Guys, I have a final round at a long-only shop at the end of this week. They are a relatively concentrated bottom-up, fundamental style investor (20 - 40 positions), manage > $50bn and I have been asked to come in and give an elevator style pitch for a long - no longer than 5 minutes to give it.
I have my stock and my outline sorted. If anyone would be kind enough to critique any points I plan to raise, then it would be much appreciated.
Given this is purely verbal, I do not have a structured thesis typed out however I do have a basic structure on how I prepare to pitch it as well as the salient points.
Will happily PM to anyone who is interested. Many thanks in advance!!
Your short idea should be the elevator company that installs elevators that take 5 mins...
I'll take a look at it if you PM it over
me too..PM me
Pm me.
Pm me
PM me
dude...just post it here
PM me I’ll have a look
Happy to take a look
PM meh
Apologies for the delay in sending, having problem with my PMs (not certified yet)
I will post here for simplicity. Thanks very much to all that have provided comments so far, they have been very helpful. The version below does not yet reflect any comments received. As it is a purely verbal pitch, my notes are structured kind of 1/2 thesis and 1/2 speech notes. I will not be reciting the below verbatim but it will be my general structure and these points are by no means complete as I will certainly elaborate as talk through it with the interviewers. Again, thanks very much all!
Vestas Wind Systems
Vestas is a EUR 12bn Danish listed company involved in the production and servicing of wind turbines globally and has consistently held the market leading position in both, with a c. 18% market share, this leading position has been stable for many years. Truly global footprint with manufacturing centres across 8 key countries. The company trades at 14x P/E and 10x P/FCF - it is an ideal candidate for a long-term buy and hold strategy.
The wind turbine industry experienced extremely high growth in its infant years and as production costs have fell, so too as the levelised cost of energy (20% fall in the last 3 years) and as the market starts to mature, wind power is becoming a truly viable alternative to traditional energy sources and is now cheaper than nuclear and gas in many countries.
Vestas has emerged as the global leader and is well positioned to gain the most from this maturing market, consistently producing strong levels of cash flow year on year as well as the most profitable compared to peers with industry leading margins, ROIC of 26% / CROIC of 34% both substantially above the cost of capital of 7%, produces ROE of 28% and pays a healthy dividend yield of 2%. The balance sheet is also rock solid, with no short term debt, EUR 500m long term bond and EUR 3.7bn cash - currently sits at 2.0x net cash / EBITDA.
Aside from just the production of wind turbines, the servicing segment is an important segment of the business, accounting for 15% of revenue and 20% of EBIT. Upon the commission of wind turbines, customers are tied into annuity-like, multi-year operation and maintenance contracts in case the turbines fail. Given Vestas' unparalleled global presence, it is a lost production factor lower than its peers at 1% - this has led to both the continued renewal of the annuity-like contracts as well as winning new contracts from the competition.
Vestas is currently trading at a discount due to its c. 20% fall in share price in late 2017. As the market has matured, the industry has moved away from government subsidy based purchases to open market auction based purchases, over the last year this has put downward pricing pressure on wind turbine manufacturers and several including Siemens Gamesa and Nordex have issued profit warnings. Vestas has issued no such profit warning yet has trimmed its guidance for 2018 margins and free cash flow, both still remain market leading. Vestas remains best placed to continue winning auctions due to its localised business model, customers favour those who have a local presence in their markets and this is key competitive advantage for Vestas, particularly in the US, which is a key global market in the wind industry. A global manufacturing and servicing footprint gives Vestas lower transportation and production costs which leads to more contract wins - the sharp decline in the share price is a case of an out of favour sector with analysts that are throwing this superior company out with the bathwater. Being the number 1 supplier in USA, investors have also fled Vestas due to the Trump administrations threat to cut the production tax credit (PTC) for the sector however recent tax legislation has shown this threat has not materialised and the rhetoric on the industry appears to be softening.
Going forward, downward pricing pressure is set to subside and the demand for wind energy is only going to grow at an ever faster rate. Developed countries constantly demand more electricity and as they look to reduce their dependence on fossil fuels and meet carbon emission reduction targets via clean energy sources and wind is projected to take a significant portion of this. OECD countries are also shifting to wind as the cost of producing wind energy is falling below that of traditional means of energy production.
