Company Review

Our company review section examines a number of recent investments and highlights key investment themes in your portfolio: innovation in life sciences, digital transformation, and sustainability.

Charles River Laboratories provides essential products and services to enable pharmaceutical and biotechnology companies, government agencies, and academic institutions to accelerate life sciences research and drug development.  Our experience with Charles River goes back fifteen years and we have seen the company strengthen across the niche markets it serves. The company is a contract research organization (CRO) and the only one with an integrated portfolio that spans the drug research process from target discovery through preclinical development.  As an example of how relevant the company is to drug development, its products and people were used in developing 85% of the drugs the FDA approved in 2018 and 2019.  With over $2.8 billion in revenues in 2020 and over 90 sites around the world, Charles River has over 50% market share of the animal research model market, 30% share of the outsourced safety assessment market, and about 20% share of services for early-stage research and manufacturing support to the biopharma industry.  This 20% share is nearly triple the size of the next competitor.  An underlying driver of Charles River revenue growth is biotech funding, and in the second quarter of 2020 alone, $51 billion was raised by biotechnology companies.  A portion of these dollars will flow to Charles River as it helps the companies pursue innovation. Further, Charles River has capabilities across the development spectrum to help companies develop, test, and manufacture a vaccine for COVID-19.  Whichever companies ultimately produce successful vaccines, they are likely to use Charles River in the process.  CEO Jim Foster has been with the company for 44 years and was named CEO in 1992—his father Henry founded the company in 1947 when he set up a one-man laboratory in Boston, overlooking the Charles River. Jim has been on the forefront of leading innovation in the CRO space, with the company investing over $3 billion in the last ten years to acquire adjacent technologies to provide ever more effective tools for the world’s leading scientists.  Our investment in Charles River augments your partnership’s already strong position in the life sciences space.

In our Q3 2019 letter, we highlighted Gartner’s subscription business on technology information and insight, and how it is increasingly indispensable to businesses. Customers look to Gartner to help guide their technology investment decisions. Recently, while performing due diligence on potential cyber security investments, we heard how important Gartner’s research is. Gartner develops “magic quadrants” to summarize competitive dynamics of specific end markets (Figure IV). Each of the vendors we spoke with pointed to their position on Gartner’s magic quadrant as an important driver of mind share and sales success. Gartner is an arbiter of which technologies are the best and worst and, by implication, which technologies will succeed and fail. Technology vendors compete to win Gartner’s approval and imprimatur, while industry executives consult Gartner research and analysts before making new technology investments. The advent of remote work and the rapid digitalization triggered by COVID-19 should heighten demand for Gartner research as businesses seek expert advice on how to adapt. A subscription to Gartner research has become the price of competing in an increasingly complex, technology-driven marketplace.

Gartner is by no means immune to Covid-19. In Q2, the company’s in-person conferences segment (10% of revenues) canceled all engagements and saw revenues drop to zero, while the company’s consulting business (9% of revenues) saw a more modest revenue decline of 5.9%. Gartner’s core research segment (79% of 2019 revenues and by far its highest profit margin business) enjoyed revenue growth of 6%. Contract value—the combined value of all outstanding research subscriptions and a gauge of future revenue growth—rose 7.2%. Research sales are weak among small and medium-sized customers, and management has guided for a low single digit decline in the business in the remainder of the year. Still, continued growth in Q2 underscores the recurring nature of the business. While the outlook for the conference segment remains uncertain, COVID-19 has created opportunities for Gartner to add virtual conferences, increasing the size and scope of its markets.  Free cash flow could reach $500 million in 2022, and recent weakness in the stock has allowed us to replace shares we sold at substantially higher prices at more reasonable valuations—about 26-times forward FCF versus the average 40-times multiple investors were paying before the pandemic.  

Global Payments is a leading global payments technology company providing innovative software and services to its global customers.  Through cloud-based enterprise solutions, Global Payments enables over 3.5 million small to medium-sized businesses in over 100 countries to accept credit and debit card, electronic, check, and digital-based payments. This means the full process from the point of sale through the authorization, settlement, funding, and processing services.  Global Payments handles card transaction processing for the world’s major international card brands including American Express, Discover, Mastercard, and Visa, as well as a number of domestic debit cards.  Small customer examples include ambulatory physician practices in the United States and cafeteria point-of-sales solutions at K-12 institutions. Their Xenial product provides a single technology platform for restaurants to integrate the hospitality area, the kitchen, and back office in order to improve customer service and keep better control of food and labor costs.  Xenial is backed by over 30 years of enterprise restaurant technology experience and is also used by large enterprises like Taco Bell, McDonald’s, and Subway.  Our position in Global Payments began through its acquisition of our investment in Total System Services (TSYS).  The merger in 2019 created a company with over $6.7 billion in sales. Management expects to recognize over $300 million in cost synergies and over $100 million in revenue synergies. The increased scale and set of software platforms will also enable better fraud analytics and a digital solution that resembles the successful PayPal model—PayPal is more consumer oriented, as opposed to Global Payments’ focus on businesses. The merger has led to new strategic partnerships. In August, management announced a new collaboration with Amazon Web Services (AWS) to transform Global Payments’ core issuing platform to deliver innovative solutions at greater scale. Global Payments’ issuer processing platform handles about 27 billion transactions globally. The company will use AWS services including storage, computer, database, security, analytics, and machine learning to fulfill compliance requirements and enable new cloud-based services. For Global Payments, this increases the potential number of card transactions to over 600 billion, and provides AWS with better understanding of global credit and debit transaction processing technology.  Jeff Sloan became CEO of Global Payments in 2013 following a career at Goldman Sachs.  At Goldman Sachs, Jeff pioneered the development of the payments practice in investment banking, where he led many of the industry’s landmark transactions over two decades.  His vision brought together Global Payments and TSYS, and we think this deal builds incremental value over the next several years.

FMC Corporation is a global agricultural chemical company with nearly $5 billion in revenues out of an $80 billion market.  FMC’s history dates to 1883 when its first product protected California orchards. Today, hundreds of products—grouped into insecticides (60% of revenues), herbicides (27%), and fungicides (6%)—help grow many crops, including numerous fruits and vegetables (19%), soybeans (19%), and rice (11%). FMC completed the transformative acquisition of Dupont’s crop protection business in 2017, and we expect the company to grow revenues at a mid-single digit pace the next several years, which will drive earnings growth of about 10%. Stone Run has a focus on sustainability issues, and we highlight aspects of FMC in this regard. Food supply is critical to human life and optimal use of our natural resources is critical. The United Nations World Food Program estimates COVID-19 will double the number of people suffering from food insecurity, and FMC’s products help improve crop yields, meaning farmers can harvest more produce on less land. Sustainability of our world’s resources requires the farmers feeding the world’s nearly eight billion people to make increasingly effective use of the available arable land used to grow crops. Only 1.4 million hectares of the world are arable versus the total land area of 13 million hectares. The more efficient farming is, the less rainforests and other wild lands will be plowed over and converted to farmland. Farmers need the right crop protection technologies to defend against destructive insects, invasive weeds, and disease. Further, FMC has had a formal sustainability program since 2010. The program includes three categories: innovation, business practices, and environmental footprint.  The environmental footprint provides targets for addressing energy intensity, greenhouse gas emissions intensity, water use intensity, and waste disposal intensity. FMC also incorporates two United Nations Sustainability Development Goals: Goal 2) Zero Hunger; and Goal 15) Life on Land. We think FMC management can help the UN achieve these goals, while also increasing company profits.  Doing good while increasing profits is not a given, and we think FMC plays an important global role.