Company Reports

Elevance Health continues to capitalize on its enviable position as the exclusive licensee of the Blue Cross Blue Shield brand in 14 states. We would argue that the Blue Cross Blue Shield brand is the most recognizable and trusted franchise in the US health insurance industry. As the largest Blue Cross Blue Shield operator, Elevance insures a very similar number of medical members as UnitedHealth in the US, which is particularly impressive given its limited geographic reach compared with UnitedHealth's national network. Specifically, Elevance's market share dives deep in its licensed states where it insures about one out of every 3 people. This high local market share remains particularly valuable in health insurance since medical-care providers typically only operate in a limited geographic area, making local market share the most relevant to most reimbursement negotiations with caregivers.

Assa Abloy is the clear global leader in locking and physical access system markets, accounting for about 13% of supply of the global addressable market—estimated to be worth around USD 100 billion. Assa Abloy’s installed-based business model confers the benefit of significant aftermarket sales—contributing about two thirds of annual revenue at high profit margins. Importantly, we think Assa Abloy’s strategic focus areas—customer relevance, product leadership, and cost-efficiency—work to protect, grow, and optimally monetise the global industry-leading installed base of locking and access systems it has amassed over many decades.

SSE is the only integrated British utility. Its wholesale generation unit operates 10.4 gigawatts, of which 4.5 GW is renewable capacity that would almost double by 2028, mostly thanks to the commissioning of offshore wind farms that will underpin earnings growth.

At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with BNSF Railway in the West in 1990, followed by an agreement with Norfolk Southern in the East. Hunt has established a definitive leadership position in intermodal shipping, with a 20%-plus share of a $25 billion industry. The next-largest competitor is Hub Group, followed by the intermodal divisions of Schneider National, STG Logistics, and Knight Swift. Intermodal made up around 48% of Hunt's total revenue in 2023.

For almost a decade, Swiss Re has been missing its stride. Yet, we think this is a top-quality business with some unique assets. More than any other European reinsurer we cover, Swiss puts research and development, data and technology, customer relationships, analytics, and insight front and center when trying to carve out a pure underwriting-based competitive advantage. It has the leading property-casualty claims ratio by a minimum of 1 percentage point. We think it operates with strong natural catastrophe underwriting skill sets, driven by its proprietary risk models and collaboration with leading scientists. Barriers to entry are high because of potential losses, should a business fail to underwrite properly. A new entrant's entire capital base could easily be wiped out. That entrenches Swiss with customers, enhances trust, and increases switching costs.

UnitedHealth operates a top-tier health insurer (UnitedHealthcare), pharmacy benefit manager (Optum Rx), provider (Optum Health), and health analytics franchise (Optum Insight). This integrated strategy has resulted in some of the best returns in the industry over the years and has been copied at least in part by the late 2018 mergers at CVS Health, which added Aetna's medical insurance assets to its retail stores and PBM, and Cigna, which added Express Scripts' PBM assets to its medical insurance operations. With the alignment of these interests, we think vertically integrated organizations like UnitedHealth have the opportunity to help bend the healthcare cost curve in the US, but questions continue to swirl around whether managed care organizations' pursuit of profits outweighs those broader benefits for the US health system.

Scor is a large reinsurance company headquartered in Paris. It operates in over 100 countries, serving many clients from offices worldwide that are connected through a backbone network of application, data, and exchange systems. This allows local access to centralized risk analysis, underwriting or pricing databases, and at the same time allowing information on local market conditions to be shared among the group’s worldwide offices. In addition, through regular exchanges of personnel between group headquarters in Paris and its non-French subsidiaries and branch offices, the group encourages professional development and training across its various geographic markets and lines of business. We think in the case of Scor, investments in risk-analysis, underwriting, and pricing haven’t been good for shareholders. That is because returns on equity have remained anemic.

With over 2,700 locations across the United States and a portfolio of over 20 different banners, no-moat Kroger is one of the nation’s leading grocery retailers. It built its vast footprint through expansion of its namesake banner along with numerous acquisitions of competing chains, giving it an ingrained presence in many US communities. Considering this, an immense top line (eclipsing $150 billion in fiscal 2023) that brings a strong standing with suppliers, and its loyalty membership program, Kroger’s competitive standing appears enviable at first glance.

