Investment Pitches

Pitch Summary:
Our biggest move was swapping out Swiss pharmaceutical and diagnostics maker Roche for U.K. pharmaceutical developer AstraZeneca. Our original thesis for Roche was that its four large cancer franchises would not fade as quickly as market forecasts while the company built its new pipeline. The pipeline does not appear to be building, however, and we expect the stock to struggle until something significant materializes. We believe AstraZeneca has a deep, diverse pipeline of products and a patent portfolio with no material expirations until the 2030s, characteristics that should allow the company to deliver solid organic revenue growth above its pharmaceutical peers through the end of the decade.

BSD Analysis:
The manager executed a strategic swap within pharmaceuticals, replacing Roche with AstraZeneca based on superior pipeline quality and patent protection. The thesis centers on AstraZeneca's robust intellectual property portfolio with patent cliffs not materializing until the 2030s, providing significant revenue visibility. The manager emphasizes the depth and diversity of AstraZeneca's product pipeline, which should drive organic growth above industry peers through the decade. This contrasts sharply with Roche, where pipeline development has disappointed and cancer franchises face earlier-than-expected pressure. The investment appears focused on sustainable competitive advantages through patent protection and R&D capabilities. The manager's confidence in AstraZeneca's ability to outgrow pharmaceutical peers suggests strong conviction in the company's innovation engine and market positioning.

Pitch Summary:
The performance of Dutch semiconductor equipment maker ASML provides a microcosm of the negative sentiment overshadowing international growth stocks. As the leading provider of extreme ultraviolet lithography equipment to makers of graphic processing units (GPU) and similar semiconductors powering demand for artificial intelligence applications, the company is in a prime position to benefit from the secular AI buildout. However, unlike U.S. GPU maker Nvidia which has seen its shares triple this year, ASML has failed to benefit from AI enthusiasm, with the shares down double digits in the third quarter and basically flat for the year.

BSD Analysis:
The manager presents ASML as a compelling example of market inefficiency, where a fundamentally strong company is being overlooked due to style rotation away from growth stocks. ASML holds a dominant position as the leading provider of extreme ultraviolet lithography equipment essential for manufacturing advanced semiconductors used in AI applications. The company is strategically positioned to benefit from the secular AI buildout, yet its shares have underperformed dramatically compared to U.S. AI beneficiaries like Nvidia. The manager views this disconnect as temporary, suggesting ASML's fundamental positioning should eventually drive outperformance. The pitch implies the current weakness presents an attractive entry point for a company with monopolistic characteristics in a critical technology segment. The manager's confidence appears rooted in ASML's irreplaceable role in the semiconductor manufacturing ecosystem.

Pitch Summary:
Coca Cola Europacific Partners (CCEP) is the largest Coca-Cola bottling franchise, accounting for an estimated 1/3rd of Coca-Cola System profits. CCEP sells whatever it deems to be the optimal mix of The Coca-Cola Company's (TCCC) 200+ brands in its 30 countries (from its owned bottling plants and coolers) and CCEP sets all prices. Over the last decade plus, alignment has been structurally enhanced between TCCC and the top bottling groups through incidence-based pricing (sales value rather than volume) and through direct ownership. Bottlers are increasingly benefiting from TCCC's innovation and overall "total beverage" strategy (including TCCC's acquired and licensed brands in energy drinks and ready-to-drink coffee, alcohol, and more). By year-end 2023, CCEP should also generate 28% of sales from the faster growing Asia-Pacific region (with no sales in China). CCEP is inexpensive compared to other global staples, with nearly 2x the average free cash flow yield. Compared to its own seven-year history, it trades at a significant discount on a price-to-earnings basis. It offers attractive defensive growth potential and predictable capital allocation.

BSD Analysis:
FMI's investment thesis for CCEP emphasizes the company's position as the largest Coca-Cola bottling franchise, representing approximately one-third of the Coca-Cola System's profits with significant operational autonomy in pricing and brand mix optimization across 30 countries. The manager highlights improved structural alignment with The Coca-Cola Company through incidence-based pricing and direct ownership, benefiting from TCCC's innovation and "total beverage" strategy expansion into energy drinks, coffee, and alcohol. Geographic diversification is a key attraction, with 28% of sales expected from faster-growing Asia-Pacific markets by year-end 2023, notably excluding volatile China exposure. FMI views the valuation as compelling, trading at nearly 2x the free cash flow yield of global staples peers and at a significant discount to its seven-year historical P/E multiple. The investment combines defensive characteristics with growth potential and predictable capital allocation, offering attractive risk-adjusted returns in the consumer staples sector.

