Investment Pitches

Pitch Summary:
We ended the year strong due to great news from Liquidia. The company won its patent litigation appeal against United Therapeutics. Shares ran up 68% in December and have continued to climb in the new year. It is my favorite position, and I expect much more ahead. CEO Roger Jeffs made a $1 million share purchase in mid-December, right before the judicial decision came down. Clearly, he believed the result would be positive. In total, he owns more than $30 million of Liquidia shares. Jeffs was previously the driving force behind Liquidia's competitor, retiring as co-CEO of United Therapeutics in 2016 after an 18 year tenure. He understands the Pulmonary Arterial Hypertension (PAH) market better than anyone else, and he is highly optimistic about the company and its prospects to take significant market share from United Therapeutics. The legal hurdles are nearly over. Liquidia is expected to have its Yutrepia inhaler product on the market in April. They have built out their sales force over the last year and have been meeting with doctors since October. The company recently presented at the JP Morgan health care conference, reiterating the superiority of their product. Liquidia has a patented manufacturing process that allows for enhanced delivery of Yutrepia to the deep lung. Clinical trials have shown that compared to the drug from United Therapeutics, Liquidia's product is better able to deliver higher doses in a safer way leading to better patient outcomes. In the past, Liquidia CEO Roger Jeffs said that he thought they could take 80 to 90 percent of the market from United Therapeutics. Obviously that was an aggressive statement, but shows both the company's ambitions and Jeffs' confidence in their product. Yutrepia will undoubtedly take a significant amount of market share in a growing market. We should know later this year whether that number is 20% or 80%. Because the range of potential outcomes is so wide, valuation right now is difficult. However, we did recently receive a clue. Mannkind owns a 10% royalty of the United Therapeutics PAH drug, Tyvaso DPI. In early January, Mannkind sold 1% of that royalty to a third party for a base price of $150 million. Using that valuation as a baseline, if Liquidia takes 50% of the market share , shares should trade more than seven times higher than they do now.

BSD Analysis:
The manager presents a compelling bull case for Liquidia based on a successful patent litigation victory against United Therapeutics, positioning the company to launch its Yutrepia inhaler in April 2024. The investment thesis centers on significant market share capture in the pulmonary arterial hypertension market, with CEO Roger Jeffs' deep industry expertise and substantial $30+ million ownership stake providing strong alignment. Clinical data demonstrates Yutrepia's superior drug delivery capabilities compared to United Therapeutics' competing product, potentially enabling better patient outcomes. The manager's valuation framework, derived from Mannkind's royalty sale, suggests shares could trade 7x higher if Liquidia captures 50% market share. With the legal obstacles cleared and commercial launch imminent, this represents a high-conviction position with substantial upside potential. The wide range of potential market share outcomes (20-80%) creates significant valuation uncertainty but also asymmetric risk-reward characteristics. Strong insider buying and management's aggressive market share projections reinforce the bullish outlook.

Pitch Summary:
Twitter thread: We are short Jin Medical International Ltd $ZJYL, a China Hustle-style charade. Jin sells wheelchairs and parts in China. In 2022, its revenues fell 8% to just $19M. $ZJYL trades at ~45x revenues. At reasonable "peer" levels of 1-6x sales, $ZJYL shares fall 90% or more.

BSD Analysis:
Jin Medical designs and manufactures wheelchairs and mobility aids in China, exporting primarily to Europe and North America. The short thesis highlights governance concerns, limited scale, and customer concentration. Growth claims are ambitious relative to the small revenue base, and disclosure quality leaves gaps around profitability and cash flow. Competition is intense in low-tech medical device markets, where incumbents have scale and established distribution. The thin float and small market cap make it susceptible to volatility and sharp squeezes unrelated to fundamentals.

Pitch Summary:
Non-operational mines; significant dilution; the company's recent merger partner has lots of trouble: a) backed by promoters with legal trouble; b) the largest shareholder is an undisclosed related party; c) would have bankrupt if not acquired; d) related to stock promotion;

BSD Analysis:
Hut 8 is one of the larger North American Bitcoin miners, now merged with US Bitcoin Corp. The short case emphasizes commodity-like economics of mining, high energy costs, and reliance on Bitcoin price appreciation to sustain operations. The merged entity aims for diversification into hosting and high-performance computing, but execution risk is high, and balance sheet leverage limits flexibility. Post-halving, hashprice compression makes breakeven mining economics more challenging. Bulls argue about optionality in AI/HPC hosting, but skeptics note pivoting from mining to hosting requires customer contracts, capex, and credible infrastructure.

Pitch Summary:
The factory is missing numerous challenges; ongoing production pospones; lack of sales; balance sheet troubles (cash shortage is coming in the next few quarters, unable to repay the debt); Update 10/28/24 - Ongoing product issues; inconsistent production; shareholders are diluted due to recent financing; repeatedly missing goals;

BSD Analysis:
PureCycle develops polypropylene recycling tech. Bears argue the company is pre-revenue, capex-intensive, and reliant on unproven scaling. Plant ramp-ups delayed, cash burn high, and equity raises frequent. Competition from chemical majors adds risk. Catalysts: Ironton plant metrics, licensing deals, DOE plastics policy. Counterpoints: ESG/regulation may help, but economics look weak.

Pitch Summary:
We will start with Farfetch (FTCH) because we were vocal about our belief in the long-term potential. In the fourth quarter, Farfetch entered a prepack admin deal (essentially a bankruptcy). We exited the stock in the third quarter after its disastrous results, but were surprised to see it fail so quickly given its cash and liquidity. Upon reflection, we attribute its failure to terrible execution and poor operational and financial discipline. Despite being our single biggest contributor to performance over the past 5 years, we made mistakes on Farfetch. We executed the process well with our initial buy decision. We saw a unique company with a huge total addressable market. The price had tanked because the market hated its purchase of New Guards Group. We thought the deal was attractive and there was a clear disconnect between fundamentals and market expectations. We initially bought the stock around $10, and thought it was worth $30. Our assessment of the deal was proven correct. Then the company benefited from the pandemic, entered a deal with Alibaba and Richemont on China, and rolled out its first large Farfetch Platform Services client (Harrods). It was nearly free cash flow breakeven in 2020. Initial execution appeared excellent. The stock rallied to $75. We sold a good amount, which is how it remains a top contributor over 5 years (our entire holding period). We should have sold it all. That's hindsight bias, rather than a process error though. There were good reasons to maintain a position. One of the biggest mistakes investors make is not letting winners run. Farfetch was an early-stage company with a low penetration of its total addressable market. It executed superbly in our short ownership period. It was in a materially better position than when we purchased it. Our bull case was always significantly higher than the stock price. Our biggest errors were 1) how we revised our estimate of intrinsic value, 2) using the wrong reference class (Amazon), and 3) poorly assessing the financial and operational discipline. After those positive fundamental developments (and stock gains), we increased our central tendency of value to ~$110 at its peak. In retrospect, the magnitude of that increase was a mistake. Business values don't nearly quadruple in a year and a half. Seems so obvious in hindsight. A central tendency of value can move more than a base case as odds of different scenarios shift. Regardless, in the future, extreme moves in intrinsic values will garner extreme rather than normal scrutiny. Also, we used the wrong reference class for FTCH. While we used many comparable companies, Amazon garnered too much emphasis. Despite knowing there is no other Amazon, we compared the companies more than appropriate. Using the wrong reference class led us to be much too bullish. Farfetch lacked key similarities: operational discipline and financial sophistication (although we didn't figure that out until much later). Amazon almost went bust after the dot.com bubble burst. Jeff Bezos, "an authentic business genius" (Warren Buffett's words), massively cut costs and restructured the business. Our first signs of this crucial difference came in late 2021 when we needed to advocate Farfetch be much more aggressive on costs. Important lessons: it's a red flag to need to advocate, and managements can easily parrot your views back to you without internalizing them. Our concerns grew in late 2022 when Farfetch started taking on significant debt and put out very disappointing long-term targets they claimed were extremely conservative. At that time, we decided to put Farfetch on a short leash: any fundamental disappointments would be cause for exit. They performed well in the first quarter of 2023, which gave us the confidence to invite them to our first investor day. Then they totally whiffed the second quarter. We sold. Jose Neves "dreamed the dream," which we believe ultimately killed the company. You want a CEO to be ambitious with aggressive goals. But Farfetch wasn't built with the operational and financial discipline required to scale a successful business. Right until the end, Neves looked to deals to solve the company's problems. Neves' desire to build the platform for luxury inhibited the company's ability to be realistic about the cost and executional actions required to sustain the business.

