Quarterly Investor Update March 2018 - Golub Group
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Quarterly Investor Update
March 2018
Today’s Speakers
This presentation is for the intended recipient and not to be distributed.
2
Topics
• Market Overview
• Investment Philosophy and Process
• Portfolio Performance and Attribution (2017)
• Portfolio Changes
• Current Portfolio Positioning
• Question & Answer Session
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3This presentation is for the intended recipient and not to be distributed.
4Market Update
• Markets hit all-time highs in January
• Return of volatility in U.S. markets, which is normal
• Interest rates, remain low but are rising
• Tax reform viewed as a catalyst
• Corporate earnings are strong
• Overall, market is no longer cheap nor exceedingly expensive
Our conclusion
• Maintain our discipline, focus our research efforts and accept that
volatility and higher rates will be in our future
This presentation is for the intended recipient and not to be distributed.
5Return of volatility in U.S. markets, which is normal
Jan 2017
Source: Golub Group, JP Morgan Asset Management
This presentation is for the intended recipient and not to be distributed.
6Market Update
• Markets hit all-time highs in January
• Return of volatility in U.S. markets, which is normal
• Interest rates, remain low but are rising
• Tax reform viewed as a catalyst
• Corporate earnings are strong
• Overall, market is no longer cheap nor exceedingly expensive
Our conclusion
• Maintain our discipline, focus our research efforts and accept that
volatility and higher rates will be in our future
This presentation is for the intended recipient and not to be distributed.
7Investment Philosophy
• Good businesses with strong competitive advantages
• Honest and able management
• Margin of Safety: buy at a discount to intrinsic value
• Strong balance sheets
• Long-term orientation
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8What do we do after entering a new position?
• Review quarterly and annual results
• Conduct periodic interviews with management
• Review our valuation assumptions at least once a quarter
• Interview competitors in the industry
• Participate in industry conferences
• Monitor industry and company-specific news
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9Our Ongoing Due Diligence and Process
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Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary.
10When do we add, trim or exit a position?
Add Trim or Exit
Why When Why When
• Allocate more • New information • Control downside • Trim or exit when
capital to the most increased risk when the the business trades
attractive positions conviction in the margin of safety around intrinsic
original thesis shrinks value
• Lower the cost
basis • Stock declined in • Always exit when
price & ongoing new information
research work suggests our thesis
supports the thesis is wrong
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11When the thesis is wrong
Thesis key components How do we validate a thesis?
• Estimate of future earnings (“earnings • Research! Research! Research!
power”) • Extensive debate among investment team
• Fair value of the earnings power members
• Time horizon: 3-5 years
The thesis is deemed wrong whenever the
earnings power or the valuation miss our
initial estimates over the time horizon
Important things to remember
• It’s inevitable that we will be wrong on the thesis from time to time
• Our entire focus after buying a stock is on thesis validation
• A decline in the stock price doesn’t necessarily mean the thesis is broken
This presentation is for the intended recipient and not to be distributed.
12This presentation is for the intended recipient and not to be distributed.
13Position Performance - 2017
Winners Losers
+55% -21%
+49% -18%
+47% -16%
Performance figures represent the percentage change in price during 2017. Individual accounts may vary.
This presentation is for the intended recipient and not to be distributed.
14This presentation is for the intended recipient and not to be distributed.
15Portfolio Changes Since Last Call
New Buys Added Exited Trimmed
These actions reflect changes to the Golub Group Equity model. Individual
results and actions may vary due to client-specific circumstances.
This presentation is for the intended recipient and not to be distributed.
16General Electric (GE) – New Buy
Thesis GE Stock Price
• Industrial conglomerate that owns seven wide moat $32
businesses $28
• Dominant market position in all business segments $24 Buy
• Concerns regarding reported earnings and GE
$20
Capital led to a major selloff in the stock
• Potential to improve profitability in Power segment $16
• Attractive Valuation $12
Recent Developments Research Activity
• New management team outlined a turnaround plan • Reviewed earnings and filings
• New board members with impressive backgrounds • Participated in two industry conferences
• Interviewed CFO Interview Morningstar analyst
appointed to the board
• Conducted four interviews with industry experts
• Adoption of new accounting standards point to
more conservative approach to financial reporting Decision
• Stock trades substantially below intrinsic value
• Initiate a position in the stock
This presentation is for the intended recipient and not to be distributed
Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary.
17Facebook (FB) – New Buy
Thesis FB Stock Price
• 2bn+ users share personal info and interests, providing
advertisers w/ high ROI $200
• Secular shift to digital ads also opens market to small $180
businesses
• Users and revenue growing faster overseas $160
Buy
• Concern about changes to News Feed, declining $140
engagement, and “fake news” overblown
• Valuation attractive $120
Recent Developments Research Activity
• FB Q4 results • Reviewed earnings and filings
• Global MAU +15%, US and Canada +3%, DAU 1.4bn • Reviewed management presentations at conferences
• Continued faster growth overseas • Reviewed competitor earnings and filings
• Slow user growth in US offset by price • Interviewed former employees
• Revenue +47%, EBIT margin 57% • Interviewed industry analysts
• TWTR Q4 • Upcoming meeting w/ FB representatives in Menlo Park
• MAU +4% to 330mm
• Revenue +2% to $732mm, break-even profitability Decision
• SNAP Q4 • High quality business w/ strong growth prospects
• Quarterly average DAU 187mm, unprofitable • Stock trades below intrinsic value
• Buy
This presentation is for the intended recipient and not to be distributed
Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary.