Pitch Summary:
Sysco Corp. is the largest global distributor of food and related products to the foodservice or food-away-from-home industry. Sales in the U.S. account for approximately 82% of the company's consolidated revenue, with the remainder mainly coming from Canada, Latin America, and Europe (18%). The company provides products and related services from thousands of suppliers to over 725,000 customer locations including restaurants (~62% of sales), education and government facilities (~8%), travel and leisure establishments (~8%), healthcare facilities (~7%), and other foodservice customers (15%). Sysco possesses many business characteristics that FMI finds attractive. The company has a dominant market position in a large, growing, resilient industry. They sell necessary, consumable products. Economies of scale allow Sysco to provide a better offering than peers while also allowing them to operate with higher margins. These advantages have helped Sysco take market share over time and earn a return on capital that consistently exceeds its cost of capital. We believe that Sysco will continue to grow its market share in the large and fragmented foodservice distribution market and should be able to generate mid-single-digit EBIT growth over time. When combined with share repurchases and dividend yield, the company should generate a high-single-digit to low-double-digit total return to investors without multiple expansion. The shares are trading at a depressed valuation relative to the S&P 500 and relative to the company's history, which we believe provides us downside protection and could generate additional upside should it revert to the historical levels.

BSD Analysis:
FMI's thesis on Sysco centers on the company's dominant market position in the large, fragmented foodservice distribution industry with significant competitive advantages through economies of scale. The manager highlights Sysco's exposure to resilient end markets including restaurants (62% of sales) and institutional customers, selling necessary consumable products with pricing power. The investment case emphasizes consistent market share gains and returns on capital exceeding cost of capital, supported by the company's scale advantages over competitors. FMI projects mid-single-digit EBIT growth combined with capital returns through dividends and share repurchases, targeting high-single-digit to low-double-digit total returns. The manager views current valuations as depressed relative to both the S&P 500 and historical levels, providing downside protection with potential for multiple expansion. The defensive nature of the foodservice distribution business offers stability during economic uncertainty.

Pitch Summary:
After a long history of underinvestment under Ashland and a messy seven years as a standalone public company, Valvoline is finally a pure-play quick lube retailer, having sold their motor oil business earlier this year. We like the business model for its stability, growth potential, pricing power, and high returns on capital. The business offers customers a better oil change experience relative to the alternatives. Going forward, the story will be simpler to understand, the analyst coverage will be uniform, and it should get reclassified as retail. In the current environment, Valvoline has the added benefit of having a tight store-level culture that helps minimize labor turnover, and has effectively no shrink, which is currently a major thorn in the side of retailers. Given Valvoline's choppy history (thanks to the divested motor oil business), we believe investors are in a wait and see mode as the company proves out its standalone financial results and accelerates its organic store expansion. Increased penetration in a fragmented market, expanded usage of synthetic oils, and a consistent experience as consumers continue to shift to do-it-for-me, should drive strong earnings per share growth at high incremental returns. Although we believe we can get an attractive return from just the growth, there is the chance for a higher valuation as Valvoline puts up its first year of (nearly) clean financials in Fiscal Year 2024. We also believe the short- to medium-term threat of electric vehicles is manageable. If our growth expectations are achieved, the downside is modest even if the multiple compresses meaningfully over our five-year investment horizon. We expect investors will increasingly appreciate Valvoline's simple, high return model after a long period of being obfuscated by inferior businesses.

BSD Analysis:
FMI presents a compelling turnaround thesis for Valvoline following its transformation into a pure-play quick lube retailer after divesting its motor oil business. The manager emphasizes the business model's defensive characteristics including pricing power, high returns on capital, and operational stability through strong store-level culture that minimizes labor turnover. The investment case centers on market share gains in a fragmented industry, benefiting from the secular shift toward do-it-for-me services and synthetic oil adoption. FMI believes the company is undervalued due to its historically complex structure, with potential for multiple expansion as Valvoline demonstrates clean standalone financials in FY2024. The manager views the EV threat as manageable over their five-year investment horizon. The thesis combines defensive cash flow generation with growth potential through organic store expansion, supported by attractive incremental returns on invested capital.

Pitch Summary:
Coca Cola Europacific Partners (CCEP) is the largest Coca-Cola bottling franchise, accounting for an estimated 1/3rd of Coca-Cola System profits. CCEP sells whatever it deems to be the optimal mix of The Coca-Cola Company's (TCCC) 200+ brands in its 30 countries (from its owned bottling plants and coolers) and CCEP sets all prices. Over the last decade plus, alignment has been structurally enhanced between TCCC and the top bottling groups through incidence-based pricing (sales value rather than volume) and through direct ownership. Bottlers are increasingly benefiting from TCCC's innovation and overall "total beverage" strategy (including TCCC's acquired and licensed brands in energy drinks and ready-to-drink coffee, alcohol, and more). By year-end 2023, CCEP should also generate 28% of sales from the faster growing Asia-Pacific region (with no sales in China). CCEP is inexpensive compared to other global staples, with nearly 2x the average free cash flow yield. Compared to its own seven-year history, it trades at a significant discount on a price-to-earnings basis. It offers attractive defensive growth potential and predictable capital allocation.