BSD Analysis:
Patient Capital Management's Farfetch investment represents a comprehensive case study in both successful contrarian investing and critical analytical errors. Initially purchased around $10 with a $30 target, the investment thesis correctly identified a unique luxury e-commerce platform with massive total addressable market potential. Early execution proved excellent, with strategic partnerships including Alibaba and Richemont, platform services expansion, and near free cash flow breakeven by 2020, driving the stock to $75. However, the manager made three critical errors: dramatically increasing intrinsic value estimates to $110 (nearly quadrupling in 18 months), using Amazon as an inappropriate reference class, and failing to assess management's operational and financial discipline. The investment ultimately failed due to CEO Jose Neves' lack of operational rigor and persistent focus on deals rather than fundamental business execution. Despite being their top contributor over five years, the company entered bankruptcy in Q4 2023, highlighting the importance of management quality assessment in growth investing.

Pitch Summary:
We initially bought EXPE in the middle of 2022 believing company fundamentals were much stronger than market expectations suggested, and their tech and infrastructure investments would lead to business improvements. We thought competitive concerns were overblown, and Expedia could continue to grow. Despite good fundamental performance, the stock languished from the time we bought it through early November. During this holding period, the "upside-to-downside capture" (how much it goes up on up days vs. down-on-down days) was poor and "alpha" non-existent. Those types of metrics just serve to quantify the market's belief state. Since we look for areas where the market is wrong, we are often buying into poor quantitative characteristics. For Expedia, that all changed when it reported its third quarter results. Its direct-to-consumer business accelerated while competitors Booking Holdings and Airbnb slowed. This exemplifies our philosophy and process. We believe markets are pragmatically efficient and very difficult to beat. We look for sources of "edge" or places the market might be wrong. Areas of high disagreement can be a fruitful place to find an edge, but they tend to come with higher levels of volatility. It takes time and patience for the fundamentals to play out.

BSD Analysis:
Patient Capital Management initiated a position in Expedia in mid-2022 based on their conviction that company fundamentals were significantly stronger than market expectations. Their investment thesis centered on the belief that Expedia's technology and infrastructure investments would drive meaningful business improvements and that competitive concerns were overblown. Despite maintaining confidence in the fundamental story, the stock exhibited poor technical characteristics for over a year, with weak upside-to-downside capture ratios and no alpha generation. The manager's patience was rewarded when third-quarter results validated their thesis, showing acceleration in Expedia's direct-to-consumer business while key competitors Booking Holdings and Airbnb experienced deceleration. This turnaround exemplified their contrarian investment philosophy of identifying areas where market sentiment diverges from fundamental reality. The investment required significant patience and conviction, as fundamental improvements took time to materialize and be recognized by the market.

Pitch Summary:
We bought UBS (UBS) and Western Alliance (WAL) during the bank selloffs in March and May. WAL gained almost 150% from our initial May purchase price in the high $20's (vs. SPX +15%). Though UBS and WAL did better than the group, regional banks broadly rallied as we avoided a recession and credit crisis. That wasn't the bet we were making. We always look for opportunities in panic, believing some babies get thrown out with the bathwater so-to-speak. WAL is also a high-return franchise. It was one of the biggest losers during the depths of the panic. At its lowest closing price ($18.20 in May), it traded for 2x what it's estimated to earn this year ($7.77). People didn't care because they saw the imminent risk of failure. Bank runs had killed competitors. Unlike competitors, Western Alliance published daily updates on deposit flows, which were encouraging and demonstrated a durable deposit base. Market failure expectations were completely disconnected from company fundamentals.

BSD Analysis:
Patient Capital Management identified Western Alliance as a high-quality regional bank trading at distressed valuations during the May banking panic. The manager purchased shares in the high $20s when the stock had fallen to $18.20, representing just 2x estimated annual earnings of $7.77 per share. Their contrarian thesis was based on the disconnect between market failure expectations and strong company fundamentals. Unlike competitors that succumbed to bank runs, Western Alliance demonstrated transparency and stability by publishing daily deposit flow updates, which showed encouraging trends and a durable deposit base. The investment reflected classic crisis investing, where panic selling created opportunities to acquire quality franchises at irrational valuations. The position generated exceptional returns of nearly 150%, vastly outperforming the market's 15% gain and validating their fundamental analysis over market sentiment.

Pitch Summary:
We bought UBS (UBS) and Western Alliance (WAL) during the bank selloffs in March and May. UBS returned nearly 60% from where we started buying in the high-teens in March (vs. SPX +15%). Though UBS and WAL did better than the group, regional banks broadly rallied as we avoided a recession and credit crisis. That wasn't the bet we were making. We always look for opportunities in panic, believing some babies get thrown out with the bathwater so-to-speak. We believed UBS acquired Credit-Suisse for a steal with significant downside protection in the form of government guarantees. We knew short-term financial results would be messy. Fear combined with short-termism created an opportunity to buy an attractive, predominantly asset management franchise with high returns on equity and long-term earnings power of $4-5/share at 4-5x earnings. A classic case of time arbitrage.

BSD Analysis:
Patient Capital Management executed a contrarian investment in UBS during the March banking crisis, purchasing shares in the high-teens when fear dominated the market. The manager's thesis centered on UBS acquiring Credit Suisse at an exceptionally attractive price with government guarantees providing significant downside protection. They viewed the acquisition as transforming UBS into a predominantly asset management franchise with high returns on equity and sustainable long-term earnings power of $4-5 per share. At their purchase price, this represented a compelling 4-5x earnings multiple. The investment exemplified classic time arbitrage, where short-term market pessimism and messy near-term financials created an opportunity to acquire quality assets at distressed valuations. The position generated nearly 60% returns, significantly outperforming the broader market's 15% gain during the same period.

Pitch Summary:
We often talk about our investment in Nu Holdings but have not presented you with a detailed research report. Our cost base on Nu is about $4 per share while the stock is currently trading for $9 per share. We continue to hold this position and, in the appendix to this letter, we are attaching our thesis on Nu Holdings. We are of the opinion that Nu is a rare company with the powerful combination of substantial market opportunity, an excellent business model, and an outstanding management team. Nu Holdings is a $40 bn market capitalization company listed on the NYSE that provides digital banking platforms and digital financial services in Brazil, Mexico, Colombia. It offers Nu credit and debit cards; savings solutions, such as Nu Personal Accounts, and a digital account solution that supports all personal finance activities. Nu has a very powerful business model exemplified by the following: Market with Low-Quality Financial Services and Low Credit Card Penetration: The model thrives in markets like Brazil where a few financial institutions control a large market share leading to high ROE's for them but bad products and services for the consumer. Leveraging Data and Analytics: The company uses credit cards to generate data and then uses advanced analytics to manage the business. Nu pursues a 'low and grow' strategy with credit limits - grant lower limits to new customers who Nu assess as higher risk and then increase those limits selectively based on a positive usage and repayment track record. Nu has a 90-day credit card delinquency rate that is consistently 25-30% better than the competitors. Superior Product without Opex-Heavy Investments: Nu does not have operational expenditures related to maintaining physical branches and instead uses technology to run its business. Further, on the marketing side, they have been able to acquire most of their customers organically and their CAC is less than $7 per customer. Both these factors lead to a much lower cost to serve compared to competitors. Nu passes on a part of these cost savings to the customers, thereby sharing their scaled economics. Cross-Selling Higher Margin Products: Once a customer is onboarded and establishes a positive credit history, Nu uses the gathered data to identify opportunities for cross-selling. This involves offering additional financial products or services with higher profit margins. An average customer now has 3 Nu products and Nu is focused on launching more products so that they can derive more and more revenue from each customer. At White Falcon, we initiated this position at around $4 per share. Currently, at a market price of $9 per share, Nu is trading for 21x next year's earnings (we then essentially bought our position at 10x 2024E earnings!). We have confidence in the credibility of these earnings projections, and we anticipate that this growth can compound consistently at substantial rates over an extended period of time. We are happy to maintain a foundational investment in Nu for the foreseeable future.

