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une 11, 2014

!"#$%&' )"*#+,- #&+ ./%&0%&' 1,*2#,,-
WhaL's a valuaLlon consclous lnvesLor Lo do ln Lhe face of markeLs hlLLlng all-Llme hlghs on an absoluLe
basls, and expenslve valuaLlons on a relaLlve basls? 1hls ls a falr quesLlon Lo ask, Lhough we Lhlnk lL also
falls vlcLlm Lo Lhe framlng effecL. 1here are several lmpllclL polnLs embedded ln Lhls sLaLemenL, one of
whlch has serlous consequences for Lhe ulLlmaLe answer-you see, noL all markeLs are hlLLlng all-Llme
hlghs, nor are all markeLs expenslve. 1hls sLaLemenL lmpllclLly assumes LhaL Lhe lnvesLmenL pool ls
resLrlcLed Lo Lhe unlLed SLaLes and Lhe unlLed SLaLes alone. Whlle many lnsLlLuLlons are resLrlcLed vla
mandaLes Lo puL Lhelr lnvesLmenL dollars Lo work ln Lhe unlLed SLaLes, and/or u.S. markeLs, noL
everyone suffers Lhese resLrlcLlons. ?eL, many subconsclously end up Lhe vlcLlms of whaL Lhe lnvesLmenL
communlLy calls Lhe home counLry blas."
Luropean markeLs ln parLlcular remaln some of Lhe cheapesL ln Lhe world Loday. We all know LhaL Lhe
Lurozone wenL Lhrough an exlsLenLlal crlsls of sorLs, and some mlghL argue LhaL Lhls parLlcular crlsls ls
far from over. lurLher, some mlghL argue LhaL Luropean demographlcs are a concernlng headwlnd Lo
long-Lerm growLh (and Lhus equlLy reLurns) amongsL oLher problems. Whlle Lhese are valld concerns,
Lhere remalns a safeLy valve lnvesLors can use Lo Lhelr advanLage ln maklng a foray lnLo Lurope more
palaLable. We have dlscussed Lurope several Llmes ln Lhls forum, sLarLlng wlLh our !uly 2012
commenLary, conLlnulng wlLh our revlew for 2013, and mosL recenLly wlLh our AugusL 2013 noLe.



Cne of Lhe mosL lmporLanL polnLs remalns how global Luropean buslnesses acLually are. 1he companles
LhaL populaLe boLh our porLfollo lnvesLmenLs and Luropean waLch llsL make plenLy of money ouLslde of
Lhe Lurozone Lo Lhe polnL where lL mlLlgaLes Lhe rlsk of Lurozone dlslnLegraLlon, and makes Lhe
demographlcs fears largely lrrelevanL.
Why do we Lhlnk lL necessary Lo make Lhls polnL yeL agaln? Whlle Lhe Lurozone's problems remaln a
concern, we Lhlnk rlghL now ls a cruclal lnflecLlon polnL where pollcy lmperaLlves shlfL from preservaLlon
of Lhe Luro pro[ecL" Lo fosLerlng a recovery envlronmenL. Slnce our flrsL lnvesLmenLs ln Lurope, Lhe
focus of Lhe pollcy communlLy on boLh Lhe moneLary and flscal slde has been Laklng sLeps LhaL bulld
confldence amongsL unlon members wlLh compeLlng lnLeresLs, and bulldlng Lhe lnsLlLuLlonal sLrucLure
necessary Lo Lake Lhe Luro from a largely fragmenLed collecLlon of naLlon-sLaLes, Lo a Lrue unlon of
lnLegraLed economles.


PlnLs of sLronger acLlon had been growlng LhroughouL Lhe early parL of Lhls year, as lnflaLlon was
deceleraLlng and Marlo uraghl was looklng for more creaLlve pollcy measures Lo boosL Lurozone
1he flrmesL slgn LhaL moneLary sLlmulus was lmmlnenL came when Lhe 8undesbank,
Cermany's own cenLral bank LhaL exerclses conslderable conLrol over Lhe LC8, shlfLed lLs sLance from
reslsLance Lo accepLance.
AlLhough durlng Lhe monLh of May, Lhe preclse acLlons Lo be Laken remalned
unclear, everyone ln Lhe lnvesLmenL communlLles marked !une 3
on Lhelr calendar as Lhe daLe when lL
all would Lake place.
1wo key ob[ecLlves are lmprovlng Lhe corporaLe lendlng markeL and weakenlng Lhe Luro, boLh of whlch
would be exLremely poslLlve for Luropean mulLlnaLlonals.
1o LhaL end, we commenced a poslLlon ln a company we had followed slnce we flrsL sLarLed looklng aL
Lurope: Croupe SL8. We Lhlnk Croupe SL8 ln parLlcular has a confluence of favorable LralLs LhaL
sLandouL amongsL Luropean companles. 1hese are worLh hlghllghLlng, below:
1he company ls owned and operaLed by lLs foundlng famlly, collecLlvely ownlng over 40 of Lhe
sLock. 1hls has fosLered an envlronmenL of long-Lerm, sLraLeglc Lhlnklng, wlLh Lhe owners acLlng
llke and proLecLlng Lhe lnLeresLs of shareholders.
Croupe SL8 ls number one, Lwo or Lhree globally ln mosL of lLs key producL segmenLs from poLs
and pans, Lo bread makers, Lo coffee machlnes and waffle makers. 1helr producLs lnclude a
broad array of householder essenLlals, everyday appllances, and premlum accessorles.
1he company owns some of Lhe mosL recognlzable household brands ln Lhe world, llke All-Clad,
krups, 1efal and Moullnex.
WlLh lLs leadlng brands, and global poslLlonlng Lhe company ls able Lo grow conslsLenLly wlLhouL
spendlng a loL of money on caplLal expendlLures. CALx amounLs Lo a mere 3.2 of revenues
annually, on average.
36 of Lhelr sales are ln Lhe Lurozone, wlLh Lhe remalnder around Lhe world lncludlng large
presences ln Asla, norLh Amerlca and LaLln/SouLh Amerlca.
Colng back Lo 2007, Lhe year before Lhe CreaL 8ecesslon began, revenue growLh has averaged
over 7.3 annuallzed, L8l1uA growLh over 10 annuallzed, and book value has compounded aL
over 10.


