The Fund recently established three new positions. Could you explain the reasoning behind the purchases?
1. Ashtead is the owner of Sunbelt Rentals, the second largest equipment rental business in the U.S., offering a range of forklifts, backhoes, aerial work platforms, scaffolding, etc. to their construction and industrial customers.
Renting equipment is often cheaper and easier than outright ownership – customers eliminate a large capital expense and convert a fixed cost into a variable cost. As a result, the rental portion of the market has been growing and today accounts for about 55% of the overall U.S. market, a share we expect to see increase further over time. The U.S. equipment rental industry remains quite fragmented with the top five competitors accounting for less than 30% of the market and thousands of small operators at the bottom. Larger players, however, enjoy important benefits from economies of scale, and so can promise better availability, quality, and timeliness of delivery, factors that are important to customers. In addition the larger the rental company is overall, the better it can service regional and national customers and the more buying power it has over equipment manufacturers.
Leveraging these advantages, Sunbelt has grown, through organic growth supplemented by small acquisitions, from just 2% market share in 2002 to 8% share today. Sunbelt’s goal is to achieve 12% U.S. market share in the medium-term, and 20% share long-term, objectives we consider quite achievable. If Sunbelt is successful in achieving its goals, the company could compound earnings per share at a mid-teens or higher rate per annum over the next decade.
2. Camping World Holdings is the largest RV retailer in the U.S., operating more than 200 stores. We estimate Camping World has roughly 13% market share by revenue while the number two player has just under 2% share. As in the case of Sunbelt, scale gives Camping World important advantages, such as substantial volume discounts from suppliers and lower-cost financing. As a result, Camping World is able to offer its customers low prices and garner what we believe to be the highest margins in the industry.
Due to its position in the industry, Camping World is often the only buyer for Mom and Pop RV dealers looking for an exit. Camping World is able to buy these businesses cheap and make them more profitable. We believe between opening and acquiring new stores, Camping World will be able to double its store count in the next five years and continue to increase market share well after that.
Today, Camping World is trading close to all-time low valuation levels – 6.0x our estimate of 2019 EBITDA – as a result of cyclical concerns and investor anxiety regarding a large recent acquisition. However, we believe that these fears are overblown, and the current price represents an attractive entry point into a high-quality business with the potential to compound value at an attractive rate for a long time to come.
3. Metro Bank, a new entrant in the U.K. banking market, was founded by Vernon Hill, one of the most successful U.S. bankers of the last 40 years. Hill’s success in the U.S. was based on a business model that emphasized fanatical customer service and robust, low-cost deposit growth. Metro Bank is essentially this same model, exported to the U.K.
The U.K. has one of the most concentrated and ossified banking industries in the western world and this concentration has stifled competition and fostered abusive business practices. Most U.K. banks are open only 35 hours a week, take seven days to open an account, and are difficult to contact on the phone. Metro Bank, by contrast, is offering U.K. customers first-rate facilities in prime locations, branches that are open 76 hours a week, including Saturdays and Sundays, account opening in less than an hour and call centers in London answered by a live person.
Unsurprisingly, the reception from the British public and business community has been spectacular, with deposit growth averaging £75 million ($96 million) per branch per year, despite virtually no advertising and paying below market interest rates. Additionally, by attracting deposits at a below market rate, Metro can take a conservative approach to lending. As a result, credit losses have been minimal so far, and we expect them to stay low relative to other banks over time. We expect that over the next five years, Metro will be able to increase its deposit share from 0.5% to about 2%, and achieve higher profitability as branches mature and overhead expenses are leveraged. We anticipate robust earnings growth over the period.
A hallmark of the Fund is low turnover. Why do you favor long holding times?
We focus on companies that we believe have exceptional management, a competitive advantage, and a large growth opportunity. We purchase positions with the expectation to hold them for five to 10 years, or more, which allows the long-term business results to drive the majority of returns. Our intensive, fundamental research provides the confidence to own companies that we believe can weather various economic cycles and produce above average business and investment results over time.