18Owens-Illinois (OI) - Add
Thesis OI Stock Price
• Largest manufacturer of glass bottle packaging Add
$26
• High barrier to entry and switching costs
• Monopoly position in several key markets $24
• Valuation doesn’t reflect business quality and $22
earnings power $20
$18
Recent Developments Research Activity
• Q4 results • Reviewed earnings and filings
• Revenue growth of 4% • Participated in two industry conferences
• Earnings growth of 10% • CFO private meeting in SF
• Continued to execute on margin • Interviewed and note exchange with largest
improvement initiatives investor in OI
• Launched a $400 million share buyback
program Decision
• Thesis remains intact and stock very cheap
• Added to stock
This presentation is for the intended recipient and not to be distributed
Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary.
19Chipotle (CMG) – Exit
Thesis CMG Stock Price
• Pioneering restaurant model w/ attractive unit economics $500
• Sales rebound driven by traffic (new menu items, marketing,
$450
mobile app) and price increases Buy
• Unit growth potential in US and franchising overseas $400 Add
• Valuation reasonable based on recovery trajectory and cheap Exit
$350
relative to historical earnings power
$300
$250
Recent Developments Research Activity
• Q4 results • Reviewed earnings and filings
• Traffic continued to decline, indicating price increases • Visited restaurants
could hurt traffic • Stress-tested valuation model
• New menu items not performing well
• Little detail around new growth initiatives Decision
• Increased investment in areas unlikely to boost traffic • CMG undervalued assuming partial recovery, but not
or revenue relative to current trajectory
• No update on CEO transition • Management actions not having expected results
• Lowered FV estimate and confidence in estimate
• Considered possibility of excellent CEO hire…and bad hire
• Thesis broken, so exited position
This presentation is for the intended recipient and not to be distributed
Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary.
20Mondelez (MDLZ) - Exit
Thesis MDLZ Stock Price
Add
• Iconic snack food brands (Oreo cookies, Ritz crackers,
$47
Trident gum) with #1 or #2 global market share
• 38% of sales from fast growing emerging markets $44
• Post spin-off restructuring plan to drive margins and $41
earnings growth $38
Trim Exit
• Activist investors Trian and Pershing Square applying $35 Buy
Add
pressure on management
• Undervalued relative to earnings potential
Recent Developments Research Activity
• Q4 results • Reviewed earnings and filings
• Revenue growth not meeting expectations • Reviewed management presentations at industry
• Margin improvement, but below estimates conferences
• Activist Trian has reduced investment • Stress-tested valuation model
• Recent CEO departure creates uncertainty around
company’s strategic direction Decision
• Margins improving but at a lackluster rate,
resulting in a reduction to fair value.
• New CEO creates uncertainty around strategy.
• Fair Value reduced so exited.
This presentation is for the intended recipient and not to be distributed
Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary.
21Deere (DE) - Trim
Thesis DE Stock Price
• Largest provider of ag equipment
• End markets were in a cyclical downturn $165 Buy
$145
• Significant competitive advantages
$125
• Valuation didn’t reflect mid-cycle earnings power $105
$85
Trim
$65
Recent Developments Research Activity
• Continued demand recovery in end markets • Reviewed earnings and filings
• Q1 results • Reviewed competitor earnings and filings
• Revenue growth of 23%
• Operating income growth of 52% Decision
• Thesis is playing out as expected
• The stock not as cheap
• Reduce the position to control risk
This presentation is for the intended recipient and not to be distributed
Transactions represent what is conducted in our mutual fund GGEFX; individual accounts may vary.
22This presentation is for the intended recipient and not to be distributed.
23Healthy Earnings Yield and Strong EPS Growth
Jun 2014
Jan 2016
Note: EPS growth for 2018 is based on Bloomberg-provided consensus estimates.
This presentation is for the intended recipient and not to be distributed.
24This presentation is for the intended recipient and not to be distributed.
25End of a 35 year bull market in bonds, rising rates to follow?
Dec 2016
Falling dollar improves
competitiveness and
helps foreign earnings
translations
Source: Strategas Research Partners
This presentation is for the intended recipient and not to be distributed.
26Year-to-date yields have shifted across the curve
Dec 2016
Falling dollar improves
competitiveness and
helps foreign earnings
translations
Source: Bloomberg, US Treasury Actives Curve 2/20/18
This presentation is for the intended recipient and not to be distributed.
27Whatever the reason for rate rise, caution is in order. Shifts in
rates have clear and direct impact on bond prices
• Inverse relationship between interest rate changes and price changes
Price Reaction to Yield Shifts
(2.75% Treasury Note due 2/15/28; Current YTM 2.85%)
Current
Investors accept lower yields Price Investors demand higher yields
Yield curve shift -1.50% -1.00% -0.50% +0.50% +1.00% +1.50%
Resulting Price 112.400 107.790 103.390 99.194 95.190 91.369 87.723
Price change 13.3% 8.7% 4.2% -4.0%
Falling dollar improves -7.9% -11.6%
competitiveness and
helps foreign earnings
translations
Source: Bloomberg, GT10 Govt TRA
This presentation is for the intended recipient and not to be distributed.
28Our strategy: Quality, underleveraged issuers; laddered
maturities weighted toward short end
Golub Group Balanced Composite
Bond Maturity Schedule
Weighted Average Maturity ~2021
Falling dollar improves
competitiveness and
helps foreign earnings
translations
Source: Golub Group, AdvisorView as of 2/27/18 for accounts included in Balanced Composite as of 12/31/2017
This presentation is for the intended recipient and not to be distributed.
29This presentation is for the intended recipient and not to be distributed.
30This presentation is for the intended recipient and not to be distributed.
31For more information, please contact your Advisor or visit www.golubgroup.com This presentation is for the intended recipient and not to be distributed. ©2018 Golub Group LLC. All rights reserved.
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