Friday, Oct 29th 2021
We’ve initiated a position in shares of Thermo Fisher Scientific (TMO) for Titan’s Flagship portfolio, using the proceeds from a sale of Fidelity National Information Services (FIS) and Visa (V).
Additionally, we’ve rotated our positions in the cloud services space to capitalize on what we believe to be a material change in the risk/reward outlook for Twilio (TWLO), trimming our position in ServiceNow (NOW) to increase exposure to Twilio.
We believe these trades — the first changes made to Flagship in 11 months — may offer clients three key advantages: - Exposure to the secular growth of healthcare; - Consolidated positioning in the hyper-competitive payments space; and - An improved risk/reward outlook in cloud services.
The COVID-19 pandemic and efforts to develop safe and effective vaccines have highlighted the urgency of supporting research to cure, treat, and mitigate public health crises.
One of the leading life sciences companies supporting public health institutions and companies is Thermo Fisher Scientific (TMO).
By revenue, TMO is the largest player in the life sciences tools (LST) industry, offering the broadest portfolio of products in the category. LST can be thought of as providing the “picks and shovels” to the healthcare and testing industries. LST companies provide both the scientific instruments, consumables, and raw materials needed for R&D and production, and we believe TMO is best-in-class.
TMO is a business that checks all of our boxes as a high-quality compounder with what we believe to be defensible moats, excellent management, and sustainable growth tailwinds.
Favorable demographics, advances in life sciences research, and increased political will to fund deeper explorations into the potential of modern medicine are all tailwinds that we believe may power continued growth of this sector. In its latest investor presentation, TMO management outlined its view that the company’s long-term organic core revenue growth should average 7-9%, a meaningful upgrade from historic levels.
The predictability and durability of cashflows for companies in the LST space has seen this group historically trade at a ~25% premium to the S&P 500, a premium we believe is warranted and are comfortable paying.
The payments industry is one of the most dynamic in the global economy.
Competition among established players and new entrants has created a scramble to acquire merchants and users as digital transformations reshape the way consumers spend and save their money.
We believe it’s the right time to consolidate our exposure in the sector.
Since adding FIS to the Flagship portfolio in May 2020, performance has been disappointing.
FIS shares have declined 14.9% net of fees since initial inclusion in the Flagship strategy through the close on 10/27/21. The net of fees return for FIS year-to-date stood at -18.6% through the close on 10/27/21, the worst performer among current Flagship holdings by more than 6 percentage points.
Since the company’s acquisition of Worldpay closed in 2019, FIS has steadily improved both its revenue and earnings growth profile with the help of $430M+ in cost synergies realized from this acquisition thus far. However, these synergies have taken longer to play out relative to our expectations, which has kept an overhang on the stock and resulted in underperformance on both an absolute and relative basis vs. industry peers.
We believe this prolonged timeline—coupled with a dearth of meaningful catalysts to drive the stock higher in the near-term—warrants reallocating capital toward what we believe may be better risk/reward opportunities for Titan clients.
Visa shares have also disappointed this year, falling 0.9% net of fees through the close on 10/27/21. The company’s most recent earnings report was a particular disappointment, with Visa guiding to slowing revenue growth in its current quarter compared to higher growth expectations of industry peer, Mastercard (MA).
In eliminating FIS and V, we are consolidating our holdings in the payments space to Flagship holdings PayPal (PYPL) and Mastercard (MA); Opportunities holding PAR Technology (PAR); and Offshore holdings PagSeguro (PAGS) and Adyen (ADYEY).
We believe Titan clients remain well-positioned to benefit from the secular growth of the payments industry, with recent moves creating what may be, in our view, a more favorable risk/reward.
Following its third-quarter earnings report, Twilio was punished harshly by investors.
Shares of the company fell 18% on Thursday after its organic revenue growth and guidance decelerated and Twilio announced the departure of its Chief Operating Officer, George Hu, after five years with the company.
Both headlines appear negative at a surface level, but on deeper investigation, we believe a decline of this magnitude in the stock is unwarranted.
We believe investors are having trouble understanding the company’s true growth rate given noise related to COVID, and Twilio’s full-year bottom-line outlook remains intact after Q3 results were better than expected.
In our view, Twilio management also telegraphed that Hu’s departure is in pursuit of a CEO role at another company, not the result of a disagreement with the current executive team at Twilio. Additionally, the team had been creating a transition plan for some time given Hu’s expected eventual transition.
Given our view that Twilio may be able to continue generating top line growth of 30%+ over the next several years, in-line with management guidance, we believe the market’s reaction to these particular developments is short-sighted. As long-term investors, Thursday’s price action created an opportunity for our clients we felt we should seize.
In order to best position our clients within the cloud services sector, we’ve sold a portion of our holdings in ServiceNow (NOW) to fund this deeper investment in Twilio. While we remain positive on ServiceNow, we believe Twilio offers a more attractive return profile after the recent sell-off.
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