1oday Lhe company ls Lradlng aL around 8.0x Lv/L8l1uA and 9.8x Lv/L8l1. Slmllar companles ln
Lhe u.S., llke Wllllams-Sonoma, !arden, newell 8ubermald all Lrade aL double-dlglL mulLlples
L8l1uA mulLlples and over 10x operaLlng lncome.
1hls growLh was conslsLenL and perslsLenL Lhrough Lhe CreaL 8ecesslon and beyond, as have
reLurns on equlLy and reLurns on lnvesLed caplLal. 8CLs have conslsLenLly been ln Lhe low Leens
and hlgher, whlle 8ClC has conslsLenLly been ln Lhe double dlglLs, and above Lhe company's cosL
of caplLal
Croupe SL8's balance sheeL ls as de-levered as lLs been, wlLh Lhe company conslderlng posslble
buybacks, whlle also leavlng ample room for accreLlve acqulslLlons-Lhe klnd of whlch Croupe
SL8 has an excellenL Lrack record of pursulng.
Many operaLlng expenses are flxed ln Luros, and Lhe rlslng prlce of Lhe Luro comblned wlLh Lhe
global sales base suppressed growLh and made Lhe company's acLual performance look less
lmpresslve Lhan lL Lruly was. Whlle acLual revenue grew 2.3 annuallzed, organlc revenue grew
aL 3.4. WlLh Lhe LC8 Laklng alm aL weakenlng Lhe Luro, Lhe beneflLs here wlll all flow Lhrough
Lo operaLlng proflL. 1hls has been a headwlnd Lo proflLablllLy for Lwo years now.
1hls ls a heads we wln, Lalls we don'L lose slLuaLlon, for should Lhe Luro rlse, our poslLlon
denomlnaLed ln dollars would lncrease ln value, whlle Lhe company's performance would
conLlnue apace. Meanwhlle, were Lhe Luro Lo fall ln value, our dollar-based poslLlon would
decllne, buL Lhe operaLlng leverage Lo Lhe Luro would greaLly acceleraLe growLh ln proflLablllLy
LranslaLlng Lo a hlgher prlce ln Lurope and a hlgher mulLlple.
lL's very hard Lo flnd companles ln Lhe u.S. Loday wlLh producLs LhaL are noL sub[ecL Lo Lhe dlsrupLlve
lmpacL of Lhe app economy, LhaL are sold globally, capable of generaLlng perslsLenL and hlgh marglns for
Lhelr owners, who also have really cheap prlces. ln LargeLlng a holdlng perlod of Lhree Lo flve years (or
longer) ln Lhe companles we buy, cheap valuaLlon ls an lmporLanL crlLerla ln achlevlng our reLurn
ob[ecLlves. We have ofLen emphaslzed Lhe Lwo key sources of reLurns ln our Llmeframe as belng Lhe
cash flow yleld of Lhe equlLy and Lhe change ln mulLlple over our holdlng perlod. When you can buy cash
flow ylelds well lnLo Lhe double dlglLs, you slmply do noL need mulLlple expanslon Lo achleve good
reLurns. Powever, lf mulLlple expanslon does work ouL ln your favor, Lhan very nlce" reLurns can
become excepLlonal.
ln our work on Lhe company-level, we alm Lo ldenLlfy slLuaLlons where our confldence ln Lhe cash flow
yleld ls hlgh. WhaL we cannoL do ls deflne an exlL mulLlple. Mr. MarkeL ls far Loo LemperamenLal ln Lhls
respecL. We can, however, ldenLlfy slLuaLlons where: a) a glven mulLlple ls slmply Loo low Loday, and b)