BSD Analysis:
White Falcon's Nu Holdings investment represents a compelling fintech opportunity in Latin America's underbanked markets. The fund acquired shares at $4 and holds at $9, representing a 125% gain with significant upside remaining. Nu's competitive advantages include superior data analytics enabling 25-30% better delinquency rates than competitors, an asset-light digital model with $7 customer acquisition costs, and a powerful cross-selling flywheel with customers averaging 3 products each. The company operates in concentrated banking markets where incumbents charge 200-400% annual credit card rates, creating substantial disruption opportunity. Nu's 'low and grow' credit strategy and 30,000+ data points per customer annually provide sustainable competitive moats. Trading at 21x 2024E earnings versus the 10x entry multiple, the valuation remains attractive given the massive market opportunity across Brazil, Mexico, and Colombia. Management's Capital One pedigree and founder David Velez's vision of building a technology company in financial services clothing supports long-term execution confidence. The combination of market expansion, rising revenue per customer, and operating leverage should drive substantial earnings growth.

Pitch Summary:
Rover (ROVR) provides an interesting case study that aptly showcases the evolving nature of value investing. Our average cost on Rover was about $4.3 per share and we featured Rover in our Q3 2023 letter when it was trading at $6.5 per share. In November 2023, Blackstone made a cash offer for Rover at $11 per share. By definition - as this was a cash offer - Rover was a value stock at the time we featured it last quarter and perhaps a deep value stock at our cost base. Even at $11 per share, we believe Blackstone got a very good deal and were sad to see us robbed of many years of compounding. However, in November 2023, from a headline perspective, Rover did not screen well as a value stock as it was trading at 19x EV/EBITDA and 60x P/E. We argued in our report that Rover is underearning due to which looking at the headline valuation metrics is not appropriate. In fact, we believed that Rover had the potential to achieve 30%+ adj. EBITDA margins (vs. 10% reported). In an environment where businesses are directing investments through the income statement, the lesson from Rover is that value investors must extend their analysis beyond the surface-level reported numbers and delve into the genuine earning potential of a business.

BSD Analysis:
White Falcon's Rover investment exemplifies their value investing philosophy of looking beyond surface-level metrics to identify underearning businesses. The fund acquired shares at $4.3 and held through a Blackstone acquisition at $11, generating a 155% return. The manager's thesis centered on Rover's significant margin expansion potential, believing the company could achieve 30%+ adjusted EBITDA margins versus the 10% reported at the time. This represented a classic value opportunity where headline metrics (19x EV/EBITDA, 60x P/E) masked the underlying earning power due to heavy reinvestment through the income statement. The successful exit validates White Falcon's approach of analyzing genuine earning potential rather than relying on traditional valuation screens. The manager expressed regret at losing future compounding years, suggesting confidence in the long-term business model. This case study demonstrates how modern value investing requires deeper fundamental analysis to identify quality businesses trading below intrinsic value despite appearing expensive on conventional metrics.

Pitch Summary:
We would like to highlight one of our portfolio holdings Thinkific Labs Inc. (TSX: THNC). Thinkific is a provider of cloud-based software solutions that enable entrepreneurs and established businesses to build, market and sell online courses directly to their customers and audience under their own brand and while retaining full ownership and control of their content and business. This is a company that IPO'd in 2021 to great fanfare and a very lofty valuation. We previously followed the company as a private company and knew that the management team was a cash flow driven and very disciplined group. The underlying unit economics of the business had proven to be attractive and the management team had successfully bootstrapped the company with very little outside capital from founding to a pre-IPO round of investment. As part of the go-public process they invested heavily in people to scale up the business to justify raising a significant amount of capital at the valuation they did. Moving into 2022, the outside world began to see the company as a money losing enterprise that was going to blow through all the cash on its balance sheet and go bankrupt. Knowing the management team and their discipline gave us the confidence to step in and build a position in the company. They were a leader and starting to right size the organization for the reality of a post COVID growth slowdown. Management discipline and execution came to fruition in Q3 of 2023 where they returned to profitability. We talk about Thinkific because several of the companies in our portfolio are currently unprofitable and our thesis is management will turn these companies profitable sooner rather than later. When this happens, the rewards are appealing. See the stock chart below. Upon news of Thinkific becoming profitable the stock moved up 42% as investors no longer saw it as a distressed asset. We continue to hold the company and believe fundamentals will continue to improve and management will move the company towards the "rule of 40" - where a combination of revenue growth and operating margin is 40% or higher.

BSD Analysis:
Pender presents a compelling turnaround thesis on Thinkific Labs, emphasizing management quality and operational discipline as key differentiators. The fund's investment was predicated on their prior knowledge of management's cash flow-focused approach and the company's proven unit economics from its bootstrapped pre-IPO growth. The investment thesis centered on management's ability to right-size operations post-COVID and return to profitability, which materialized in Q3 2023. The 42% stock price surge following the profitability announcement validates the manager's contrarian positioning when the market viewed THNC as distressed. Pender's continued conviction is based on expectations for further fundamental improvement and progression toward the "rule of 40" metric, suggesting sustainable growth with strong margins. The case exemplifies their broader portfolio strategy of investing in temporarily unprofitable companies with strong management teams positioned for operational inflection points. This disciplined approach to distressed SaaS investments appears well-suited for the current small-cap environment.

Pitch Summary:
Four main segments are under pressure due to commoditized solutions; client retention challenges; aggressive accounting decisions to mitigate revenue decline; 55% to 65% long-term downside risk;

BSD Analysis:
MSCI is a dominant provider of equity indexes, ESG ratings, and portfolio analytics. The short thesis focuses on valuation risk, slowing ESG momentum, and dependency on passive fund flows. Index licensing revenues have been robust, but incremental growth depends heavily on ETF AUM tied to MSCI benchmarks. ESG ratings, once a major growth engine, face pushback from regulators and investors questioning methodology. The Analytics segment has lower margins and more competition, diluting group profitability. With a premium multiple, bears argue any deceleration in fund flows or regulatory scrutiny on ESG could drive multiple compression.

Pitch Summary:
A large amount of commercial loan impairment for 2024 (Hyatt Regency missed $260 mil payment); financing shaky projects; Q4 numbers are likely to have an increase in impairments; potential covenant breach; Update 3/6/24 - Follow-up report based on YE earnings call: Asset impairment; higher realized losses; Update 8/28/24 - Follow-up report: More impairments; not-enough dividend cut; more write-offs; Update 2/10/25 - Follow-up report.

BSD Analysis:
Blackstone Mortgage Trust is a large commercial real estate lender. The short thesis stresses exposure to office and CRE refinancing risk, rising funding costs, and dividend sustainability concerns. With higher-for-longer interest rates, credit losses may rise as borrowers struggle to refinance. While backed by Blackstone, structural headwinds in commercial real estate make downside risk meaningful.

