Company Reports

Although we still believe that Hennes & Mauritz, or H&M, (the world’s second-largest fashion company in terms of revenue) benefits from scale advantages and brand recognition, we think these are no longer sufficient to guarantee medium- to long-term economic profits in an increasingly competitive environment, hence our no-moat rating for the company.

Fletcher Building is a New Zealand building supplies company. We estimate about 65% of its revenue is tied to residential construction, 25% commercial, and about 10% infrastructure.

The short-cycle nature of demand for Sandvik’s metal-cutting tools and mining equipment exposes the group to cyclical swings in industrial manufacturing and commodity prices. A combination of divestments and continuous focus on ways to improve operational efficiency has successfully created a more resilient and profitable business. However, restructuring programs are frequently required to protect profitability once macroeconomic conditions change.

As one of the major players in the home care sector in China, Blue Moon has been an early mover in terms of product innovation and channel penetration, which has driven above-industry sales growth in recent years. The majority of Blue Moon’s sales come from laundry detergent, where the market has grown at a CAGR of midsingle digits in the past decade. Consumption premiumization coupled with rising per capita income have led to a market transition from powder detergent to liquid detergent. Blue Moon was one of the early movers in the latter category and has been the market leader in terms of value share for the past 10 years consecutively. Likewise, the company’s early entrance in the liquid soap market with competitive offerings has helped secured its number one position during the same period, despite the advent of international peers such as Procter & Gamble and Reckitt Benckiser. These investments in products that could cater for shifting consumer preferences have conferred satisfactory returns for Blue Moon.

Murata Manufacturing is a top supplier of passive components, such as the multilayer ceramic capacitor, or MLCC (40% global share), and surface acoustic wave, or SAW, filters (40%-45% global share). While we acknowledge that shipments of digital devices are slowing down, we believe progress in telecommunications technology will be the driver to increase content per device.

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. ADP had successfully migrated most of its small and midsize clients to its strategic platforms as of fiscal 2021 and will be migrating enterprise clients to its new human capital management platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.

Squarespace offers subscription-based drag-and-drop website-building software that caters to various use cases, including e-commerce, blogging, and portfolio websites as well as stand-alone software for social media content design, hospitality management, and scheduling.

Once the biggest bank in the world, NatWest Group is now a much smaller and mostly U.K.-focused bank with a good retail and commercial banking franchise. The bank also stands on a more solid footing than it has ever had during the last decade. The largest litigation and conduct issues—such as the residential mortgage-backed securities case in the U.S. and the redress for mis-sold payment protection insurance, which had been significant headwinds to performance over the recent past—have come to a close.

Cronos Group cultivates and sells cannabis predominantly in Canada and Israel. With 2023 net sales below CAD 100 million, it is the smallest Canadian licensed producer we cover by far. This hurts its ability to reach scale on overhead expenses, leading us to forecast the company will not reach breakeven adjusted EBITDA profitability within our 10-year forecast.

Paylocity's unified platform appeals to clients who prefer an all-in-one payroll and human capital management, or HCM, solution. Clients can customize through add-on modules, including talent management and benefits administration, alongside core payroll functionality, and integrate with over 400 third-party providers, including referral partners such as benefit brokers. A unique feature of Paylocity's platform is the complementary inclusion of communication and engagement tools, including social collaboration platform Community, and video, survey, and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software into the business.

Banco de Chile’s reputation and long history in Chile have allowed it to attract a large pool of noninterest-bearing deposits, giving it a lower cost of funds than most of its rivals. This funding advantage has contributed to the bank’s impressive profitability, historically delivering returns on equity in the mid to high teens.

D.R. Horton is the largest US homebuilder with an extensive geographic footprint, wide product breadth, and affordable price point. Management is focused on expanding the business while generating steady returns on invested capital and positive cash flows throughout the housing cycle.

Paycor HCM is well positioned to take share in the expansive and highly fragmented small- and midsize-business payroll and human capital management market through industry consolidation and rising demand for sophisticated HCM solutions. At present, most of the small-business market is serviced by regional providers or do-it-yourself solutions such as Intuit QuickBooks or Microsoft Excel, creating meaningful scope for greater penetration by functionality-rich providers like Paycor.

Canopy Growth grows and sells cannabis products primarily in Canada, which accounts for roughly 50% of sales. Unfortunately, the Canadian market is overloaded with too many licensed producers, leading to tough price competition and a stubbornly robust illicit market, so Canopy has yet to reach profitability. We forecast mid-single-digit growth over the next decade for the Canadian market, driven by the conversion of illicit consumers into the legal market. We expect competition to ease as continued industry losses drive consolidation.

Walgreens Boots Alliance is one of the largest retail pharmacy chains in the United States, with over 8,500 locations. Nearly three fourths of Americans live within five miles of a Walgreens location. The company operates in three segments: US retail pharmacy, international, and US healthcare.

Schneider Electric is well positioned for the ongoing convergence of electrical hardware and software markets. Its portfolio of electrical power and industrial automation products exhibits high barriers to entry and will benefit from the secular trends of digitalization, the energy transition and reshoring production, supporting long-term structural growth. Several acquisitions have expanded Schneider’s digital capabilities, leveraging its leading market share in electrical products to further integrate itself with end users’ operations and create more meaningful relationships with customers. The shift away from purely transactional sales toward stickier digital revenue and its continuous focus on productivity improvements has lowered the cyclicality of operating performance.

Siemens is a disparate portfolio of high-quality businesses in different sectors. The spinoff of its cyclical energy and wind turbine divisions has enhanced the group’s return profile and provides more durable returns than in the past. Further deconsolidation appears unlikely. All its businesses have strong product portfolios to compete in long-term attractive end markets that benefit from the secular growth trends of digitalization and the energy transition. In addition, its installed base of long-life industrial equipment requires a constant stream of aftermarket upgrades and maintenance, underpinning its high-single-digit earnings growth ambition.

In the UK, Barclays operates what we believe to be a strong retail franchise underpinned by a market-leading share in credit cards. The international segment is dominated by a bulge-bracket investment bank, one of the last full-service global investment banks headquartered in Europe. It also includes a credit card and current account business in the US and a global wholesale banking operation. Both segments contribute about equally to income.

Berkeley Group Holdings’ focus on large-scale, capital-intensive brownfield redevelopment projects distinguishes its strategy from its UK homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only UK residential developer that regenerates large, complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

Suncorp is a well-capitalized financial services business with a dominant market position in the Australian and New Zealand general insurance industry. In addition to offering insurance under the parent name, key brands in Australia include AAMI, GIO, Bingle, Apia, Shannons, and Terri Scheer. In New Zealand, key brands include Vero, AA Insurance, and Asteron Life. The insurer carries concentrated weather and earthquake risk in Australia and New Zealand and in particular Queensland, which makes up around 25% of gross written premiums in Australia.