since the end of 2021, taking an additional beating after the sour July 2024 earnings release. At the time of our purchase, Helen's stock traded at a 14% free cash flow yield and for 8x normalized operating profit.

BSD Analysis:
Palm Valley initiated a contrarian position in Helen of Troy, viewing it as a misunderstood consumer products roll-up trading at compelling valuations. The company owns a portfolio of leading brands including OXO, Hydro Flask, Osprey, PUR, Hot Tools, and Dry Bar, plus licensed relationships with Braun, Vicks, Honeywell, and Revlon. Short sellers have targeted the stock, arguing it's an overleveraged roll-up with weak brands and poor cash flow, but Palm Valley disagrees with this thesis. Most brands hold leading market positions, and the strategic licensing partnership with Procter & Gamble provides marketing support and brand stewardship opportunities. The asset-light business model generates significant cash flow, enabling reasonable leverage maintenance despite active acquisition strategy. Recent performance weakness reflects discretionary spending normalization post-pandemic stimulus rather than structural brand deterioration. The stock has declined dramatically since late 2021, accelerating after disappointing July 2024 earnings. Palm Valley's purchase at a 14% free cash flow yield and 8x normalized operating profit multiple suggests significant upside potential if the company can stabilize operations and benefit from eventual consumer spending recovery.

Pitch Summary:
WH Group's shares have shrugged off the sluggishness in the Chinese economy and are responding to a combination of significantly improved U.S. and Mexico Pork segment performance, in addition to the pending IPO of Smithfield. Second quarter operating profit from the company's North American pork business was $58 million versus a loss of $277 million in the prior year quarter, as a result of higher prices and lower feed costs. Operating margins for the firm's core Packaged Meats segment (bacon, sausage, ham) remain excellent and exceed peers like Tyson and Hormel. We believe WH Group's motivation for pursuing a separation of Smithfield is due to increasingly contentious rhetoric covering trade between China and the U.S., as well as a persistent discount of the Hong Kong parent company's valuation. Smithfield will remain majority-owned by WH Group after the partial spinoff.

BSD Analysis:
Palm Valley views WH Group as an undervalued global protein leader benefiting from operational turnaround and strategic restructuring. The company has demonstrated remarkable improvement in North American operations, with Q2 operating profit of $58 million versus a $277 million loss in the prior year, driven by favorable pricing and lower feed costs. The core Packaged Meats segment maintains superior operating margins compared to peers like Tyson and Hormel, highlighting competitive advantages in bacon, sausage, and ham production. The pending Smithfield IPO represents a strategic catalyst to unlock value trapped by geopolitical concerns and the Hong Kong parent's valuation discount. Management's motivation for the partial spinoff addresses escalating US-China trade tensions while maintaining majority control of the valuable US assets. The structure should reduce geopolitical risk while allowing investors to access Smithfield's strong fundamentals independently. WH Group's shares have shown resilience despite Chinese economic weakness, suggesting the market is recognizing the value of the North American recovery and strategic repositioning through the Smithfield separation.

Pitch Summary:
Amdocs is one of the Fund's larger positions. The stock appreciated during the quarter on record revenue and strong margins. The firm continues to facilitate digital and cloud migrations for the world's leading telecommunications companies. Management has embraced the marketing opportunity from associating its services with AI (artificial intelligence), including tools used to streamline contact center call handling times. Recurring managed services revenue accounts for nearly 60% of the top line and includes agreements with many top providers such as AT&T, Vodafone, TELUS, and Charter. While the sell side sometimes seems to struggle with accepting Amdocs' mature growth rates, we value the firm's consistency and strong cash generation.

BSD Analysis:
Palm Valley maintains a significant position in Amdocs, viewing it as a high-quality technology services provider with defensive characteristics. The company delivered record revenue and strong margins, demonstrating execution in the competitive telecommunications services market. Amdocs benefits from secular trends toward digital and cloud migrations among leading global telecom providers, positioning it as a critical infrastructure partner. Management has strategically positioned the company to capitalize on AI opportunities, including contact center optimization tools that enhance operational efficiency for clients. The business model's strength lies in its recurring revenue base, with nearly 60% from managed services contracts with tier-one providers including AT&T, Vodafone, TELUS, and Charter. This recurring revenue provides predictable cash flows and customer stickiness in mission-critical telecom infrastructure. While growth rates have matured, Palm Valley values the company's consistency and strong cash generation over growth volatility. The market's focus on high-growth technology may undervalue Amdocs' stable, cash-generative business model in essential telecom services.