BSD Analysis:
FMI presents CCEP as an undervalued defensive growth play within the global consumer staples sector. The manager emphasizes the company's dominant position as the largest Coca-Cola bottling franchise, controlling one-third of system profits with pricing autonomy across 30 countries. The investment thesis benefits from structural improvements in bottler-franchisor alignment through value-based pricing rather than volume-based metrics. FMI highlights CCEP's exposure to Coca-Cola's "total beverage" strategy, expanding beyond traditional soft drinks into energy, coffee, and alcohol categories. Geographic diversification provides growth exposure to faster-growing Asia-Pacific markets while avoiding China risk. The valuation case appears compelling with CCEP trading at nearly 2x the free cash flow yield of global staples peers and at a significant discount to its own seven-year historical P/E multiple. The manager emphasizes predictable capital allocation and defensive growth characteristics. The combination of market leadership, structural franchise improvements, category expansion, and attractive valuation provides multiple paths to returns in this defensive consumer staples investment.

Pitch Summary:
Sysco Corp. is the largest global distributor of food and related products to the foodservice or food-away-from-home industry. Sales in the U.S. account for approximately 82% of the company's consolidated revenue, with the remainder mainly coming from Canada, Latin America, and Europe (18%). The company provides products and related services from thousands of suppliers to over 725,000 customer locations including restaurants (~62% of sales), education and government facilities (~8%), travel and leisure establishments (~8%), healthcare facilities (~7%), and other foodservice customers (15%). Sysco possesses many business characteristics that FMI finds attractive. The company has a dominant market position in a large, growing, resilient industry. They sell necessary, consumable products. Economies of scale allow Sysco to provide a better offering than peers while also allowing them to operate with higher margins. These advantages have helped Sysco take market share over time and earn a return on capital that consistently exceeds its cost of capital. We believe that Sysco will continue to grow its market share in the large and fragmented foodservice distribution market and should be able to generate mid-single-digit EBIT growth over time. When combined with share repurchases and dividend yield, the company should generate a high-single-digit to low-double-digit total return to investors without multiple expansion. The shares are trading at a depressed valuation relative to the S&P 500 and relative to the company's history, which we believe provides us downside protection and could generate additional upside should it revert to the historical levels.

BSD Analysis:
FMI presents a classic defensive value play in Sysco, emphasizing the company's dominant position in the essential foodservice distribution industry. The manager highlights Sysco's competitive moat through economies of scale that enable superior service offerings and higher margins versus competitors. The investment thesis centers on the company's ability to gain market share in a large, fragmented market while serving resilient end markets including restaurants, healthcare, and education. FMI projects mid-single-digit EBIT growth driven by market share gains and operational leverage. The total return expectation of high-single to low-double digits incorporates both organic growth and capital returns through dividends and share repurchases. The manager emphasizes the defensive nature of consumable products and the company's consistent returns above cost of capital. Valuation appears attractive both relative to the S&P 500 and Sysco's historical trading range, providing downside protection with potential for multiple expansion. The thesis combines growth, income, and value characteristics in a recession-resistant business model.

Pitch Summary:
After a long history of underinvestment under Ashland and a messy seven years as a standalone public company, Valvoline is finally a pure-play quick lube retailer, having sold their motor oil business earlier this year. We like the business model for its stability, growth potential, pricing power, and high returns on capital. The business offers customers a better oil change experience relative to the alternatives. Going forward, the story will be simpler to understand, the analyst coverage will be uniform, and it should get reclassified as retail. In the current environment, Valvoline has the added benefit of having a tight store-level culture that helps minimize labor turnover, and has effectively no shrink, which is currently a major thorn in the side of retailers. Given Valvoline's choppy history (thanks to the divested motor oil business), we believe investors are in a wait and see mode as the company proves out its standalone financial results and accelerates its organic store expansion. Increased penetration in a fragmented market, expanded usage of synthetic oils, and a consistent experience as consumers continue to shift to do-it-for-me, should drive strong earnings per share growth at high incremental returns. Although we believe we can get an attractive return from just the growth, there is the chance for a higher valuation as Valvoline puts up its first year of (nearly) clean financials in Fiscal Year 2024. We also believe the short- to medium-term threat of electric vehicles is manageable. If our growth expectations are achieved, the downside is modest even if the multiple compresses meaningfully over our five-year investment horizon. We expect investors will increasingly appreciate Valvoline's simple, high return model after a long period of being obfuscated by inferior businesses.