Pitch Summary:
InTest Corp manufactures process and test equipment, such as docking stations, manipulators, thermal test chambers, induction heating tools, and image capture systems. Historically, InTest derived most of its revenues from the semiconductor capital equipment end market (67% of sales in 2021), but the company is intentionally growing its business in other end markets to reduce cyclicality and provide a more stable base of cash flows to deploy into acquisitions. Other served end markets include aerospace and defense, general industrial, life sciences, automotive, and security. In 2020, InTest appointed Nick Grant, an Ametek veteran, as CEO. Since then, revenues have doubled from a combination of organic growth and acquisitions. We think the company is in the early stages of a great compounding journey following the playbooks made famous by industrial companies like Danaher, Roper, and Ametek. Grant's track record so far reinforces our belief. The three tuck-in acquisitions of 2021 have been accretive and performed above our expectations. Additionally, after raising ~$20 million through a share offering with shares at $22, the company recently implemented a buyback with shares trading closer to $12. We increased our stake in InTest after the company lowered its 2023 guidance due to a slowdown in the semiconductor market. In our view, the long-term growth story—geographic expansion, product development and deeper customer reach— remains intact, the slowdown is just a normalization after post-pandemic double ordering. InTest expects annual revenue of $200-$250 million by 2025 (~60% higher than estimated 2023 revenue). Several acquisitions will be needed to meet these targets, but very little growth is currently priced into shares. In addition to the sales growth, we expect meaningful operating leverage; for example, a 6% year-over-year increase in sales in 3Q23 led to an18% increase in net income. The company's enterprise value today is ~$125 million (~7x TTM EBTIDA). We expect mid-teens EBITDA% margins should be easily achievable off a higher revenue base. If management comes close to meeting its targets, we should see shares trade at multiples of their current level.

BSD Analysis:
Liberty Park presents a compelling bull case for InTest Corp, viewing it as an early-stage compounder following proven industrial playbooks. The fund highlights CEO Nick Grant's successful track record since 2020, doubling revenues through organic growth and accretive acquisitions while diversifying away from cyclical semiconductor exposure into aerospace, defense, and other end markets. The manager sees the current semiconductor slowdown as temporary normalization rather than structural decline, maintaining confidence in the long-term growth trajectory. With revenue targets of $200-$250 million by 2025 representing 60% growth, the fund believes minimal growth expectations are priced into the current ~7x TTM EBITDA valuation. The combination of revenue growth and operating leverage potential, demonstrated by 18% net income growth on just 6% sales growth, supports their thesis that shares could trade at multiples of current levels. The fund's decision to increase their position during the guidance cut demonstrates conviction in the diversification strategy and management's capital allocation discipline, including the recent share buyback implementation.

Pitch Summary:
XPEL is a global supplier of protection films. Like the film protecting the surface of your phone, XPEL's films can be applied to your car body, car window, and home or office window to protect it from scratches and chips or provide privacy and UV protection. The company is led by CEO Ryan Pape, who has high integrity, a strong customer focus, and who concentrates on long term value creation when allocating capital. Pape became CEO in 2010 and has steered the company from near bankruptcy to a $1.4bn valuation today. He owns shares worth $57mm and is aged 42, giving him a long runway and incentive to compound capital. We invested in XPEL shares in 2020 between $11-$15 and have been shareholders since, tending to reduce our position between $70-$100 and add to it between $40-50. The stock halved from the $80s to the low $40s late last year primarily because of short seller reports. We nearly tripled our share ownership as a result. The stock trades at $50 today and we think will be worth $100-$150 in three years. We think XPEL is one of the highest quality businesses we have come across and that its competitive advantages are generally greatly misunderstood. We believe its advantages are its scale, customer captivity, excellent owner/operator, and culture. XPEL's primary product is paint protection film ('PPF'), which accounts for 57% of its revenues. We estimate the company has around 40% market share in the US, making it the largest player. XPEL does not manufacture PPF or sell it directly to car owners. Instead, the company sources films and coatings from a network of manufacturers and sells the finished product to thousands of aftermarket installers, retail and wholesale dealers, and auto OEMs like Porsche and Rivian. Some investors argue this makes XPEL an unnecessary middleman. We think this is a mistaken belief based on the simplistic view that XPEL sells films, which is something that could be relatively easily replicated. While XPEL obviously sells films in a literal sense, our research suggests that installers switching to XPEL from other film suppliers see an increase in order volumes by around 20% - that leads to a substantial increase in the installer's profits and is the true product XPEL sells. As a result, there is often a wait list to become an XPEL-exclusive shop. Like a franchisor, XPEL manages the number of installers in a metro to ensure healthy system sales and profits. XPEL generates these advantages because its scale enables it to invest and develop the best product, range of products, service, software, and brand. It can also spend more on marketing than anyone else and typically ranks first on Google searches, bringing leads and revenues to installers at no incremental cost to those installers. Customers increasingly ask for the brand by name and installers increasingly depend on the company for their entire business. A growing number of industry participants now describe XPEL as "the Xerox of PPF" and for many shops XPEL provides all film, software, branding, and significant lead generation. The company is further moving ahead of competitors by rolling out CRM and ERP-like software that will enable installers to become increasingly sophisticated. This will boost system sales and deepen customer relationships even more. In fact, XPEL has such a strong relationship with its customers that at its 2023 Installer Day we noted how some installers ran to buy clothing from XPEL when the company debuted new merch. While XPEL's excellent and deep management is understood by many investors, we believe that its culture remains greatly underappreciated. The company's 'No Tomorrow' motto is not just a slogan – XPEL's employees and customers are often entrepreneurs who are self-starters, hard-working, business savvy, and impressive. Many of XPEL's employees have been installers themselves, and we believe it is this deep understanding and energetic culture that makes them winners. XPEL likely earned $2 in EPS in 2023 and we believe there is a long runway for growth given the low attach rate of PPF on new cars, which we estimate is 7-8% in the US and 1% internationally. With XPEL's expansion by geography, product, and channel, we expect the company to grow revenues by 15-20% p.a. for the next three years and expand margins to reach $4 in EPS. The company has also done a good job making bolt-on acquisitions, which we estimate will further increase EPS to $5. Assuming a 20-30x P/E for a high quality business with excellent management and strong balance sheet results in an intrinsic value of $100-$150 in three years, vs $50 today. Despite these qualities, the stock halved from the $80s to the low $40s late last year primarily because of short seller reports alleging that: (i) Tesla accounts for 25-35% of revenues that will soon disappear, and (ii) XPEL's largest supplier has developed a product with PPG that makes XPEL redundant. We disagree with both arguments. In October, Tesla announced that it will offer PPF installation at two service centers in California. This caused XPEL stock to decline around 20% as we believe investors extrapolated that Tesla would roll this out to service centers much more broadly, XPEL would lose all revenues for film installed onto Teslas, and that other OEMs may follow suit. While XPEL clarified that revenues associated with Teslas accounted for only 5% of sales, a short seller subsequently claimed based on speaking with 143 installers that the true number was 25-35%. That caused the stock to decline roughly another 20%. While data from 143 installers seems conclusive at first glance, we believe that XPEL's 5% claim is accurate and that Tesla's involvement is just as likely to be positive as it is negative. We believe the 5% claim for two reasons. First, XPEL has one of the highest integrity managements we have come across and its software tracks to the square-foot how much film its installers are cutting for Teslas and other vehicles. Secondly, the short seller's survey took results from the US aftermarket installers channel and extrapolated that to all company revenues. This needs to be substantially adjusted as: (i) PPF is only 57% of XPEL revenues, (ii) the US is 59% of revenues and Tesla market share is far lower internationally, (iii) XPEL also sells through the dealership and OEM channels where Tesla revenues are zero, and (iv) average order values for Teslas are likely to be lower. E.g. a Tesla Model 3 sold for $40k is far more likely to only have the front of the car wrapped for $2.5k than a six-figure Porsche or Ferrari, which may be entirely wrapped for $8k. When these and other factors such as the installers likely thought they were speaking to a Tesla owner and prospective client and so exaggerated the number of Teslas they have worked on, we believe that the short seller's data are consistent with XPEL's 5% claim. It is also important to understand that the biggest driver of increasing PPF adoption is greater awareness - were you aware of PPF before today? We can think of no better OEM to promote PPF than Tesla, and Tesla could conceivably increase PPF awareness by more than 5%. In fact, XPEL already supplies PPF to some auto OEMs like Porsche and Rivian and finds that aftermarket attach rates for those OEMs are higher than many other makes. This suggests that Porsche or Rivian growing awareness leads to incremental customers, even for the aftermarket. We pushed back against bulls when XPEL stock jumped in 2022 after the Rivian partnership was announced, and believe that investors can be overly focused on individual OEMs. The reality is that XPEL's films go on all vehicles and no single OEM is likely to be key. The second piece of news that caused XPEL's stock to fall was that its largest supplier Entrotech had formed a JV with paint and coatings company PPG. A short seller alleged that the JV had developed a new paint with protective qualities that makes XPEL's protective films redundant. We disagree. Our understanding is that Entrotech has manufactured colored paint films for over a decade and that PPG has been offering its own colored paint films since 2021. PPG is a major supplier of paints and protective coatings to auto OEMs and paint films have been one of those options for years. Entrotech was already using PPG's paint as a layer in its paint films and the JV formalizes what was already a close relationship. While the JV potentially gives Entrotech greater distribution, there has been no significant innovation that makes protective films redundant. It turns out that although Entrotech/PPG's colored paint films and XPEL's transparent paint protection films sound similar, there is a crucial difference. As the CEO of the JV said in this interview in August, 2023, "paint films are a paint". The CEO of Entrotech also states in this presentation in 2021 that "we are paint, just in film form… conceived to replace spray paint". Paint film is a very thin film with paint on it. Although this makes it slightly more protective than the protective coatings that traditionally go on top of the paint on a vehicle, the CEOs of both the JV and Entrotech repeatedly emphasize that the film's main selling point is its environmental benefits. In fact, the CEO of the JV does not mention protective qualities at all in the interview linked above. The environmental benefits come because the film is wrapped onto a vehicle by hand rather than sprayed in a paint shop, meaning there is no need for spray guns, heating, rolling, or other equipment that comes with a carbon footprint. While paint films are environmentally friendly, they come with two major drawbacks that have limited their adoption - cost and time. OEMs have already invested hundreds of millions of dollars in many cases to build each paint shop. These paint shops are highly efficient, largely automated, and the largest can paint hundreds of thousands of vehicles per year. In contrast, wrapping a vehicle by hand with paint film is far more expensive per vehicle and usually takes more than a day. This significantly increases cost and slows the production process. As a result, paint films have seen limited adoption despite their environmental benefits. We do not think they significantly reduce XPEL's growth prospects.