Pitch Summary:
Lassonde appears to have hit its stride after facing a rough patch of cost inflation and manufacturing inefficiencies a couple years ago. The fruit juice and drink manufacturer grew operating profit by more than 30% in the latest period. Management expects major capital investments in their manufacturing infrastructure to further improve performance, particularly in the U.S. market, where margins have lagged Canada. To expand its higher margin Specialty Foods segment, Lassonde recently closed an acquisition of the premium sauce brands Gia Russia, Little Italy in the Bronx, and G Hughes, the leader in sugar free BBQ sauce.

BSD Analysis:
Palm Valley views Lassonde Industries as a successful turnaround story that has overcome previous operational challenges. The Canadian beverage manufacturer has emerged from a difficult period marked by cost inflation and manufacturing inefficiencies, demonstrating strong operational execution. Operating profit growth exceeded 30% in the latest period, indicating significant margin expansion and operational leverage. Management's strategic capital investments in manufacturing infrastructure should drive further performance improvements, particularly in the underperforming U.S. market where margins lag Canadian operations. The recent acquisition of premium sauce brands including Gia Russia, Little Italy in the Bronx, and market-leading G Hughes sugar-free BBQ sauce expands the higher-margin Specialty Foods segment. This diversification strategy reduces dependence on traditional beverage categories while capturing premium pricing. The company appears well-positioned to benefit from improved operational efficiency, geographic margin convergence, and portfolio premiumization through strategic acquisitions in higher-value food categories.

Pitch Summary:
Resources Connection operates on the other end of the staffing spectrum from TrueBlue, offering consulting and professional staffing services. Current revenues are the lowest in years, which demonstrates the severity of the industry downturn, since bill rates have grown materially over time. On the last earnings call, RGP's CEO said once clients see the first interest rate cut, "It's going to be a firm line in the sand that we're moving in the right direction." Our portfolio holdings aren't immune from the beggar mentality! We expect RGP's earnings to continue sliding in the near-term, but the company has no debt and a significant amount of cash to sustain it until the recovery. RGP's dividend yield exceeds 5%.

BSD Analysis:
Palm Valley maintains a bullish long-term view on Resources Connection despite near-term headwinds in professional staffing markets. The company operates in higher-value consulting and professional services, differentiating it from industrial staffing peers like TrueBlue. Current revenues have reached multi-year lows, highlighting the severity of the professional staffing downturn even as bill rates have increased over time. Management expects Federal Reserve rate cuts to serve as a catalyst for client activity recovery, though Palm Valley acknowledges this "beggar mentality" dependency on monetary policy. The investment thesis centers on RGP's strong balance sheet with zero debt and substantial cash reserves providing downside protection during the cycle. The company offers an attractive 5%+ dividend yield while maintaining financial flexibility. Palm Valley expects continued earnings pressure in the near-term but views the current downturn as cyclical rather than structural, positioning for recovery when professional services demand normalizes.

Pitch Summary:
Demand for TrueBlue's short-term, industrial-focused day labor services have declined more than other forms of temporary staffing, and second quarter results fell short of guidance. The company has aggressively reduced expenses to limit its operating losses in this challenged environment. The shares are trading below tangible book value and for 3.5x our estimate of normalized operating profit.

BSD Analysis:
Palm Valley maintains a bearish stance on TrueBlue despite attractive valuation metrics, citing deteriorating fundamentals in the industrial staffing sector. The company's short-term day labor services are experiencing disproportionate demand weakness compared to other staffing categories, with Q2 results missing guidance expectations. Management has implemented aggressive cost reduction measures to mitigate operating losses in the challenging environment. The stock trades at compelling valuation levels below tangible book value and just 3.5x normalized operating profit estimates. However, the fund views this as a value trap given the severity of the industrial labor market downturn. The staffing industry faces structural headwinds as temporary job demand continues deteriorating, with government data showing inflated payroll numbers being revised lower. Palm Valley expects continued pressure until demand convergence occurs between temporary and permanent employment markets.