where Lhe markeL should asslgn a hlgher mulLlple ln Lhe fuLure were lL Lo LreaL Lhe equlLy more
Conslder: lf you buy a sLock wlLh a 13 cash flow yleld for half of lLs falr value mulLlple, Lhen ln flve
years, were Lhe mulLlple Lo sLay exacLly Lhe same, you would expecL a 13 annuallzed reLurn. Were you
Lo geL a falrer exlL mulLlple, your annuallzed reLurn would be 32 over your holdlng perlod. 1o geL Lhls
32 we assume one buys $1, LhaL compounds ln value aL 13 annuallzed, whlch can Lhen be sold dollar-
for-dollar aL Lhe end of $3 years. 1here ls an embedded assumpLlon here: LhaL Lhe company can
conLlnue Lo lnvesL Lhe proceeds of Lhe 13 annuallzed cash flow reLurn Lo generaLe Lhose very same
reLurns movlng forward as lL has done ln Lhe pasL. 1hls ls where our quallLaLlve analysls becomes
exLremely lmporLanL and ls one of Lhe focal polnLs of our analysls. 1aken alLogeLher, Lhls lllusLraLlon
shows how over flve years, an lnvesLor can Lake a poslLlon LhaL should reasonably earn 13 annuallzed,
or double over flve years, lnLo one LhaL quadruples. 1hls by no means serves Lo suggesL LhaL we expecL
Lo earn Lhese klnds of reLurns ln Lhls poslLlon, or any poslLlon for LhaL maLLer, buL we do spend
conslderable efforL Lrylng Lo flnd slLuaLlons where lf Lhlngs go wrong, we fare well as lnvesLors, buL lf
Lhlngs go rlghL we can earn ouLslzed reLurns.
MulLlple expanslon ls a Lrue performance enhancer (Lhough lLs opposlLe, mulLlple conLracLlon ls a huge
deLracLor). MulLlple conLracLlon ls exacLly whaL people are referrlng Lo when Lhey say LhaL any one
markeL ls overvalued, and Lhus forward reLurns wlll be suppressed. --1he asserLlon of overvaluaLlon ls
merely Lhe argumenL LhaL Lhe mulLlple coefflclenL of reLurns wlll be a drag over your deslred holdlng
perlod. 1hough Lhls may be a problem ln Lhe u.S., flrsL, lL does noL necesslLaLe negaLlve reLurns, second,
lL does noL mean LhaL each and every securlLy wlll suffer from Lhe drag, lasL, and mosL lmporLanL ln our
eyes, lL does noL suggesL LhaL one musL lnvesL only ln Lhe u.S.

1hank you for your LrusL and confldence, and for selecLlng us Lo be your advlsor of cholce. lease call us
dlrecLly Lo dlscuss Lhls commenLary ln more deLall - we are always happy Lo address any speclflc
quesLlons you may have. ?ou can reach !ason or LllloL dlrecLly aL 316-663-7800. AlLernaLlvely, we've
lncluded our dlrecL dlal numbers wlLh our names, below.
Warm personal regards,

!ason CllberL, CA/lS, Cll
Managlng ulrecLor
C: (316) 663-7800
u: (316) 663-1940
M: (917) 336-3066
LllloL 1urner, Lsq.
Managlng ulrecLor
C: (316) 663-7800
u: (316) 663-1942
M: (316) 729-3174

3#45 67"8*"$#&97 %4 &*5 &79744#"%,- %&+%9#5%:7 *8 8;5;"7 "74;,54< 1he vlews expressed above are Lhose of 8CA lnvesLmenL Advlsors LLC (8CA).
1hese vlews are sub[ecL Lo change aL any Llme based on markeL and oLher condlLlons, and 8CA dlsclalms any responslblllLy Lo updaLe such
vlews. asL performance ls no guaranLee of fuLure resulLs. no forecasLs can be guaranLeed. 1hese vlews may noL be relled upon as lnvesLmenL
advlce. 1he lnvesLmenL process may change over Llme. 1he characLerlsLlcs seL forLh above are lnLended as a general lllusLraLlon of some of Lhe
crlLerla Lhe Leam conslders ln selecLlng securlLles for Lhe porLfollo. noL all lnvesLmenLs meeL such crlLerla. ln Lhe evenL LhaL a recommendaLlon
for Lhe purchase or sale of any securlLy ls presenLed hereln, 8CA shall furnlsh Lo any person upon requesL a Labular presenLaLlon of: (l) 1he LoLal
number of shares or oLher unlLs of Lhe securlLy held by 8CA or lLs lnvesLmenL advlser represenLaLlves for lLs own accounL or for Lhe accounL of
offlcers, dlrecLors, LrusLees, parLners or afflllaLes of 8CA or for dlscreLlonary accounLs of 8CA or lLs lnvesLmenL advlser represenLaLlves, as
malnLalned for cllenLs. (ll) 1he prlce or prlce range aL whlch Lhe securlLles llsLed ln lLem (l) were purchased. (lll) 1he daLe or range of daLes
durlng whlch Lhe securlLles llsLed ln response Lo lLem (l) were purchased<