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultraluxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch's brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation. Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, we see a lack of control over distribution (a little less than 60% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which we believe can be damaging for brands with long-shelf-life products. We believe that the demand for high-end watches is not structurally impaired (around 50% of revenue), branded jewelry offers attractive upside for growth (around 9% of revenue from Harry Winston brand), while lower-priced watches (less than 20% of sales) are stabilizing and growing from a low base as the smartwatch category matures and innovation provides a boost. The company is increasingly taking action to tackle costs in the low-end brands and limit grey market channels for high-end brands while investments in automation should help achieve higher profitability even with lower volumes. We expect Swatch Group’s sales to grow at a 4% pace over the long term (versus low-single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet, and Blancpain, high-single-digit growth for jewelry brand Harry Winston and low-single-digit growth for low-end watches (Tissot, Swatch, Mido, Hamilton, and so on).

Stifel Financial’s revenue and earnings took a step back in 2022 and 2023 as higher net interest income from tightening monetary policy couldn’t offset the effects of fear of a recession on client assets and investment banking revenue. About 20%-25% of the company’s revenue is from net interest income, which grew about 80% in 2022 to $900 million and another 25% in 2023 to $1.1 billion as the Federal Reserve increased interest rates. Net interest income will be a relative area of strength until the Fed reduces rates in response to either a recession or lower inflation. We currently forecast mid-single-digit revenue growth over the next couple of years as winds reverse, with capital markets revenue growth offsetting the effect of interest-rate headwinds on net interest income.

Broadcom is an amalgamation of high-value chip and software businesses that on the whole are differentiated and moaty, in our view. Broadcom is a terrific aggregator of firms, big and small. Its ability to acquire and streamline generates strong profits and cash flow, and fuels its robust dividend. We laud the firm for its execution and operating efficiency, which build upon its large organic investment and help it to outperform its end markets organically.

As the flagship airline in Hong Kong, Cathay Pacific operates an extensive global route network leveraging its dominance in the international aviation hub. The absence of a domestic market means Cathay must rely entirely on international markets. Before the pandemic, the North American market accounted for about 26% of Cathay's passenger capacity, followed by Europe and North Asia (including China), each representing about 20% of capacity.

Strike is the largest holder of gas resources in Western Australia’s Perth Basin with a net combined 1,022 petajoules, or PJ. Growth in resource positions via exploration drilling has been rapid and is ongoing. In a vertically integrated manufacturing strategy, the firm had aimed to take low-cost natural gas from its fields as feed stock for production of urea using renewable energy. However, this more complex plan has been superseded by a gas acceleration strategy which targets up to four sources of gas production coming online by the end of 2025, to be supplied direct to domestic gas customers. The change of heart was enabled by improved WA gas prices, and due to financing for direct-to-market projects becoming available.

Raymond James’s results in recent years outperformed many of its peers, as it has a relatively large and steady wealth management business, made multiple acquisitions in recent years, and booked higher net interest income as the US federal funds rate rose. While we continue to expect fairly steady growth in the company’s revenue powered by its wealth management business, its revenue and earnings growth could underperform peers over the next several years. If we assume a soft landing to the US economy, investment banks will experience a large bounce back in profits from depressed 2023 levels. Raymond James has less exposure to a rebound in investment banking activity with its capital markets business historically being less than 20% of revenue.

After selling DaVita Medical Group in 2019, DaVita focuses almost exclusively on providing services to end-stage renal disease, or ESRD, patients primarily in the United States, although its international footprint is expanding organically and through acquisitions. Over several decades, DaVita has built the largest network of dialysis clinics in the US, and although covid-19-related mortality and labor pressures cut into its profits in recent years, we see brighter days ahead for the firm, despite some challenges emerging on the obesity drug front.

W.R. Berkley's niche focus and strict underwriting discipline result in a business model that has historically earned outstanding returns during hard market pricing periods, but only modest excess returns during soft periods. Still, we think results over the long term have validated the company's approach.

TIM, 67%-owned by Telecom Italia, is the smallest of the three major wireless carriers in Brazil. The removal of Oi from the market in 2022 has greatly improved the competitive environment. While we expect TIM will generate steady results in the coming years, we believe the firm’s modest fixed-line footprint leaves it at a disadvantage to both its larger competitors.

We believe Telefonica Brasil (Vivo) is one of the strongest telecom carriers in Brazil, vying with America Movil to offer converged wireless and fixed-line services across much of the country. Recent consolidation has made the wireless industry much more attractive, but the market still faces several challenges, including a legacy of low wireless pricing and a fragmented fixed-line industry, coupled with economic and political instability. We expect Vivo’s performance will continue to improve over the next couple of years and that its solid balance sheet should enable it to ride out any bumps along the way.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global radio access network, or RAN, market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its branch count, which now stands at roughly 1,600 locations. While this expansive footprint is still an important component of Fastenal’s business model, other strategies—including expanding its product portfolio, its vending and inventory management services, and, most recently, its on-site program—have become increasingly important growth drivers.