Pitch Summary:
In 2022, I noticed that peer company NSIT had been purchased by ValueAct. At the time, NSIT had a much more attractive valuation at 10-12x P/E. The company has a history of success but not nearly as much as CDW. I thought if Value Act could have a slightly positive influence on NSIT, the investment returns could be dramatic. I'd watched Value Act influence other distribution businesses like LKQ and also figured they might know something about NSIT, given its long term partnership with former ValueAct holding Microsoft. Our earliest purchases of NSIT have more than doubled and outperformed CDW. I find these investments particularly compelling now. The companies have struggled to grow the last 2 years after tech spending significantly ramped during Covid. Fundamentals could worsen in a recession though these businesses do not seem to be over-earning today. In a recession, I would also expect these companies to emerge stronger as they have in the past. Another mitigant is that cash flow is typically counter-cyclical as some working capital would unwind. At some point IT spending should grow faster, and these companies will be there to help their customers navigate complex decisions. I would not be surprised to see these investments double over the next five years driven primarily by earnings growth. With any of our investments, poor capital allocation is one potential reason we could sell our shares. CDW has allocated capital well through its history and NSIT has become more focused on returns which helps mitigate that risk. I also will monitor the value these companies provide to their customers. They seem to be as, if not more, important to their customers and will be mindful of any changes that simplify IT decision-making.

BSD Analysis:
Right Tail Capital's investment in NSIT represents a value-oriented play on IT distribution enhanced by activist investor involvement. The manager identified an attractive entry point in 2022 when NSIT traded at 10-12x P/E, significantly cheaper than peer CDW. The investment thesis was bolstered by ValueAct's acquisition of the company, given their successful track record improving distribution businesses like LKQ and their historical relationship with Microsoft. The manager's confidence in ValueAct's operational influence has been validated, with NSIT shares more than doubling and outperforming CDW since purchase. Similar to CDW, NSIT faces near-term headwinds from normalized tech spending post-COVID, but the manager views current fundamentals as sustainable rather than cyclically elevated. The company has improved its focus on capital returns under ValueAct's influence, addressing a key risk factor. The manager expects both CDW and NSIT to benefit from eventual IT spending acceleration and anticipates potential doubling over five years driven by earnings growth.

Pitch Summary:
CDW is an exceptional IT solutions provider superbly positioned among a fragmented group of customers and vendors. CDW provides IT solutions (hardware, software and services) to more than 250,000 customers primarily in the US and Canada. They help their customers navigate an increasingly complex IT market and maximize returns on their technology investments. CDW's $21B in revenue suggests that the company has less than 10% market share in an estimated addressable market opportunity at ~$440B. The company came public for the second time in 2013 at $17 per share and today has a market cap of ~$30B (~13x higher) and enterprise value of $35B. I find that several aspects of CDW are under-appreciated at first glance. The company is much more than a B2B distributor of commoditized IT equipment like computers – it creates win-win relationships with its customers and vendor partners. The company is a solutions provider often serving as an outsourced IT teammate for small businesses. CDW has described its sweet spot as customers with less than 5000 employees, those that are big enough to benefit from significant IT expertise but small enough to not have adequate resources internally. Because CDW sells over 100,000 products from over 1000 brands, they act as a neutral third party and recommend the best solutions for each client rather than focusing on one vendor's products. Of their ~15,000 employees, ~2/3 are customer-facing, showing how much the company cares about serving its customers. Unsurprisingly, vendors also like working with CDW. The company serves as a knowledgeable extension of a vendor's salesforce to many smaller customers. Therefore, CDW sits in the middle of a fragmented base of vendors and a fragmented base of customers serving as a valuable, agnostic partner to both sides. Over the course of my career, I've found that distributors sitting in between fragmented customer and supplier bases can create significant value for all parties involved, including shareholders. Other Right Tail investments such as O'Reilly Auto Parts, Ferguson and Brown & Brown share similar attributes. These great operational characteristics have led to superior financial results. Over the last 10 years, CDW typically has grown revenues 200-400 bps faster than the overall IT market. The company has produced some operating leverage with EBITDA margins gradually moving up to the 9-10% range. Given the sales compensation structure that is tied to gross profit dollar growth, modest operating leverage makes sense. I'm amazed by how little incremental capital CDW spends to grow. When the company is not making acquisitions, it needs little fixed capital, and capex has typically been below D&A. As it relates to working capital and P&L investments such as increased sales and marketing, incremental returns on capital have typically been above 30%. Ideally, CDW would be able to grow even faster by reinvesting more capital into the business at these returns; however, the 7% sales CAGR (low double digits EBITDA CAGR) since the company came public in 2013 has been impressive. Interestingly, if I look back to CDW's first time as a public company, the sales CAGR from year end 2000 to today is also high single digits. I find these investments particularly compelling now. The companies have struggled to grow the last 2 years after tech spending significantly ramped during Covid. Fundamentals could worsen in a recession though these businesses do not seem to be over-earning today. In a recession, I would also expect these companies to emerge stronger as they have in the past. Another mitigant is that cash flow is typically counter-cyclical as some working capital would unwind. At some point IT spending should grow faster, and these companies will be there to help their customers navigate complex decisions. I would not be surprised to see these investments double over the next five years driven primarily by earnings growth. With any of our investments, poor capital allocation is one potential reason we could sell our shares. CDW has allocated capital well through its history and NSIT has become more focused on returns which helps mitigate that risk. I also will monitor the value these companies provide to their customers. They seem to be as, if not more, important to their customers and will be mindful of any changes that simplify IT decision-making.