BSD Analysis:
FMI presents a compelling turnaround thesis for Valvoline following its transformation into a pure-play quick lube retailer after divesting its motor oil business. The manager emphasizes the business model's defensive characteristics including pricing power, high returns on capital, and operational stability through strong store-level culture that minimizes labor turnover. The investment case centers on organic growth through market share gains in a fragmented industry, benefiting from the secular shift toward synthetic oils and consumer preference for professional service. FMI believes the company is undervalued due to its historically complex structure, with potential for multiple expansion as Valvoline demonstrates clean standalone financials in FY2024. The manager views the electric vehicle threat as manageable over their five-year investment horizon. The thesis combines both growth and value elements, with downside protection even if valuation multiples compress. FMI expects the simplified business model will attract broader investor recognition and potentially lead to reclassification as a retail stock.

Pitch Summary:
Coca Cola Europacific Partners (CCEP) is the largest Coca-Cola bottling franchise, accounting for an estimated 1/3rd of Coca-Cola System profits. CCEP sells whatever it deems to be the optimal mix of The Coca-Cola Company's (TCCC) 200+ brands in its 30 countries (from its owned bottling plants and coolers) and CCEP sets all prices. Over the last decade plus, alignment has been structurally enhanced between TCCC and the top bottling groups through incidence-based pricing (sales value rather than volume) and through direct ownership. Bottlers are increasingly benefiting from TCCC's innovation and overall "total beverage" strategy (including TCCC's acquired and licensed brands in energy drinks and ready-to-drink coffee, alcohol, and more). By year-end 2023, CCEP should also generate 28% of sales from the faster growing Asia-Pacific region (with no sales in China). CCEP is inexpensive compared to other global staples, with nearly 2x the average free cash flow yield. Compared to its own seven-year history, it trades at a significant discount on a price-to-earnings basis. It offers attractive defensive growth potential and predictable capital allocation.

BSD Analysis:
FMI presents CCEP as an attractive value play within the global consumer staples sector, emphasizing the company's dominant position as the largest Coca-Cola bottling franchise controlling one-third of system profits. The manager highlights improved structural alignment between CCEP and The Coca-Cola Company through incidence-based pricing and direct ownership, which enhances profitability and reduces volume risk. The investment benefits from TCCC's "total beverage" strategy and innovation across energy drinks, ready-to-drink coffee, and alcohol categories. Geographic diversification is improving with 28% of sales expected from faster-growing Asia-Pacific markets by year-end 2023, while avoiding China exposure. The valuation appears compelling with nearly 2x the free cash flow yield of global staples peers and trading at a significant discount to its own seven-year P/E history. This represents a defensive growth opportunity with predictable capital allocation in the essential beverages market, offering both value and quality characteristics that align with FMI's investment philosophy.

Pitch Summary:
Sysco Corp. is the largest global distributor of food and related products to the foodservice or food-away-from-home industry. Sales in the U.S. account for approximately 82% of the company's consolidated revenue, with the remainder mainly coming from Canada, Latin America, and Europe (18%). The company provides products and related services from thousands of suppliers to over 725,000 customer locations including restaurants (~62% of sales), education and government facilities (~8%), travel and leisure establishments (~8%), healthcare facilities (~7%), and other foodservice customers (15%). Sysco possesses many business characteristics that FMI finds attractive. The company has a dominant market position in a large, growing, resilient industry. They sell necessary, consumable products. Economies of scale allow Sysco to provide a better offering than peers while also allowing them to operate with higher margins. These advantages have helped Sysco take market share over time and earn a return on capital that consistently exceeds its cost of capital. We believe that Sysco will continue to grow its market share in the large and fragmented foodservice distribution market and should be able to generate mid-single-digit EBIT growth over time. When combined with share repurchases and dividend yield, the company should generate a high-single-digit to low-double-digit total return to investors without multiple expansion. The shares are trading at a depressed valuation relative to the S&P 500 and relative to the company's history, which we believe provides us downside protection and could generate additional upside should it revert to the historical levels.

BSD Analysis:
FMI outlines a classic defensive value play in Sysco, emphasizing the company's dominant position in the essential foodservice distribution industry. The manager highlights Sysco's competitive moat through economies of scale that enable superior margins and service offerings compared to competitors in this fragmented market. The investment thesis centers on the company's ability to consistently generate returns above its cost of capital while taking market share over time. FMI projects mid-single-digit EBIT growth combined with capital returns through dividends and share repurchases, targeting high-single-digit to low-double-digit total returns. The valuation appears attractive both relative to the S&P 500 and Sysco's historical trading range, providing downside protection with potential for multiple expansion. This represents a quality defensive holding with predictable cash flows in an essential industry, fitting FMI's preference for businesses with pricing power and resilient demand characteristics.