BSD Analysis:
Plural Investing presents a comprehensive bull case for XPEL, emphasizing the company's dominant market position and misunderstood competitive advantages. The manager views XPEL as a high-quality franchise-like business model where the company's scale enables superior product development, marketing reach, and installer support that drives 20% volume increases for switching installers. CEO Ryan Pape's $57 million equity stake and track record of steering the company from near-bankruptcy to a $1.4 billion valuation demonstrates strong owner-operator alignment. The investment thesis centers on massive growth runway given low PPF attach rates of 7-8% domestically and 1% internationally, supporting 15-20% annual revenue growth projections. The manager effectively refutes short-seller concerns about Tesla exposure and competitive threats from Entrotech/PPG, arguing Tesla represents only 5% of revenues and paint films serve different environmental purposes rather than protective functions. With projected EPS growth from $2 to $4-5 through organic expansion and acquisitions, the $100-150 price target implies 100-200% upside at 20-30x earnings multiples. The recent stock decline from short-seller attacks created an attractive entry point for tripling position size.

Pitch Summary:
Kyndryl is a spin-off from IBM that is successfully turning itself around. The company is the largest provider of services to manage on-premise data centers, a market that is declining at low to mid-single digits rates per annum. IBM offloaded Kyndryl in 2021 as part of an attempt to rebrand itself as a growing and cloud-focused business. While IBM initially hoped that Kyndryl stock would be priced at $50, it had to settle for $28 and the stock sold off after the spin as each Kyndryl share was worth 5% of an IBM share and the company was a loss making business in a declining industry that few wanted to own. The stock bottomed in 2022 at $8, we bought long-term call options in late 2022 when the stock traded between $9 and $11, and bought shares throughout 2023 between $14 and $17. It trades at $21 today and we estimate will be worth $40 in three years when the company generates $4 in FCF. Although Kyndryl appeared to be an unattractive business, several clues suggested it could turn itself around as a standalone company. CEO Martin Schroeter was an IBM-lifer who knows the business well and came out of retirement to take the job. He owns around 2.5mm shares, options, and various units, with many exercising or vesting at $18, $24, and $39. We think Schroeter would only have come out of retirement if he thought these targets were beatable. He and many of the management team also bought significant amounts of stock between $9 and $17. They likely see some easy wins for Kyndryl now that it is a standalone company. 40% of its contracts earned 0% gross margins (!) at the spin as IBM often bundled these in with other services to fuel growth in other areas. If the company succeeds in bringing these contracts up to 'normal' 20% margin levels, generating $4 per share in FCF is likely achievable. And Kyndryl is succeeding. Gross margins have increased from 12% in FY22 to 16.9% YTD, and signings YTD have been at 26% margins. Given the 3-5 year length of Kyndryl's contracts, gross margins are likely to converge to 26% over time as old contracts roll off and new ones begin. Kyndryl also has other easy wins. The company is now growing businesses that compete with IBM, such as IT consulting and helping clients move to AWS or Azure. IBM also had a bureaucratic cost structure and culture which Kyndryl has taken steps to address. It's sales per employee is much higher than competitors due to the mission critical and sticky nature of its work, suggesting greater profit potential if it can reduce costs. We believe these steps give Kyndryl a path to $4 per share in FCF in three years and a 10x multiple for a valuation of $40. The stock is at $21 today. If management are right that new growth initiatives will return the company to revenue growth in 2025 a higher 15x multiple may be possible.

BSD Analysis:
Plural Investing presents a compelling turnaround thesis for Kyndryl, the IBM spin-off trading at a significant discount to intrinsic value. The manager's investment rationale centers on margin expansion from repricing legacy zero-margin contracts to normalized 20% levels, with gross margins already improving from 12% to 16.9% year-to-date. CEO Martin Schroeter's significant equity ownership and insider buying between $9-$17 provides strong alignment, while his decision to come out of retirement suggests confidence in achieving stock price targets of $18-$39. The company benefits from mission-critical, sticky customer relationships and higher sales per employee than competitors, indicating operational leverage potential as bureaucratic IBM-era costs are eliminated. Kyndryl's expansion into cloud migration services for AWS and Azure creates new growth vectors beyond the declining on-premise data center market. The manager's $40 price target assumes $4 FCF per share at a 10x multiple, representing 90% upside from current levels. The investment thesis relies on successful contract repricing execution and cost structure optimization as an independent entity.