BSD Analysis:
Right Tail Capital presents a compelling bull case for CDW as an exceptional IT solutions provider positioned between fragmented customer and vendor bases. The manager emphasizes CDW's role as more than a commodity distributor, highlighting its value-added services as an outsourced IT partner for mid-market companies with fewer than 5,000 employees. The investment thesis centers on CDW's superior capital efficiency, with incremental returns on capital exceeding 30% and minimal capex requirements. The company has demonstrated consistent outperformance, growing revenues 200-400 basis points faster than the overall IT market over the past decade while expanding EBITDA margins to 9-10%. Despite recent headwinds from post-COVID tech spending normalization, the manager views current fundamentals as sustainable and expects the business to emerge stronger from any potential recession. The fragmented $440 billion addressable market provides significant runway for growth, with CDW currently holding less than 10% market share. The manager's five-year outlook anticipates potential doubling driven primarily by earnings growth as IT spending accelerates.

Pitch Summary:
Motorola Solutions was another top contributor to performance as the Company continued its steady execution with +9% year-over-year sales growth and +22% adjusted earnings per share growth. While Motorola's backlog for products declined, much of it was due to accelerated revenue recognition on strong deliveries for its Land Mobile Radio (LMR) business - a critical long-term solution for emergency services around the globe. The technology behind LMR is quite simple; however, it is an extremely robust implementation that needs to withstand regular and even mega catastrophes (e.g., hurricanes) in order to guarantee uptime for the emergency services that depend on it for communications. The Company has superlative, unmatched competitive positioning in this core business and should be able to continue to expand value-added service offerings to LMR and drive attractive long-term growth. Wedgewood Partners now has owned Motorola Solutions for over five years (funded by the partial sale of our 20-year holding then of Berkshire Hathaway). We'd like to provide an update on the Company, which has been a significant gainer in the portfolio. As a reminder, Motorola Solutions is the dominant market leader in its core Land Mobile Radio (LMR) business: providing infrastructure, handsets, and related software and services for customized, highly resilient, secure networks for global police and emergency services, a variety of government and military applications, and other commercial and public safety applications where security and reliability are of the utmost importance. The Company continues to find success in using its entrenched position in these mission-critical networks to layer in faster-growing and higher-margin software, service, and video products. Although Motorola has some credible competition in these ancillary products, in contrast to its dominance in the LMR business, the Company is the only player capable of fully integrating an entire service offering, given their structural competitive advantage of its LMR network backbone. In Wall Street terminology, this is basically an example of the beloved razor and blades model, except there is little credible competition for the razor; both the razor and blades are consumable/subscription-type products, and the whole model is on steroids, with actual growth for the entire industry.

BSD Analysis:
Wedgewood Partners expresses strong conviction in Motorola Solutions, a five-year holding that has been a significant portfolio winner, highlighting the company's consistent execution with 9% sales growth and 22% adjusted earnings per share growth. The manager emphasizes Motorola's dominant market position in Land Mobile Radio (LMR) systems, which provide mission-critical communications infrastructure for global emergency services, police, government, and military applications where reliability and security are paramount. The investment thesis centers on Motorola's unmatched competitive positioning in LMR technology, which must withstand extreme conditions including natural disasters to ensure continuous uptime for emergency services. Wedgewood views this as a classic "razor and blades" business model with superior characteristics - minimal competition for the "razor" (LMR infrastructure), consumable/subscription-type products for both components, and actual industry growth. The firm believes Motorola's entrenched position in mission-critical networks creates a structural competitive advantage that enables the company to layer higher-margin software, services, and video products onto its LMR backbone. While acknowledging competition in ancillary products, Wedgewood emphasizes that Motorola is uniquely positioned to provide fully integrated solutions due to its dominant LMR network foundation. The manager sees continued opportunities for attractive long-term growth through expanding value-added services and maintaining the company's superlative competitive positioning in this critical infrastructure market.

