This week’s reading list: We listen to where CalSTRS one of the largest investors in the world is allocating funds, we try and make some sense of bond markets, we look more at the psychology of luck and try to figure out if AI can beat the market? Find out more in the list below…
🎙️ CalSTRS: How the $300 Billion Pension Fund is Allocating in 2023 (Money Maze Podcast)
This week’s reading list: Value Investing? What To Do When All Your Stocks Appear To Be Losers? We hear from investing giants, Joel Greenblatt, Howard Marks, David Einhorn and Jeremy Grantham. Find out more in the list below…
Electrical products distributor and services provider, IPD Group Ltd (ASX: IPG) was listed in December 2021 and is an ASX rarity: the company has seen sustained share price growth since its IPO despite the market turmoil of 2022, especially in small caps.
Last week our head of Australian Equities, Ron Shamgar held an investor briefing where he discussed IPD, below we share our write up and the video of his views on the business and its outlook over the next 12 months.
IPD Group operates in two primary business areas: the distribution of electrical products and the provision of electrical services. The Company serves as a distributor for electrical product manufacturers, typically based overseas, who want to distribute their products in Australia. This division is responsible for the majority of the Company’s revenue. Additionally, IPD Group offers a variety of services including installation and commissioning, calibration and testing, maintenance, repairs, and refurbishment. The services division contributes to approximately 10% of the company’s revenue.
While IPD Group’s business and share price performance has been stellar over the past 12 months, the company is still flying under the radar and is well positioned to benefit from structural tailwinds in years to come.
As the world continues to take steps towards reducing carbon emissions, one area of business that is expected to experience exponential growth is the electric vehicle (EV) market. As a vertically integrated provider of end-to-end solutions to the Australian EV market, IPD Group is in a prime position to take advantage of this trend.
While EV charging solutions currently account for a smaller part of IPD’s business, this is expected to change rapidly in the coming years. In April 2022, IPD Group acquired Gemtek Group, a turn-key energy management and EV solutions provider, to expand its offerings in the electric vehicle charging market. IPD Group also distributes ABB’s electric vehicle chargers, which positions the company as a leader in this space.
According to recent data, Australian EV sales almost doubled in 2022, with 3.8% of all new cars purchased being electric. As more consumers switch to electric vehicles, the demand for EV charging solutions is set to skyrocket. In 2022, there were 4,943 public chargers in Australia, but only 464 of these were fast chargers. This means that Australia needs approximately 20 times more public chargers in 2030 compared to today to meet the growing demand for EV charging infrastructure.
With its acquisition of Gemtek and its distribution of ABB’s electric vehicle chargers, IPD Group is well-positioned to take advantage of the growing demand for EV charging solutions. The company’s end-to-end solutions for EV charging will be critical to the success of the EV market in Australia. As more consumers make the switch to electric vehicles, IPD Group will play an important role in building the infrastructure needed to support this growing market.
While IPD Group may be seen as an unexciting industrial company by some investors, the reality is that it is exposed to a number of areas poised for growth. The company boasts a robust balance sheet, consistently generates profits and is paying out a reasonable dividend. We think IPD Group’s stable financial position and potential for growth make it a wise choice for those seeking a small cap with big potential.
Disclaimer: IPD Group Ltd (ASX: IPG) is currently held in the TAMIM Portfolios
In this week’s reading list we cover off on articles discussing – how mobility is changing cities, a gem from Warren Buffett, a discussion with Investor Peter Keefe about playing the long game and whether the bond market is overplaying the risk of a deep recession and more. Find all the “good stuff” below.
📚 Infrastructure technologies: Challenges and solutions for smart mobility in urban areas (McKinsey and Company)
📚 Warren Buffett on raising stake in Japanese trading houses (CNBC)
According to the International Energy Agency (IEA), electric vehicles (EVs) account for only 9% of new cars sold today. This is expected to rise dramatically over the coming years, with a fleet of over 300 million anticipated by 2030, totalling 60% of new car sales. Governments around the world are putting in place both incentives and restrictions to accelerate adoption – even in Germany, which agreed to new restrictions on internal combustion engine (ICE) vehicles with the European Union by 2035 just this past week.
Investing in companies that benefit from megatrends (or “structural tailwinds” as the finance community likes to say) such as the rise of EVs is a time-tested approach to generating wealth. An industry that is growing makes it much easier to generate higher sales each year, just as Visa (NYSE: V) and MasterCard (NYSE: MA) have benefited from the rise of electronic payments, Amazon (NASDAQ: AMZN) has led the way in online retail, and Booking Holdings (NASDAQ: BKNG) has profited from the transition to online travel bookings.
There’s obviously no shortage of people aware of the trend towards EVs, as you can see from the share price of the industry’s most popular maker, Tesla (NASDAQ: TSLA). The high expectations and size of Tesla’s market value today (around US$600 billion) mean it’s less likely that investors will see big returns from this point forward. Rather than directly investing in an EV manufacturer, it can also be extremely profitable to invest in an industry’s “picks and shovels” – that is, the parts and components that go into a major product rather than the product itself. Take traditional ICE vehicles, for example. Over the past 10 years, General Motors and Ford’s share prices have increased ~22% and ~2% respectively (excluding dividends), while O’Reilly Auto Parts and Autozone (two companies that supply car parts) returned a whopping ~770% and ~560%.