Pitch Summary:
After a long history of underinvestment under Ashland and a messy seven years as a standalone public company, Valvoline is finally a pure-play quick lube retailer, having sold their motor oil business earlier this year. We like the business model for its stability, growth potential, pricing power, and high returns on capital. The business offers customers a better oil change experience relative to the alternatives. Going forward, the story will be simpler to understand, the analyst coverage will be uniform, and it should get reclassified as retail. In the current environment, Valvoline has the added benefit of having a tight store-level culture that helps minimize labor turnover, and has effectively no shrink, which is currently a major thorn in the side of retailers. Given Valvoline's choppy history (thanks to the divested motor oil business), we believe investors are in a wait and see mode as the company proves out its standalone financial results and accelerates its organic store expansion. Increased penetration in a fragmented market, expanded usage of synthetic oils, and a consistent experience as consumers continue to shift to do-it-for-me, should drive strong earnings per share growth at high incremental returns. Although we believe we can get an attractive return from just the growth, there is the chance for a higher valuation as Valvoline puts up its first year of (nearly) clean financials in Fiscal Year 2024. We also believe the short- to medium-term threat of electric vehicles is manageable. If our growth expectations are achieved, the downside is modest even if the multiple compresses meaningfully over our five-year investment horizon. We expect investors will increasingly appreciate Valvoline's simple, high return model after a long period of being obfuscated by inferior businesses.

BSD Analysis:
FMI presents a compelling turnaround thesis for Valvoline following its transformation into a pure-play quick lube retailer after divesting its motor oil business. The manager emphasizes the business model's defensive characteristics including pricing power, high returns on capital, and operational stability through strong store-level culture that minimizes labor turnover. The investment case centers on market share gains in a fragmented industry, benefiting from the secular shift toward do-it-for-me services and synthetic oil adoption. FMI believes the company is undervalued due to its historically complex structure, with potential for multiple expansion as Valvoline demonstrates clean standalone financials in FY2024. The manager views the EV threat as manageable over their five-year investment horizon. The thesis combines both growth and value elements, with downside protection even if valuation multiples compress, making it an attractive risk-adjusted opportunity in the current market environment.

Pitch Summary:
Coca Cola Europacific Partners (CCEP) is the largest Coca-Cola bottling franchise, accounting for an estimated 1/3rd of Coca-Cola System profits. CCEP sells whatever it deems to be the optimal mix of The Coca-Cola Company's (TCCC) 200+ brands in its 30 countries (from its owned bottling plants and coolers) and CCEP sets all prices. Over the last decade plus, alignment has been structurally enhanced between TCCC and the top bottling groups through incidence-based pricing (sales value rather than volume) and through direct ownership. Bottlers are increasingly benefiting from TCCC's innovation and overall "total beverage" strategy (including TCCC's acquired and licensed brands in energy drinks and ready-to-drink coffee, alcohol, and more). By year-end 2023, CCEP should also generate 28% of sales from the faster growing Asia-Pacific region (with no sales in China). CCEP is inexpensive compared to other global staples, with nearly 2x the average free cash flow yield. Compared to its own seven-year history, it trades at a significant discount on a price-to-earnings basis. It offers attractive defensive growth potential and predictable capital allocation.

BSD Analysis:
FMI presents CCEP as an undervalued defensive growth opportunity within the global beverage ecosystem. The manager emphasizes the company's strategic position as the largest Coca-Cola bottling franchise, controlling pricing and product mix across 30 countries while benefiting from enhanced structural alignment with TCCC through incidence-based pricing. Key growth drivers include geographic diversification with 28% exposure to faster-growing Asia-Pacific markets (excluding China) and participation in TCCC's total beverage strategy across energy drinks, coffee, and alcohol categories. The valuation case is compelling with CCEP trading at nearly 2x the free cash flow yield of global staples peers and at significant discounts to its own historical P/E multiples. FMI values the predictable capital allocation and defensive growth characteristics in an uncertain macro environment. This appears to be a quality franchise trading at attractive valuations with multiple expansion potential.

Pitch Summary:
Sysco Corp. is the largest global distributor of food and related products to the foodservice or food-away-from-home industry. Sales in the U.S. account for approximately 82% of the company's consolidated revenue, with the remainder mainly coming from Canada, Latin America, and Europe (18%). The company provides products and related services from thousands of suppliers to over 725,000 customer locations including restaurants (~62% of sales), education and government facilities (~8%), travel and leisure establishments (~8%), healthcare facilities (~7%), and other foodservice customers (15%). Sysco possesses many business characteristics that FMI finds attractive. The company has a dominant market position in a large, growing, resilient industry. They sell necessary, consumable products. Economies of scale allow Sysco to provide a better offering than peers while also allowing them to operate with higher margins. These advantages have helped Sysco take market share over time and earn a return on capital that consistently exceeds its cost of capital. We believe that Sysco will continue to grow its market share in the large and fragmented foodservice distribution market and should be able to generate mid-single-digit EBIT growth over time. When combined with share repurchases and dividend yield, the company should generate a high-single-digit to low-double-digit total return to investors without multiple expansion. The shares are trading at a depressed valuation relative to the S&P 500 and relative to the company's history, which we believe provides us downside protection and could generate additional upside should it revert to the historical levels.