Pitch Summary:
UnitedHealth Group shares rebounded during the quarter and the holding was a top contributor to portfolio performance. The Company reported double-digit growth in earnings per share during the quarter. It has been able to adjust pricing in its Healthcare segment to keep up with medical cost inflation while working with its Optum units to deliver more value-based care, replacing the traditional fee-for-service health-care model. The Optum segment grew operating income over +15% on strong expense management and continued uptake of value-based care offerings. Value-based care is a sensible, long-term growth opportunity for the Company to pursue and also differentiates them from the vast majority of healthcare providers, particularly as it relates to Medicare patients. For example, the Company's value-based care programs provide more preventative care opportunities and homebased care visits for patients which helps save the U.S. health-care system billions in unnecessary spending, while also providing patients with better outcomes because diseases and behaviors are caught or corrected at earlier stages. Furthermore, the Company has invested in several core assets over the years in order to execute this value-based strategy. It may well become the standard of care as the proportion of people in the U.S. with healthcare insurance coverage continues to reach new highs.

BSD Analysis:
Wedgewood Partners maintains a bullish outlook on UnitedHealth Group, highlighting the company's strong operational execution with double-digit earnings per share growth and effective pricing strategies to manage medical cost inflation. The manager emphasizes UnitedHealth's strategic transformation toward value-based care through its Optum segment, which delivered over 15% operating income growth driven by strong expense management and increased adoption of value-based care offerings. The investment thesis centers on UnitedHealth's differentiated approach to healthcare delivery that replaces traditional fee-for-service models with value-based care, particularly for Medicare patients. Wedgewood views this transition as a significant competitive advantage that positions UnitedHealth ahead of most healthcare providers while creating substantial cost savings for the U.S. healthcare system. The firm believes UnitedHealth's value-based care programs, which emphasize preventative and home-based care, deliver superior patient outcomes while reducing unnecessary healthcare spending. The manager sees this model as potentially becoming the standard of care as healthcare insurance coverage continues expanding. Wedgewood's confidence stems from UnitedHealth's strategic investments in core assets that enable effective execution of the value-based care strategy, positioning the company for long-term growth in the evolving healthcare landscape.

Pitch Summary:
Meta Platforms was a leading contributor to performance during the quarter. Revenue growth came in at a strong +23% (foreign exchange-neutral) while adjusted expenses grew slower, with operating margins in the Company's core Family of Apps business hitting nearly a sterling 50%. The Company has been a consistent beneficiary of artificial intelligence (AI) over the past several years, investing aggressively behind deep learning recommendation systems that help power products that reach nearly the population of the planet. Meta's AI investments, combined with its massive scale, allow the Company to quickly spin up new products across its digital advertising real estate to reinforce its competitive positioning. Meta's core Family of Apps products are backed by extremely large and complex (i.e. difficult to copy) AI recommendation systems that have to sort through billions of datapoints in real time and come up with the probability of a user engaged to click. Meta is one of the few companies that has been able to consistently and profitably monetize AI technologies for shareholders and we continue to hold it as a top position in portfolios.

BSD Analysis:
Wedgewood Partners expresses strong conviction in Meta Platforms, emphasizing the company's exceptional financial performance with 23% revenue growth and impressive 50% operating margins in the Family of Apps segment. The manager highlights Meta's strategic advantage in artificial intelligence, noting the company's multi-year investment in deep learning recommendation systems that power products reaching nearly the global population. The investment thesis centers on Meta's ability to profitably monetize AI technologies through its sophisticated recommendation algorithms that process billions of data points in real-time to optimize user engagement. Wedgewood views Meta's AI infrastructure as a significant competitive moat that is extremely difficult for competitors to replicate due to its scale and complexity. The firm believes Meta's combination of massive scale and AI capabilities creates a virtuous cycle that reinforces its dominant position in digital advertising. The manager positions Meta as one of the few companies successfully translating AI investments into shareholder value, distinguishing it from other tech companies struggling with AI monetization. Wedgewood maintains Meta as a top portfolio position, reflecting high confidence in the company's long-term competitive positioning and growth prospects.