One popular way to take advantage of the growing EV market (and other global megatrends) might be an investment in semiconductor manufacturers.
Quick Primer: Semiconductors
A semiconductor is a substance that can operate as both a conductor (it can carry electrical charge) and an insulator (it prevents the flow of electrical charge). Combining semiconductors with insulators and other materials, engineers are able to precisely control the movement of electricity. Semiconductors are therefore a critical component in a host of electronic equipment, such as computers and other consumer electronics, telecommunication devices, and automobiles. Depending on how they function (whether or not they are sensitive to the type of voltage or current), semiconductors are typically classified as either “Digital” or “Analogue”. Analogue semiconductors are used to convert ‘real world’ phenomena (such as temperature, pressure, sound and light), and are usually integrated into a product’s design (such as an automobile’s powertrain control device). They rely less on having cutting-edge technology, but more on skilled and experienced people. These factors mean that companies with expertise manufacturing analogue semiconductors can typically maintain a stronger market position over time.
Two that might be worth considering are Marvell Technology Group (NASDAQ: MRVL) and Texas Instruments (NASDAQ: TXN).
Much More than a Calculator
Texas Instruments (NASDAQ: TXN) needs no introduction for those with a love of high school mathematics, which often required students to purchase a scientific calculator. The business is much more than this, however. Texas Instruments is a diversified semiconductor supply, with approximately 77% of the company’s revenue generated by analogue semiconductors, industrial (40% of 2022 revenue), automotive (25%), personal electronics (20%), communications equipment (7%), enterprise systems (6%), and other (2%). There has been consistent growth in the Company’s automotive and industrial businesses, which accounted for 65% of revenue in 2022, up from 42% in 2013. In automotive, Texas Instruments specifically focuses on five sectors: infotainment & cluster; advanced driver assistance systems (ADAS); hybrid, electric & powertrain systems; passive safety; and body electronics & lighting. Texas Instruments traces its roots back to 1930, and has an ambition of making electronics more affordable through semiconductors. As well as benefiting its customers and society at large, it has also produced stellar financial performance, including:
11% free cash flow per share CAGR (2004-2022)
19 consecutive years of dividend increases, 25% CAGR (2004-2022)
47% share count reduction (2004-2022)
95th percentile return on invested capital in the S&P 500 (2022)
92nd percentile in S&P 500 cash returns as a percent of revenue (2022).
No wonder it was a favourite of famed investor Peter Lynch, author of “Beating the Street” and “One Up On Wall Street”, whose Magellan Fund at Fidelity Investments generated a compound annual return of 29.2% between 1977 and 1990.
Deal-Maker Poised for Megatrends
Listed on the share market in 2000 near the height of the “dot com bubble,” Marvell Technology Group (NASDAQ: MRVL) is a diversified semiconductor manufacturer. It operates 5 reporting segments: data centres (35% of quarterly revenue in 4Q 2022, which ended 28 January, 2023), enterprise networking (26%), carrier infrastructure (19%), consumer (13%), and automotive/industrial (7%).
Marvell has a history of deal-making, and has acquired more than 10 companies since its founding in 1995. The largest of these transactions was in October 2020, when the company acquired Inphi for USD $10 billion. This added Inphi’s leading electro-optics interconnect platform to Marvell’s business, and enhanced its position in 2 leading megatrends: 5G and cloud computing. In fact, Marvell estimates that the merger expanded the combined company’s total addressable market (TAM) to more than $23 billion, which is anticipated to continue growing at a 12% compound annual growth rate (CAGR). Marvell’s revenue jumped 50% the following year as a result of the deal, and continued to climb in 2022, with a further 32.7% growth.
Growth in 2022 was in part due to another acquisition, this time Innovium, which makes networking ethernet switches optimized for the cloud. Management sees this as a complement to the Inphi transaction, as well as to the company’s existing expertise in data centres. While the cloud business has historically performed strongly, it was an uncharacteristic point of weakness in Marvell’s recent quarter, with sales declining 13% from the prior year’s quarter. Fortunately, the company’s diversified business model paid off, with overall revenue increasing by 6% due to strong growth in enterprise networking, carrier infrastructure and automotive/industrial, which should increase further in future periods.
Conclusion
Identifying companies that benefit from megatrends is a great strategy for finding long-term investment winners on the share market. Sectors such as EVs, cloud computing, and 5G are emerging as key growth areas of the economy over the coming years, and companies in these sectors are likely to benefit as “a rising tide lifts all boats.” Instead of focusing on the headline acts, semiconductors (the “picks and shovels” of these industries) might prove even more profitable over the long run – as we have seen in the past with the likes of automotive parts. With Texas Instruments firing on all cylinders and the Marvell share price significantly depressed (as supply chains have eased the dramatic semiconductor shortage during the pandemic), now might be the time to dive in and charge up your portfolio.
