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Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
2011 Value Investing Congress NotesDay 1:Speaker #1:Seeing Value Through the CloudKian Ghazi- Hawkshaw Capital Management
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Background (from Whitney Tilson)
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Kian has been running this company for 10 years
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Worked at Lehman brothers and is a Wharton MBA
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Firm does some of the most extensive scuttlebutt research of anyone in this business
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Understanding how a manger thinks through his ideas is the most valuable part of attending theconference
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As such, he is going to go really deep into a single idea
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Concentrated value portfolio with a focus on in-depth research
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Long short portfolio
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Extensive primary research: calling customers and former employees to get insights intothe industry
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Trying to confirm or refute their variant view
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They do not use paid networks
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The majority of what they do is cold calls to proprietary contacts who are unpaid
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How do they invest?
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They are value investors but their style goes beyond cheap business
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Look for high quality, one of a kind business.
Does the business have a dominant market share, barriers to entry?
Shown by return on capital (ROC)
Rock solid balance sheet with excess cash and monetizable assets
o
Do a deep dive to try to see land mines before they step on them
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Perform a pre-mortem on an investment
If there is a permanent impairment to the earnings power, what might cause that?
If they can think of a lot of these they will avoid investing
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Invest in a business and not a stock
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Best Idea:
Ingram Micro Inc. (IM)
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Have talked to 25-30 industrycontacts
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employees, customers,competitors
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World’s
largest IT distributor
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1500 vendors and 180K value addedresellers
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$3B market cap, $35B in sales,trading .9x TBV and 10x EPS
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Number one share worldwide
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Number 1 in the US and number 2 in Europe
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Bear case:
Commoditized service in a highly competitive, low margin business
Mediocre returns on capital and thus the stock should trade at book value
Shift to the cloud is a major headwind
If Microsoft, Cisco and HP are trading at 10x earnings, then the middle manshould trade at a lower multiple than those companies
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Subtle industry tailwinds that the market does not understand
Offers a cost effective sales channel to small to medium sized businesses(SMBs)
Industry competitive dynamic is shifting toward a better environment
Cloud fears are overblown
Oligopoly is developing
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Valuation
Book value is a floor to the value
Appraised the business at 100% upside over 2 years
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Why does this opportunity exist?
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Threat of the cloud
Uncertainty leads to an opportunity
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Large cap tech is out of favor
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Margins are at peak levels
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Change in the industry is subtle
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What is the value of 2 tier distribution
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Exists because they are the primary sales channel for selling tech into SMBs
8M SMBs
These firms purchase 40% of all tech products sold
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30% are sold through 2 tier distribution
Other 70% is sold direct or through the 1
st
tier
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Cost effective sales channel
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What is the value to the distributor?
Cost effective sales channel
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outsourced sales
Don’t need a large sales force—
cost effective
Choose to use this to reach SMB than direct
Outsourced credit department
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All outside billing and collections
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One credit worthy company
Outsourced training
Distributor trains the value added reseller
Help with troubleshooting
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Industry Quotes
Comes down to efficiency, logistics and scale
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many companies
don’t
wantto manage sales
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What is the value to the reseller?
One stop shop: one place and one bill
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
This very important and some customers are willing to pay more forit
Source of financing
—
need credit extended by the distributor
Outsourced logistics and fulfillment
Resellers do not have to hold any inventory
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no warehouses
If an order is placed by 5pm then the product is received the next daywith labeling that says it comes from the reseller
Support and expertise
Conferences to help them understand trends
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Realize that price is not everything
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service is very important
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Why is a rational oligopoly in the making?
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4 changes in the industry
Key geographies have consolidated
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less competition
US: top 5 players have a 75% share
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Top 3 do the same thing
Mainly sell PCs, printers, and other computerperipherals
o
Next 2 are slightly different
High touch, low velocity
Ship to products directly to the data center
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Servers
Europe
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Top 5 have 62% share
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#2 and #4 in Germany have merged (# 1 market in Europe)
Synnex is no longer a price spoiler
No longer have to build share fast to achieve the scale they need tocompete
The CEO was the CEO at Ingram
He is focused on return on tangible capital (ROTC) and profits now
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Margins are trending up
Lifting the weight off of the shoulders of the industry
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This reduces pricing competition
Focus on ROC in the entire industry
Was previously focused on growth
Didn’t talk about ROC
at all
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Synnex is now talking about ROC
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Same is true of Tech Data now
Company wants to achieve a ROC 500bps above thecost of capital
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Ingram has a chart dedicated to ROC now
Targeting ROC 300-400bps above the cost of capital
Each company is pursuing growth adjacencies with little overlap
Better growth opportunities and better margins
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