Pitch Summary:
PayPal Holdings was a top contributor to portfolio performance during the quarter. Revenues grew +9% (FX neutral) while adjusted operating income grew +24%, driven by higher transaction margin dollars and continued excellent expense discipline. The Company's core branded payments and Venmo transactions grew at a healthy mid-single digit clip. PayPal has several investment initiatives that will contribute to accelerating growth over the next few years to help take advantage of their leading market share in e-commerce payments. The Company serves over 35 million online merchants. PayPal's large, online merchant acceptance base is a rare and crucial component to profitably monetizing payment volumes that many competitors lack. While the Company's earnings multiple has expanded recently, it continues to trade at levels we think are quite cheap given their strong positioning in the long-term secular expansion of global e-commerce.

BSD Analysis:
Wedgewood Partners maintains a bullish stance on PayPal, highlighting the company's strong operational execution with 9% revenue growth and 24% adjusted operating income growth driven by improved transaction margins and disciplined expense management. The manager emphasizes PayPal's competitive moat through its extensive merchant network of over 35 million online merchants, which creates a rare and valuable ecosystem for payment monetization that competitors struggle to replicate. The firm views PayPal's current valuation as attractive despite recent multiple expansion, believing the market undervalues the company's dominant position in the secular growth of global e-commerce. The investment thesis centers on PayPal's ability to accelerate growth through strategic initiatives while leveraging its established market leadership. The manager sees the combination of healthy transaction growth in core branded payments and Venmo, along with strong expense discipline, as evidence of the company's operational excellence. Despite the stock's recent performance, Wedgewood believes PayPal remains undervalued relative to its long-term growth prospects in digital payments. The firm's confidence stems from PayPal's unique competitive positioning and the ongoing digital transformation of commerce globally.

Pitch Summary:
FedEx – Global logistics company FedEx was a detractor this quarter, after being a top performer in Q2. The company reported a challenging quarter, missing expectations in a tough revenue environment. Some one-off issues also impacted results, including the US Postal Service contract expiring. While anticipated cost savings did not materialize to the extent the market expected, we believe these savings are likely to come through soon. We are also awaiting a final decision on the potential spin-off of the FedEx Freight business, as we wrote about last quarter. The market has consistently undervalued FedEx's less-than-truckload operations. A spin-off or sale could unlock substantial value, as peers like Old Dominion and Saia trade at higher multiples on revenue and cash flow than those currently reflected by the market and in our appraisal of FedEx Freight.

BSD Analysis:
Longleaf Partners maintains a constructive view on FedEx despite near-term operational challenges and market disappointment. The fund attributes the quarterly underperformance to temporary factors including the US Postal Service contract expiration and delayed cost savings realization, rather than structural issues. The manager expects anticipated cost savings to materialize in upcoming quarters, providing operational leverage and margin expansion. The potential FedEx Freight spin-off represents a significant value catalyst, as the market consistently undervalues the less-than-truckload operations relative to pure-play peers. Comparable companies like Old Dominion and Saia trade at premium multiples that suggest substantial value unlocking potential through separation. The fund's analysis indicates the freight division trades at a significant discount to intrinsic value within the current corporate structure. This investment reflects the manager's ability to identify hidden value in complex corporate structures and their patience to wait for value realization catalysts.

Pitch Summary:
MGM Resorts – Hospitality and gaming company MGM Resorts was the top detractor in the quarter. The day of the company's earnings report, the stock price was down 13%; however, we saw nothing in the report that alters our long-term investment case. While this industry can experience some quarter-to-quarter volatility, we remain confident in the long-term earnings potential. MGM continues to generate substantial FCF and execute significant share buybacks, further boosting FCF per share. MGM is also enhancing its online offering and continuing to streamline its portfolio with more non-core asset sale potential ahead. We remain confident in the management team, led by CEO Bill Hornbuckle.