Pitch Summary:
A real sweet spot for our investment style is discovering companies run by owner/managers, CEOs with huge ownership stakes in their company. It's hard to find a better example of this then Joe Shoen, CEO and Chairman of U-HAUL Holdings (UHAL). Shoen owns 55% of the company, with his stake valued at nearly $6 Billion, and his total annual compensation is $1 million. He clearly has more to gain from a higher stock price than his paycheck. UHAL is based in Reno, Nevada, and is North America's largest "do-it-yourself" moving and storage operator. UHAL is synonymous with self-moving and is four times larger than its biggest competitor, Penske Truck Leasing. UHAL was founded in 1945 by Shoen's father as a trailer rental company and began renting trucks in 1959. In 1973 they began their network of U-HAUL managed retail stores where they rent trucks and trailers, self-storage units and moving supplies like boxes and tape. UHAL has 23,000 locations in North America of which 2,200 are company-owned and over 21,000 are independent franchised dealers. UHAL's rental fleet consists of 192,000 trucks, 138,000 trailers and 44,000 towing devices. A major growth area for the company has been the self-storage business. Most locations have large property footprints, and with a captive audience walking in the door it made the storage business a natural. They now operate 1,900 self-storage locations with 950,000 storage units. The pricing of UHAL moving trucks has recently been coined the UHAL growth index. It can cost $1,200 to rent a truck from California to Texas, and as little as $400 from Texas to California. It has become a useful tool to track migration patterns between states. Last year the leading migration growth rates were Texas, Florida, and North Carolina. The states suffering the most losses were California, Massachusetts, and Illinois. For fiscal year 2023 UHAL had $5.75 Billion in revenue and $923 million in GAAP net income. Revenue has grown 70% over the past five years. GAAP earnings per share were $4.71, and with today's share price at $67, the shares are trading at 14 times earnings. UHAL's share price has doubled over the past five years. One negative of UHAL's financial performance has been the lack of free cash flow. This is due to huge capital expenditures of more than $2 billion per year due to the build-out of their self-storage business. This is expected to subside in the future as the build-out develops. UHAL has a strong balance sheet with net debt at 2.1 times EBITDA and interest coverage of 8.5X. The current market Cap is $12.8 Billion. Joe Shoen does not have a great reputation with Wall Street analysts. He rarely speaks to the press, and he chafes at certain questions on conference calls. He doesn't like analyst's focus on short term results, and he chooses to focus on the big picture and long-term results. While many money managers are happy to invest in money losing tech companies trading at a high multiple of revenue, we prefer to invest in solid companies like UHAL run by owner/operators like Joe Shoen.

BSD Analysis:
Old West presents a compelling value investment thesis for U-Haul centered on exceptional owner-operator alignment, with CEO Joe Shoen owning 55% of the company worth nearly $6 billion while taking only $1 million in annual compensation. The company dominates the North American do-it-yourself moving market with four times the scale of its nearest competitor and operates an extensive network of 23,000 locations. UHAL has demonstrated strong financial performance with $5.75 billion in revenue and $923 million in GAAP net income for fiscal 2023, representing 70% revenue growth over five years. The stock trades at an attractive 14x earnings multiple despite the company's market-leading position and strong balance sheet metrics including 2.1x net debt-to-EBITDA and 8.5x interest coverage. The self-storage business represents a significant growth driver, leveraging existing property footprints and captive customer traffic from the moving business. While free cash flow has been pressured by heavy capital expenditures exceeding $2 billion annually for self-storage expansion, management expects this investment phase to moderate as the build-out matures. The manager views UHAL as a superior alternative to overvalued tech companies, offering solid fundamentals and long-term value creation under proven owner-operator leadership.

Pitch Summary:
As we discussed in last quarter's Investor Letter, we were in the process of selling Pioneer Resources (PXD) following a no-premium buyout bid from ExxonMobil (XOM). The merger consideration was for new shares in XOM that as of October 23rd were only worth approximately $250 for each share of PXD. Interestingly, PXD's stock was trading for $248 leaving little room for further upside. Additionally, XOM's $250 per share offer price was at the lower end of our estimate of fair value for PXD. Given the limited upside, we have made the decision to sell PXD and roll the proceeds into a new position in EOG Resources (EOG) so we can maintain our energy exposure. EOG should be a familiar name for our investors, as we owned it as recently of last year. We sold our EOG shares in March to take advantage of the sell-off in Alphabet (GOOG). EOG is the largest shale producer in the Unites States, with daily production of 970,000 barrels of oil equivalent. The company owns a diversified resource base with "Tier 1" acreage in the heart of most of the prominent shale plays in the United States. Their premium holdings are a testament to the prowess of their exploration team, as EOG was often the first driller to discover and develop these shale basins. The management team of EOG is widely considered to be one of the best in the industry. EOG's is one of the most profitable oil companies on the planet. Last year they generated a return on invested capital of 24% despite an average oil price of $77. These high returns are primarily a result of EOG's industry leading drilling costs, combined with the lowest land costs in the industry. EOG's land cost advantage is because they were often one of the first oil companies to acquire drilling rights in the core of many of the shale oil basins in the US. Additionally, they haven't done any major acquisitions of other E&P companies to grow their land holdings. Their exploration prowess and reliance on organic growth has left EOG with a pristine balance sheet with a net cash balance of approximately $600 million. The EOG management team is very shareholder focused and has made a commitment to return more than 60% of their free cash flow to shareholders while also growing production 5-10% annually. Over the past 12 months, EOG has paid out $5.80 per share in dividends, representing a 4.6% yield. We believe EOG can generate free cash flow of $5.5-$9.0 billion at oil prices of $80-100 per barrel. This compares attractively with their market capitalization of only $66 billion. Additionally, using the same oil price range, we believe normal earnings power is approximately $12-$14 per share. We estimate the intrinsic valuation range of EOG is $120-$190 per share. We rolled our proceeds of PXD into our new position in EOG at $126 per share, on the low end of our estimated valuation range.

BSD Analysis:
Pelican Bay re-established a position in EOG Resources at $126 per share after selling Pioneer Resources due to limited upside in the ExxonMobil merger. The manager values EOG at $120-190 per share based on projected earnings power of $12-14 per share at $80-100 oil prices. The investment thesis highlights EOG's position as the largest US shale producer with 970,000 barrels daily production and premium "Tier 1" acreage acquired early in shale basin development. EOG's competitive advantages include industry-leading drilling costs and the lowest land costs, achieved through first-mover exploration success rather than expensive acquisitions. The company generated exceptional 24% ROIC at $77 oil prices, demonstrating operational excellence under the widely respected management team. EOG maintains a pristine balance sheet with $600 million net cash and commits to returning over 60% of free cash flow to shareholders while growing production 5-10% annually. The current 4.6% dividend yield ($5.80 per share) provides attractive income, while projected free cash flow of $5.5-9.0 billion at target oil prices appears compelling against the $66 billion market cap. The manager views the entry price as attractive at the low end of the valuation range.