BSD Analysis:
FMI outlines a classic defensive value play in Sysco, leveraging the company's dominant position in the essential foodservice distribution market. The manager highlights Sysco's competitive moat through economies of scale, enabling superior margins and consistent market share gains in a fragmented industry. With 82% of revenue from the stable U.S. market and exposure to resilient end markets like healthcare and education, the business model offers recession-resistant characteristics. FMI projects mid-single-digit EBIT growth driven by market share expansion and operational leverage. The investment thesis emphasizes attractive total return potential of high-single to low-double digits through organic growth, share buybacks, and dividend yield, even without multiple expansion. Trading at depressed valuations relative to both the S&P 500 and historical levels provides downside protection with potential for valuation normalization upside.

Pitch Summary:
After a long history of underinvestment under Ashland and a messy seven years as a standalone public company, Valvoline is finally a pure-play quick lube retailer, having sold their motor oil business earlier this year. We like the business model for its stability, growth potential, pricing power, and high returns on capital. The business offers customers a better oil change experience relative to the alternatives. Going forward, the story will be simpler to understand, the analyst coverage will be uniform, and it should get reclassified as retail. In the current environment, Valvoline has the added benefit of having a tight store-level culture that helps minimize labor turnover, and has effectively no shrink, which is currently a major thorn in the side of retailers. Given Valvoline's choppy history (thanks to the divested motor oil business), we believe investors are in a wait and see mode as the company proves out its standalone financial results and accelerates its organic store expansion. Increased penetration in a fragmented market, expanded usage of synthetic oils, and a consistent experience as consumers continue to shift to do-it-for-me, should drive strong earnings per share growth at high incremental returns. Although we believe we can get an attractive return from just the growth, there is the chance for a higher valuation as Valvoline puts up its first year of (nearly) clean financials in Fiscal Year 2024. We also believe the short- to medium-term threat of electric vehicles is manageable. If our growth expectations are achieved, the downside is modest even if the multiple compresses meaningfully over our five-year investment horizon. We expect investors will increasingly appreciate Valvoline's simple, high return model after a long period of being obfuscated by inferior businesses.

BSD Analysis:
FMI presents a compelling turnaround thesis for Valvoline following its transformation into a pure-play quick lube retailer after divesting its motor oil business. The manager emphasizes the company's defensive business model with stable cash flows, pricing power, and high returns on capital in a fragmented market. Key investment drivers include organic store expansion, increased synthetic oil penetration, and the secular shift toward do-it-for-me services. FMI values the company's operational advantages including low labor turnover and minimal shrinkage issues that plague traditional retailers. The investment case centers on multiple expansion potential as Valvoline demonstrates clean standalone financials in FY2024. The manager acknowledges EV risks but considers them manageable over the medium term. With modest downside protection even under multiple compression scenarios, this appears to be a quality growth story trading at reasonable valuations.

Pitch Summary:
Housing: White Brook continues to invest in Builders First Source (BLDR) and believes the stock is materially undervalued. While higher interest rates have substantially slowed the existing housing market, new homes are being built at an above-consensus rate. Fundamentally, the United States continues to be under housed with occupancy of housing at all-time highs, even if particular markets most impacted by the technology sector (SF, Seattle) and a reversal of work from home practices (Miami, Phoenix, exurbs) now see a substantial decline in existing home sale prices. Tactically, the nation's largest home builders have adapted to the interest rate environment by adjusting the size of homes built and by subsidizing new customer loans. New housing permits and starts have been far above worst case expectations, and materially better than what would have been expected unless there was a housing shortage, given the current mortgage rate environment. Further supported by solid renovation activity, Builders continues to generate prodigious free cash flow. Over the medium term, the country's insufficient housing position will have to be rectified, and Builders is well positioned.

BSD Analysis:
White Brook Capital views Builders FirstSource as materially undervalued, maintaining a bullish stance despite headwinds from higher interest rates impacting the existing housing market. The manager's thesis centers on a fundamental housing shortage in the United States, evidenced by all-time high occupancy rates and new home construction continuing at above-consensus levels despite challenging mortgage rate conditions. The investment case is supported by homebuilders' tactical adaptations to the rate environment, including adjusting home sizes and subsidizing customer loans, which has kept housing permits and starts well above worst-case expectations. The manager emphasizes that current construction activity levels would only be sustainable in a housing shortage scenario, validating the structural demand thesis. Builders FirstSource benefits from both new construction activity and solid renovation demand, generating strong free cash flow throughout the cycle. The company's market position as a leading building products supplier positions it well to capitalize on the inevitable resolution of the housing shortage over the medium term. Despite near-term rate pressures, the fundamental supply-demand imbalance in housing provides a compelling long-term investment opportunity.