BSD Analysis:
Despite short-term stock price volatility, Longleaf Partners maintains conviction in MGM Resorts' long-term value proposition and earnings potential. The fund views the 13% post-earnings decline as market overreaction rather than fundamental deterioration, demonstrating their contrarian investment approach. MGM's substantial free cash flow generation and aggressive share buyback program continue to drive per-share value creation, which aligns with the fund's capital allocation preferences. The company's strategic portfolio optimization through non-core asset sales provides additional value realization opportunities and capital for higher-return investments. MGM's digital transformation and online gaming expansion represent growth catalysts in evolving gaming markets. The manager's confidence in CEO Bill Hornbuckle's leadership suggests strong operational execution capabilities. The fund's willingness to maintain exposure despite near-term volatility reflects their long-term investment horizon and conviction in the hospitality and gaming sector's recovery potential.

Pitch Summary:
PayPal – Digital payments platform PayPal was a contributor for the quarter. The company posted solid results, with gross margin dollars growing by 8%, an improvement over the 4% increase in the previous quarter. Strong cost management also led to double-digit FCF growth, a key metric for us. The company further enhanced shareholder value by repurchasing nearly 10% of its shares on an annualized basis, leading to even stronger FCF per share growth. Much of what we envisioned at our initial investment is materializing quicker than expected, driven by the improved leadership of relatively new CEO Alex Chriss.

BSD Analysis:
Longleaf Partners' PayPal investment thesis is materializing ahead of expectations under new CEO Alex Chriss's leadership. The company is demonstrating operational leverage with accelerating gross margin dollar growth from 4% to 8% quarter-over-quarter, indicating improving business momentum. Strong cost management discipline has translated into double-digit free cash flow growth, which aligns with the fund's focus on cash-generative businesses. PayPal's aggressive share repurchase program at nearly 10% annualized rate significantly amplifies per-share value creation and demonstrates management's confidence in the business. The combination of operational improvements and capital allocation efficiency is driving stronger FCF per share growth than initially anticipated. The manager's confidence in CEO Alex Chriss suggests effective leadership transition and strategic execution. This investment exemplifies the fund's preference for companies with strong competitive positions that can generate substantial shareholder returns through both operational excellence and disciplined capital allocation.

Pitch Summary:
CNX Resources – Natural gas company CNX Resources was also a top performer in the quarter. The company delivered another quarter of solid operations and continued growth in value per share. As we approach the fall and winter, natural gas prices may firm up, although that remains beyond our control. CNX's low-cost structure and hedging strategy position it to deliver free cash flow (FCF) in a variety of price environments. That FCF will continue to be directed to value accretive share repurchase. If you would like to learn more about CNX, we hosted a podcast with CEO Nick DeIuliis in the quarter that covers a range of topics.

BSD Analysis:
Longleaf Partners maintains a bullish stance on CNX Resources based on the company's operational excellence and disciplined capital allocation strategy. The fund highlights CNX's competitive advantage through its low-cost structure and effective hedging strategy, which provides downside protection and cash flow stability across various natural gas price environments. The company's consistent delivery of solid operational results and continued growth in value per share demonstrates management's execution capabilities. CNX's commitment to returning free cash flow to shareholders through value-accretive share repurchases aligns with the fund's preference for shareholder-friendly capital allocation. The manager's engagement with CEO Nick DeIuliis through a podcast indicates strong management relationships and confidence in leadership. The seasonal natural gas price dynamics provide potential upside catalysts heading into winter months. This investment reflects the fund's focus on companies with durable competitive advantages and strong free cash flow generation.

Pitch Summary:
Kellanova – Packaged food company Kellanova was the top contributor for the quarter. The company is being purchased by Mars at a slight premium to our appraisal. This outcome was one of multiple potential paths to value recognition when we first invested. The company's portfolio of strong brands had been undervalued by the market, but the spin-off of its less attractive cereal business allowed the snacks division to showcase its strengths. While we would have liked to own it longer, the company delivered strong results this year and ultimately attracted Mars, who offered a full and fair price. We exited our position on this price strength during the quarter.

BSD Analysis:
Longleaf Partners successfully identified value in Kellanova's strong brand portfolio that was undervalued by the market. The fund's thesis centered on the company's strategic spin-off of its less attractive cereal business, which allowed the higher-quality snacks division to demonstrate its inherent strengths and value proposition. The acquisition by Mars at a premium to the fund's appraisal validates their investment approach and demonstrates effective value recognition. The manager viewed the Mars acquisition as one of several potential value realization paths they had identified at initial investment. While the holding period was shorter than preferred, the investment delivered strong returns and achieved full value recognition. The successful exit on price strength demonstrates disciplined portfolio management and adherence to valuation principles. This represents a textbook value investing success story with clear catalyst identification and execution.