Pitch Summary:
We rolled the proceeds of NTR into a new position in On Semiconductor (ON). On Semi is a specialty semiconductor manufacturer with leading positions in power management and image sensing chips. Over the last 5 years, the company has benefited from strong tailwinds in their end markets that have resulted in revenue growth of 50% and earnings growth of 130% over that time frame. We expect these tail winds to persist for many years. The company has operating margins of 30%, returns on invested capital of 20%, and little leverage on their balance sheet. On Semi's business can be broken up into 3 operating segments. Their primary product is power-optimizing semiconductors built on Silicon Carbide (SiC). These chips are used to regulate power between batteries and computer systems, and are critical to electric vehicles, EV chargers, solar inverters, battery storage, and other industrial applications. Demand for these chips is expected to grow between 25-30% CAGR through the end of the decade. On Semi is the second largest producer of SiC power chips with a 9% market share. They have long-term contracts worth $11 billion with most of the major auto companies including Tesla, VW, Hyundai, and BMW. The company has been able to create a superior competitive position in the market through wholly owned low-cost SiC fabs and advanced packaging for their chips that many customers favor over rival configurations. On Semi is building more SiC capacity through brownfield development at their legacy fabs. These older fabs can be updated for only 60% of the cost of constructing a newer greenfield fab from scratch. Additionally, these fabs are being retrofitted with state-of-the-art 300mm wafer equipment that will lower marginal costs relative to their peers. We believe this new SiC capacity provided by these brownfield projects should allow ON Semi to boost gross margins by 3% and sustain their low-cost advantage in the marketplace. The second largest product family at On Semi is their image sensor chips that are utilized in automotive and industrial applications. On Semi is the global leader in this category with a 46% market share of the auto market, and 68% share of the autonomous driving (ADAS) segment. The image sensor market is expected to grow 12-15% through 2027. Lastly, On Semi has another segment that provides legacy power components used in 5G communications equipment and data center servers. The legacy business is expected to fall 1-2% annually through 2027. The company is managing this division as a cash cow and they are not making further investments in these product categories. Management believes that growing end-market demand, higher operating margins, and capacity expansion should allow On Semi to grow their free cash to $3.5-$4.0 billion in 2027, up from $1.6 billion last year. The company plans to return 50% of their future free cash flow to investors through share repurchases. They currently have a $3 billion share authorization in place, representing 10% of their $30 billion market cap. The remainder of their free cash flow will go into organic projects and tuck-in acquisitions to support growth targets. For example, they will invest $2 billion in their SiC Fab capacity expansion. The balance sheet is in great shape with net debt of $1.1 billion, representing a low net debt-to-EBITDA ratio of only 0.3x. The balance sheet is well termed out with no maturities until a $700 million note due September 2028. The company also has access to a $1.125 billion revolving line of credit that currently has no outstanding balance. There is a convertible note due 2027 that is well in the money and will likely convert to equity. We have included the anticipated dilution from this conversion in our diluted share count when calculating our valuation range. In late October, shares of On Semi came under pressure after the company reported a slowdown in EV component orders as some of the traditional European and American automakers paused capital investment plans for new EV lines. Additionally, economic weakness in China and Europe caused EV sales to temporarily stall. We believe the selloff in On Semi's stocks was overdone, as sales of EVs and plug-in electric vehicles will continue to take share of the automotive market in coming years. We estimate that On Semi can grow revenues to $9-$11 billion over the next few years with operating margins of 33-40%. This would result in normal earnings power of $5.00-7.50 per share. We believe an earnings multiple of 16-19x is appropriate for the company, which would result in an intrinsic value of $80-140 per share. We initiated our position in On Semi for $68 per share.

BSD Analysis:
Pelican Bay initiated a new position in On Semiconductor at $68 per share, establishing a target valuation range of $80-140 based on 16-19x earnings multiple applied to projected earnings power of $5.00-7.50 per share. The manager's thesis centers on ON's dominant position in high-growth Silicon Carbide (SiC) power semiconductors, where the company holds 9% market share and has secured $11 billion in long-term contracts with major automakers including Tesla, VW, Hyundai, and BMW. The investment case is strengthened by ON's cost advantages through brownfield fab development at 60% the cost of greenfield construction, combined with 300mm wafer equipment upgrades expected to boost gross margins by 3%. The company's diversified portfolio includes leadership in automotive image sensors (46% market share, 68% in ADAS) and a legacy power components business managed as a cash cow. Management projects free cash flow growth from $1.6 billion to $3.5-4.0 billion by 2027, with 50% returned to shareholders through buybacks under a $3 billion authorization. The manager views recent weakness from EV order slowdowns as temporary, maintaining conviction in long-term EV adoption trends driving 25-30% CAGR demand growth for SiC chips through the decade.

Pitch Summary:
Inter Parfums ("IPAR"): The Fragrance Expert Behind Leading Perfume Brands

Summary Investment Thesis
1) Industry Leader in Fragrance Licensing and Distribution
2) Durable Long-Term Revenue Growth via Existing Brands and Additions of New Licenses
3) Capital Light Business Model with High Returns on Invested Capital and a Long Reinvestment Runway
4) Founder Led Company with High Insider Ownership that aligns Management with Shareholders

Company Overview & History
Inter Parfums is a leading fragrance house that partners with prestige brands to develop, manufacture, market and distribute perfumes globally under licensing agreements. IPAR was founded in 1982 by Jean Madar and Phillipe Benacin, who collectively own 44% of the company. Both founders are still actively involved in the company with Mr. Madar serving as the CEO of IPAR's US operations while Mr. Benacin is CEO of the European business, Inter Parfums SA (publicly traded European subsidiary that is 72% owned by IPAR). IPAR focuses on licensing agreements with prestige brands that already have a devoted brand following in categories outside of fragrances. IPAR typically targets brands with fragrances that have either been under-managed or are relatively nascent but have large growth potential via a dedicated fragrance strategy. IPAR's top fragrance brands include Montblanc, Jimmy Choo, Coach, and Guess. Over the last 2 years, IPAR has added fragrance licenses with Ferragamo, DKNY, Lacoste and Roberto Cavalli, all of which should meaningfully contribute to revenue growth for the company going forward.

Fragrance Industry Overview
The fragrance market is a niche category that requires scale and expertise that is better outsourced to a third party than managed internally by leading brands. The cost to design, market and distribute a fragrance line is too expensive relative to the potential revenue from the product. While top fragrance brands can generate revenue of $1-2 billion, most successful fragrance brands generate revenue in the $10-200mm range. Despite the small size, category extension into fragrances can still be a lucrative business for brands and serves to enhance the value of the brand if managed correctly. As a result, prestige brands often enter into licensing agreements with dedicated fragrance houses such as IPAR to manage their fragrance category. IPAR leverages their internal expertise that is required to design, manufacture, market and distribute a single fragrance over many brands.

An overview of the fragrance development, marketing and distribution process helps to contextualize why scale and expertise is required throughout the value chain and is better outsourced than managed internally.

Development: Fragrance development is a complex process that can take multiple years and requires a team of experts to craft not only the scent, but also the bottling, labeling and marketing program. Given the longevity of fragrance brands once they are launched, there is little need for this development team following commercialization, thus making it difficult for an individual brand to support these activities.

Manufacturing: Manufacturing is also complex as safety requirements associated with alcohol manufacturing are high and the process itself requires significant volumes to operate profitably. Given the small scale of most individual fragrance brands, manufacturing expertise is better leveraged by an independent third party who can utilize purchasing power to lower the input costs and drive larger volumes through the manufacturing process via relationships with multiple brands.

Marketing & Distribution: In addition to the cost required to develop and manufacture a fragrance, marketing and distribution is better handled by a third party who can leverage their scale to increase sales of individual brands, something that a brand by itself cannot accomplish. Distribution is also a scale business. Given the small size of the category, retailers prefer to work with a single point of contact that can provide multiple brands of perfumes to fill shelf space as opposed to engaging with multiple brands that can each only supply 1-2 fragrances. Additionally, by working with someone like IPAR for fragrances, retailers know that if sales of one brand struggle, they can turn to IPAR to replace it with another brand ensuring that sales remain steady.

Competitors include Coty, Estee Lauder, L'oréal and Puig along with numerous smaller competitors. IPAR primarily differentiates versus peers by focusing exclusively on fragrances (as opposed to cosmetics, beauty, etc) and targeting smaller, established brands that have been under-managed or have potential for growth through a more focused management of the fragrance category. IPAR's recent addition of the Lacoste license is a perfect example of the Company's strategy. This brand was previously managed by COTY, but it did not receive adequate attention given that it was a relatively small brand for the significantly larger COTY. It is estimated the Lacoste once generated $200mm of revenue as part of the P&G portfolio (which COTY acquired), but sales have recently declined to $100mm. IPAR believes with a more focused marketing and investment strategy, it can grow Lacoste sales back to the $150-200mm level.

