Aces high

additional research

Hello,

I have been talking about one unique US company now for a year. At the beginning, I thought I was buying unscreenable high quality turnaround emerging from operational difficulties, while major catalyst seemed just in the way. Initially I was wrong and the investment ran into delays I was not expecting. New management came and did what all great managers usually do. Quick fixes, lean focus and prefering to do few things right instead of diverting focus on lots of different things at once.

Crucially, the most important change was that management focused on what they actually can control instead of relying on others. This created opportunity to significantly increase the position in December and then let the operational improvements to play out. It was not long and the improvements from A —> B started to be visible. Suddenly the company posted its strongest quarter in five years with >30% revenue growth for what I believed was a company trading at <10x earnings for 2027. Naturally after pointing the inefficiency up and doubling my position, the share price increased by almost 60%.

Yet… I think the shares are still cheap and the company trades at my estimated 11.6x P/E for 2027 for a business I believe is worth 16-20x due to limited competition, very high ROIC given the products are coming from one facility, capital light expansion ahead is starting to ramp up and the company throws out cash while growing. I estimated that incremental ROIC will land at 35-40% on capacity expansion which means lots of profit could be paid out to shareholders even in the growth phase.

In other words, I still think this GARP investment offers terrific risk/reward from this price and I will look again into valuation, comparison to other successful investment and the most importantly—free option I think market is not realizing. I believe the changes that happened in the last half of the year are a clean sign of my personal investment hurdle—the future is much better than the past. I do not like labels, but I think we will see this company to become a “compounder" for a long period of time. My valuation work tells me 20-26% IRR over the five-year period is possible if management executes like they have done till this point.

Again, I am spending lots of time with companies I already own. To me, this proved to be higher ROIC than just looking 95% of time for new ideas. As I want to get to 6-8 positions portfolio, I want to know more about my companies than to know many companies and there is a high possibility this might end up 15-20% position for me in the near future. So before I release my next write-up, I decided to spend a day on my second largest position. And given that I have new people here on my blog asking me whether this opportunity is still on I decided to dedicate time explaining it.

I would end this brief overview by how I ended this article.

Shares have re-rated or have they not?