Pitch Summary:
Westrock Coffee – The coffee "brand behind the brand" for a variety of retailers and restaurants, was the top detractor for the quarter. The company reported disappointing results, with full-year projections now at the lower end of initial guidance. While some macroeconomic headwinds are impacting consumer spending—particularly on premium coffee purchases—Westrock's primary focus remains on completing its new plant in Conway, Arkansas. We expect this facility to generate meaningful FCF starting next year, which should significantly strengthen the company's financial position. However, the market is in a "wait-and-see" mode until these improvements materialize. Additionally, some technical selling pressure due to a warrant exchange may have contributed to recent stock weakness but is a temporary factor and should be behind us as we move forward.

BSD Analysis:
Despite Westrock Coffee being the quarter's top detractor, Longleaf Partners maintains a bullish stance based on the company's strategic infrastructure investments and future cash flow potential. The manager acknowledges near-term headwinds from macroeconomic pressures affecting premium coffee consumption and disappointing quarterly results. However, the investment thesis centers on the Conway, Arkansas plant completion, which is expected to generate meaningful free cash flow starting next year and significantly improve financial positioning. The fund views current market weakness as temporary, driven by both fundamental challenges and technical factors like warrant exchange selling pressure. The "brand behind the brand" business model provides diversified exposure to coffee retail and restaurant channels. Management's focus on completing the new facility demonstrates commitment to long-term value creation despite short-term volatility. The market's wait-and-see approach creates potential opportunity for patient investors.

Pitch Summary:
Anywhere Real Estate – Real estate brokerage franchisor Anywhere was another top contributor for the quarter. In the short term, this company's stock price is impacted most by interest rates. As the Federal Reserve started easing rates in the quarter, optimism around mortgage rates improved which was a positive for Anywhere. While the housing market remains volatile, even at these low levels Anywhere continues to be FCF positive. The company will generate substantial FCF in a more normalized environment. We trimmed our position after recent strong performance but continue to have confidence in CEO Ryan Schneider as he works on what is within the company's control to grow value per share.

BSD Analysis:
Longleaf Partners maintains a bullish outlook on Anywhere Real Estate despite acknowledging the company's sensitivity to interest rate cycles. The manager views the Federal Reserve's rate easing as a positive catalyst that improved mortgage market sentiment and benefited the stock. The investment thesis centers on Anywhere's ability to generate positive free cash flow even in challenging market conditions, suggesting operational resilience. The fund expects substantial free cash flow generation when housing markets normalize, indicating significant operating leverage to market recovery. Management confidence in CEO Ryan Schneider reflects appreciation for leadership's focus on controllable value creation initiatives. The decision to trim the position after strong performance demonstrates disciplined portfolio management while maintaining conviction. The franchise model provides recurring revenue streams that support cash flow stability through market cycles.

Pitch Summary:
CNX Resources – Natural gas company CNX Resources was also a top performer in the quarter. The company delivered another quarter of solid operations and continued growth in value per share. As we approach the fall and winter, natural gas prices may firm up, although that remains beyond our control. CNX's low-cost structure and hedging strategy position it to deliver free cash flow (FCF) in a variety of price environments. That FCF will continue to be directed to value accretive share repurchase. If you would like to learn more about CNX, we hosted a podcast with CEO Nick DeIuliis in the quarter that covers a range of topics.

BSD Analysis:
Longleaf Partners presents a bullish case for CNX Resources based on the company's operational excellence and disciplined capital allocation strategy. The manager emphasizes CNX's low-cost structure and hedging strategy as key competitive advantages that enable consistent free cash flow generation across various commodity price environments. The focus on value-accretive share repurchases demonstrates management's commitment to returning capital to shareholders rather than pursuing growth at any cost. While acknowledging that natural gas prices remain outside management control, the fund appreciates the company's defensive positioning through hedging. The manager's engagement with CEO Nick DeIuliis through a podcast suggests strong confidence in leadership. CNX's ability to grow value per share through operational efficiency and capital discipline forms the core investment thesis. The seasonal natural gas demand patterns provide potential upside catalysts heading into winter months.