market folly

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Alex Wright of Fidelity Special Situations Fund who pitched two longs: Pearson (LON:PSON) and Bunzl (LON:BNZL)


Alex Wright's London Value Investor Conference Presentation

Long: Pearson (LON:PSON)  Wright said that Pearson was the most exciting stock in his portfolio. His Special Situations Fund purchased shares in 2017, the shares are up around 35% since then. The stock performed poorly between 2015 and 2017 losing about 60% of its value. Analysts are negative on Pearson with 3 buys and 9 sells, the most sell recommendations in the FTSE 100. Low unemployment in the US has pushed college enrollments down. Also, Amazon and marketplace sellers have challenged text book publishers by providing a more effective platform for re-selling second-hand text books.

Pearson is a complex business that primarily sells text books and online resources for education. It is primarily US focused. The company is misunderstood by the market. Education is a structural growth area. Pearson has 40% market share in their core market. Education is changing from being textbook/ analogue in delivery to being online/ digital. The cost of delivering digital education is preventing competition from other players and giving Pearson a competitive advantage. They are twice the size of their nearest competitor.  Digital will go from 50% to 80%. The digital model is access not ownership, more like Spotify or Netflix. It will stop competition from course material resellers. Over time digital will reduce the cost base and create a simpler business - £300m cost savings by 2020. Pearson could become one of the highest quality companies in the FTSE 100.

Long: Bunzl (LON: BNZL):  Bunzl is a global distributor and outsourcer making things like plastic forks, coffee cups, and cleaning products. The US is their major market.  EV/ sales has fallen from 0.85 to 0.7 since 2015. Investors fear that Bunzl’s business will get disrupted by Amazon. Amazon does sell most of the products that Bunzl distributes.  Amazon won’t eat Bunzl’s lunch. Bunzl does not compete primarily on price. Their customers use them because they are a one stop shop. They supply Walmart stores in the US with till rolls, cleaning products and light bulbs. Walmart is their largest customer. Costa is another big customer who Bunzl supply with coffee cups. They are better than Amazon at delivering reliably on time. They offer their customers bespoke solutions that Amazon don’t. 

Investors have also been worried about Bunzl’s reliance on single use plastics, the negative environmental impact and the potential for regulation. Bunzl is beginning to address this issue.  Where they have the use of recycled products and wood products have led to higher profit margins.  Bunzl can grow by acquisition. Wright noted that analysts on the sell side find it hard to model businesses that grow by acquisition.


Be sure to check out the rest of the presentations from the London Value Investor Conference 2018.