Vestas gives you an opportunity to purchase a 34% CROIC market leading business with a strong net cash position that has promising growth prospects for 14x P/E and 10x P/FCF. Whilst short term industry headwinds certainly exist, for an investor with a 5 - 8 year investment horizon, it is an excellent compounder.
So the real risks is industry dynamics. Cheap to itself. Maybe Best Buy in the sector, but the real analysis would be a deep dive in wind power economics an outlook.
I’ve seen cheap stocks get crushed because the industry changed and they lost pricing power.
Either things stabilize and you own a cheap stock that wil compound or the industry takes it down.
Suppose are the attractive return on capital and valuation metrics implicitly based on a government-subsidised pricing (and potentially volume) environment or do they reflect the more competitive market place Vestas will play in going forward. Is this a market leading business, but in a sector which is over-earning due to government subsidies by 20% / 30% / 40% / 50%? Is wind an obvious beneficiary of growing electricity demand given its unpredictability and challenges around energy storage? Any working capital nasties which make the balance sheet less attractive than it might at first appear? Agree with the above comments that the accounting and whether or not this is a good company in a bad industry would be key areas of focus.
You are probably right on the 5-8 year thesis, but nobody is willing to wait that long. With that said I see signs of a good management team and high quality. If I were you I would elaborate on the penchant for conservative guidance.
What is exact status of PTC impact? Will this impact customer financing, if so how and what are the alternatives?
How are they accounting for earnings from the service contracts (another LTSA GE situation...)?
Send it over!
Posted it in the thread a couple of hours ago, please see above.
Thanks very much!
So just a quick technical thing I've learned from pitching to different funds...keep in mind their AUM relative to your target co's market cap.
You say they manage > $50bn, so lets call it $50bn, and have 20-40 positions. Lets call it 30. An equal weighted portfolio would have an average position size of ~$1.7bn. A position that large in your target co at EUR 12bn would equal ~11.5%. At that point your position is large enough that the firm would be required to make numerous filings etc and that can be a headache. So...unless its a AAA idea / the firm doesn't mind being the largest shareholder or making SEC disclosures they will probably not be interested.
This isn't to knock your idea at all. But I've been in situations before where I've pitched ideas to PMs where my target co's market cap was too small to make sense for the fund and their ears basically turn off / lose interest.
But if this is just an interview exercise to see how you do analysis wise I doubt it'll be a problem.
To be honest I noticed that too. Is it realistic for a $50 billion fund to only have 30 positions? I feel like their investable universe might be only a 100 names. So that data point in the fund only holding 30 positions didn’t make sense to me.
. just saw the comment below
I think first comment addressed a key issue. This almost seems like a long-term macro/sector call vs. individual stock picking. Yes it looks like it generates good margins, nice returns on its capital, and trades at what seemingly is a reasonable valuation. But can all of this continue over the next 10 years? That seems like a macro call on wind. Now if we're talking L/S...
yep I’ve learned what not do by experience.
Offshore oil looked cheap years ago. And 4-5 years ago no one thought oil below 80 was sustainable. Even the shale guys. Yet somehow the shale guys figured out how to produce profitably at 40 and ate up the pricing power of the offshore guys.
They seem like similar industries to me. Large cap-ex energy infrastructure. Not saying wind will go down that path, but it’s why I think it’s a macro call and not a valuation trade. If you can really prove it’s just temporary noise/headwinds then the stock looks attractive.
Your best bets in these type of industries are the firms with operational leverage and very high P/E ratios. If the industry has bottomed out and maybe has some tailwinds all of a sudden pricing power returns and earnings can skyrocket. I think alcoa may have fit that definition and some of the chemical companies I think it’s name is chemera a citron short that went up like ten times.
A novice value investor (who hasn’t been hurt yet) buys on pe at peak earnings. Then gets crushed. Banks are sort of an example in 2008-2009. Looked cheap backwards but ended up expensive forward looking.
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