Pitch Summary:
Railcars: During the quarter, several of the largest railcar manufacturers' management spoke at an industry conference. Between those discussions and our follow-up, there were two significant takeaways. 1. There is no demand spike this year, and the industry continues to plan for 40,000 railcar deliveries for the next two to three. Those 40,000 cars replace expensive and hard to maintain cars that are both in operation today and that comprise a significant amount of the railcars in storage. This is a good market environment for incumbents. While the industry is hopeful about onshoring and there are whispers of the need for additional cars to move freight to and from new US factories, skepticism developed over the railcar industry's history pervades the manufacturers, and they plan to deliver from existing capacity if and when that demand materializes. 2. Higher interest rates are a boon for railcar lessors. An increase in interest rates of 1% translates to an increase in lease rates of $100 per railcar per month. Given current rates, upon renewal, an increase of $300 per month per car won't be atypical. Separately, Greenbrier Companies (GBX), announced a $1.9bn backlog in mid-September that positively surprised the industry. It suggests Greenbrier's manufacturing is filled through 2025, although it's unclear whether other manufacturers saw similar demand. The stock positively reacted to the news before negatively reacting to increases in the 10-year treasury, which, ironically, ultimately helps them and their growing leasing operations. WBCP continues to own the stock and believes it is attractively valued.

BSD Analysis:
White Brook Capital maintains a bullish stance on Greenbrier Companies, viewing the railcar manufacturer as attractively valued despite recent market volatility. The manager highlights two key industry dynamics supporting the investment thesis: stable replacement demand of 40,000 railcar deliveries annually over the next 2-3 years, creating a favorable environment for incumbents, and the positive impact of higher interest rates on railcar leasing operations, with each 1% rate increase translating to $100 per month per car in higher lease rates. The announcement of a $1.9 billion backlog in September, filling manufacturing capacity through 2025, demonstrates strong demand visibility and validates the investment case. While the stock initially reacted positively to the backlog news before declining on treasury yield concerns, the manager notes the irony that higher rates actually benefit Greenbrier's growing leasing operations. The combination of stable replacement demand, rate-driven leasing tailwinds, and strong order visibility through 2025 supports the manager's conviction in the position. The current valuation appears compelling given these fundamental drivers and the company's positioning in a consolidated industry with high barriers to entry.

Pitch Summary:
LS Electric is another name in Korea that is poised to benefit, but for additional reasons. While LS also makes transformers, it mainly focuses on hardware & installation services to connect new factories to the grid (e.g., switchgear, switchboards, controls, etc.). With the CHIPS Act ($280bn designated for tech onshoring), Korean car, battery, and semiconductor companies are building facilities in the U.S. and taking LS along for the ride. LS has long-standing relationships with these Korean customers and is winning business as a turnkey electrical solution provider for their new U.S. factories. The company's backlog now stands at KRW 2.5tn (nearly a year of sales), up 43% vs. a year ago and up 133% vs. December 2021. At a very reasonable 9x PE, we think LS is far from peak earnings – especially if they achieve margins equivalent to the last cycle (8-9% net income margins vs. 4-5% currently). We believe the stock could double from here.

BSD Analysis:
The fund manager presents a strong bull thesis for LS Electric, emphasizing its unique positioning to benefit from Korean industrial onshoring to the United States. Unlike pure transformer manufacturers, LS Electric specializes in comprehensive electrical infrastructure solutions including switchgear, switchboards, and installation services for factory grid connections. The CHIPS Act's $280 billion allocation for technology onshoring creates a substantial tailwind as Korean automotive, battery, and semiconductor companies establish U.S. manufacturing facilities. LS Electric's competitive moat stems from long-standing relationships with Korean industrial customers, positioning it as their preferred turnkey electrical solution provider for U.S. expansions. The company's order backlog of KRW 2.5 trillion represents nearly a full year of sales, growing 43% year-over-year and 133% since December 2021. At 9x PE, the valuation appears attractive given the manager's expectation that earnings are far from peak levels. If LS Electric achieves historical cycle margins of 8-9% versus current 4-5% levels, the manager believes the stock could double, representing significant upside potential in the electrical infrastructure modernization theme.

Pitch Summary:
One of our favorite names in the space is HD Hyundai Electric, a Korean company that was historically more domestically-focused but has seen a surge in demand from U.S. utilities as U.S. transformer manufacturers have run out of capacity. HD also has easy access to electrical steel in Korea, a unique raw material its U.S. counterparts struggle to get. HD is now working on a U.S. capacity expansion and they think profit margins can hit historic highs as U.S. sales carry higher pricing/margins. Expectations are for 20% growth next year with expanding margins, yet the stock trades on less than 10x PE with a 7.5% FCF yield. Its order backlog is an impressive KRW 4.7tn (2-3 years' worth of sales), up 60% compared to a year ago and up 147% compared to December 2021.