At some point, a brand likely reaches a scale where it would consider managing the fragrance internally. However, IPAR's history demonstrates why even reaching scale for an individual brand isn't enough to successfully run and maintain the brand. In 2012, Burberry notified IPAR that it would not renew its license agreement with the Company. At the time, Burberry's ~$300mm of revenues accounted for 50% of IPAR's revenue. Burberry attempted to manage the fragrance category in-house for 5 years before ultimately returning to the outsourcing model, this time with COTY. I estimate that sales had declined by ~15% upon the transition to COTY compared to an industry CAGR of +5% over the same time period. Burberry's difficulties managing such an established and successful fragrance brand and the decision to return to a licensing model is evidence of the expertise required to manage this category.

As part of the license termination, IPAR received a $250mm from Burberry, which enabled IPAR to acquire new licenses (notably Coach and Guess) to offset the loss of Burberry. IPAR's success growing these brands and overcoming the loss of Burberry reinforced the value proposition of IPAR in the fragrance market. By growing these two brands, in addition to multiple other brands, IPAR demonstrated to brand owners that they can enhance the broader brand value through the launch of fragrances and can provide a high margin revenue stream for brand owners through the licensing arrangement.

IPAR Financial Overview
IPAR expects to generate long-term revenue growth in the 8-10% range. Given the high visibility into both category growth and durability of existing brands, IPAR has the confidence to forecast this growth out to 2030. The 8-10% revenue growth is driven by mid-single digit growth from existing brands and supplemented with ongoing license additions through 2030. Existing brand growth is driven by the introduction of new "blockbuster" fragrances every 2-3 years and smaller "flanker" fragrances every 1-2 years. IPAR's fragrances carry very high gross margins in the 65% range, but require heavy marketing and advertising, which results in EBITDA margins of ~20%. Revenue growth will support modest margin expansion that should support an EPS CAGR of 10-15% over the forecast period. IPAR acts as a general contractor on the manufacturing side, which results in a capital light business model for the company. Strong free cash flow will be utilized for a combination of dividend increases, share repurchases and license acquisitions as necessary. IPAR is currently in a net cash position and is expected to build cash balances through the forecast period, providing EPS optionality to the extent that cash is deployed into accretive growth opportunities. The 44% ownership interest by the co-founders provides comfort that management will be good stewards of capital.

Valuation
IPAR is currently trading near a trough valuation multiple due to investor concerns around unsustainably elevated sales (see discussion below) and broader apathy toward small cap stocks.

Despite near-term investor concerns, I believe IPAR is a better business today than historically due to revenue diversification and greater scale. In 2019, IPAR's top 4 brands accounted for 62% of revenue whereas in 2024 the top 4 brands are estimated to account for 55% of revenue. As IPAR continues to add brands to the portfolio, revenue concentration should steadily decline. Additionally, greater scale has resulted in significantly higher free cash flow, which provides an opportunity for an accelerated pace of license acquisitions (see Lacoste example above). As investor comfort over long-term earnings power materializes, I believe IPAR will eventually trade back to its LT average P/E multiple of 30x as the quality of the business has only improved over the last 5 years.

Normalized Earnings Power – Primary Investor Debate Today
The debate on IPAR revolves around whether current sales are inflated due to a combination of consumer restocking post-COVID and generally elevated fragrance market sales that could be related to temporary consumer preferences. IPAR provides details on sales from each brand, which helps investors peel back the onion on sales trends. At a high level, each of IPAR's top 5 brands will launch a blockbuster fragrance in 2024 after 2 years without blockbuster launches. These major launches combined with the newly acquired Lacoste and Cavalli brands that will both contribute to sales for the first time in 2024 should enable IPAR to outgrow the broader industry.

Another way to triangulate 2024 revenue is to estimate what 2024 revenues would have been assuming normalized growth rates from 2019 pre-pandemic levels. The main assumption is that pre-COVID industry growth trends would persist. We can then layer on the addition of new brands and the pricing increases (to offset inflation) that IPAR took in 2022 and 2023 to estimate a "normalized" 2024 revenue level. Under these assumptions, it appears that IPAR's 2024 revenue might be slightly elevated, although this may be sustainable given increased consumer interest in the fragrance category more broadly.

The point of this exercise is not that these figures are perfectly accurate, it is instead a sanity check to better understand if IPAR's sales are elevated relative to history. If there is any lesson that investors have learned coming out of COVID, it is that almost every business has seen their results normalize toward historical growth trends after wild fluctuations through the pandemic. In IPAR's case, 2024 revenues may be slightly elevated versus trend, but are reasonably close to what I would have expected in a normal operating environment. When combined with a trough valuation, this gives me confidence that we have a high margin of safety in the stock. If my estimates and the Company's forecast prove to be too aggressive, maybe estimates need to decline at most -15%? Realistically, once investors gain confidence in the normalized earnings power for IPAR, I believe the stock is likely to re-rate back toward its 30x earnings multiple. Note this is purely an exercise to understand short-term forecasts. In the long run, all of the quality business attributes for IPAR will remain intact and IPAR should be able to generate double digit sales growth while steadily increasing margins.

China Opportunity – Embedded Call Option
The China opportunity is enormous and largely untapped by IPAR today. Penetration of fragrances into China is only 4% today compared to 50% in Europe and 23% in the US. While IPAR is unlikely to see a significant increase in sales in China over the next 1-3 years, it does represent an enormous opportunity that I expect IPAR will eventually tap over the next 5-10 years. For patient investors, this has the opportunity to result in meaningful earnings growth potential above the target of 10-15%.

IPAR Summary Investment Thesis
IPAR is a business that checks so many boxes within the Headwaters investment philosophy. The Company generates high returns on invested capital with a long reinvestment runway as the company steadily gains share in a large and growing fragrance market. Given the complexity and expertise required to manage a fragrance brand compared to the relatively small revenue potential, the category itself is ideally suited to an outsourcing model. IPAR's expertise as a dedicated fragrance house and success growing multiple fragrance brands makes the company a leader in this relatively niche market.

By focusing on licensing agreements with established brands, IPAR minimizes execution risk and is able to leverage the halo effect of broader brand marketing. As a result, IPAR has a history of generating consistent revenue growth as organic growth from existing brands is supplemented with the addition of new licensing agreements (+24% sales CAGR from 2002-2022 despite losing Burberry, a 50% customer concentration). The strong margin profile of IPAR's fragrance business combined with the capital light manufacturing model results in substantial free cash flow that can be utilized for license acquisitions, dividends and share repurchases. IPAR continues to be led by its two co-founders who have extensive experience in the industry. Their combined 44% ownership interests ensures that management's interests are aligned with shareholders. Assuming a 30x P/E multiple on 2028 EPS of $7.95 implies a $260 share price (inclusive of $20 of cash), or a +15% CAGR from today's price.

BSD Analysis:
Headwaters Capital presents a compelling bull case for Inter Parfums (IPAR), positioning it as a specialized fragrance licensing leader with durable competitive advantages. The manager's thesis centers on IPAR's role as an outsourced fragrance expert for prestige brands, leveraging scale economies and specialized expertise that individual brands cannot efficiently replicate in-house. The company's 8-10% long-term revenue growth target is supported by organic growth from existing brands plus new license acquisitions, with high gross margins of 65% and EBITDA margins around 20%. The capital-light business model generates strong free cash flow for reinvestment, dividends, and share repurchases. Management quality is highlighted through founder leadership with 44% insider ownership, ensuring aligned interests. The manager addresses investor concerns about potentially elevated post-COVID sales through detailed normalization analysis, concluding that 2024 revenues may be only modestly above trend. At current trough valuations, the manager sees significant upside potential as the stock re-rates toward its historical 30x P/E multiple, targeting $260 per share by 2028 for a 15% CAGR return.