BSD Analysis:
The fund manager presents a compelling bull case for HD Hyundai Electric, positioning it as a prime beneficiary of U.S. electrical grid modernization trends. The company has transitioned from a domestically-focused Korean business to capturing significant U.S. market share as domestic transformer manufacturers reach capacity constraints. HD Hyundai's competitive advantage stems from privileged access to electrical steel, a critical raw material that U.S. competitors struggle to source reliably. The company's U.S. capacity expansion strategy targets higher-margin international sales, with management expecting profit margins to reach historic peaks. The valuation appears attractive at less than 10x PE with a 7.5% free cash flow yield, despite expectations for 20% growth and margin expansion. The order backlog of KRW 4.7 trillion represents 2-3 years of sales visibility, having grown 60% year-over-year and 147% since December 2021, demonstrating strong demand momentum in the electrical infrastructure sector.

Pitch Summary:
The largest stock contributor was Alchip Technologies in Taiwan which added about 1.4% to returns. Alchip continues to report excellent results on legacy designs, while additional wins with aspiring AI chip developers such as AWS (Amazon) provide future optimism.

BSD Analysis:
The fund manager maintains a bullish stance on Alchip Technologies, highlighting the company's strong operational performance and promising growth prospects. The position contributed significantly to quarterly returns at 1.4%, demonstrating the stock's positive momentum. Alchip's legacy design business continues to generate excellent results, providing a stable revenue foundation. The company has secured new design wins with major cloud providers like Amazon's AWS, positioning it well for the artificial intelligence chip development boom. This diversification into AI-focused semiconductor solutions represents a strategic expansion beyond traditional ASIC offerings. The manager's optimism appears well-founded given the secular growth trends in AI infrastructure and Alchip's established relationships with leading technology companies. The combination of steady legacy business performance and emerging AI opportunities creates a compelling investment thesis for continued outperformance.

Pitch Summary:
We previously wrote about Text (formerly LiveChat) in our fourth quarter 2020 letter. Ever since, the company has continued to exceed our expectations; revenue in the core LiveChat product has grown at a 23% CAGR, as the company managed to introduce a significant price increase for LiveChat last year on top of the ongoing per-seat to per-agent pricing model transition we initially highlighted. Following last year's price increase, the LiveChat product's average revenue per user has increased by 60% since early 2020. While LiveChat still accounts for about 93% of sales and is still growing (26% y/y last quarter), the newer Chatbot and HelpDesk products are also slowly becoming meaningful contributors as well. Chatbot has grown revenue at a 42% CAGR since our initial update and now accounts for approximately 6% of overall revenue. That growth has been driven by 20%+ growth rates in both the total number of paying users and average revenue per user. At only 2% of sales, the company has just recently begun to provide more detailed HelpDesk KPIs, but the revenue generated by the product has grown at a 62% CAGR since our write-up in 2020. We believe both products have long runways ahead as Text can cross-sell each into an existing LiveChat customer base that is 13x and 38x the current customer bases for Chatbot and HelpDesk, respectively. While growth-y SaaS companies have fallen out of favor over the last 18 months, we believe Text remains an attractive investment for the same reasons that we did three years ago. It is growing revenues at higher rates than its competitors while maintaining industry-leading margins and high levels of free cash flow. Part of this has been due to Text's access to lower-cost labor in Poland and a weak Zloty over the past two years (most revenues are generated in USD), but even after adjusting for this, we believe Text sets the standard for what a quality SaaS business's financials should look like at maturity, let alone one that is still in growth mode. Despite the growth investments in the new products mentioned above, the company has consistently returned excess cash flow to shareholders in the form of dividends (4.5% yield at current prices) rather than chasing low-ROIC growth, and these dividends have grown at a 27% CAGR since 2018. At 16x current PE, shares remain attractively priced given the runway for continued double-digit EPS growth.

BSD Analysis:
The manager maintains a bullish stance on Text S.A., highlighting the company's exceptional execution since their 2020 investment. The core LiveChat product has delivered 23% revenue CAGR with successful price increases driving 60% ARPU growth since 2020. The investment thesis centers on product diversification, with Chatbot growing at 42% CAGR and HelpDesk at 62% CAGR, creating significant cross-selling opportunities within the existing customer base. Text's competitive advantages include access to lower-cost Polish labor, USD revenue generation benefiting from weak Zloty, and industry-leading margins with strong free cash flow generation. The company's disciplined capital allocation, returning excess cash via dividends yielding 4.5% with 27% CAGR growth since 2018, demonstrates management quality. At 16x PE with continued double-digit EPS growth potential, the valuation remains attractive despite SaaS sector headwinds.