market folly

At the Value Investing Congress today, Timothy Hartch of Brown Brothers Harriman gave the case for longs of Dentsply (XRAY) and Energy Solutions (ES) in a presentation entitled "Quality and Value".

Be sure to check out all of our notes from the Value Investing Congress.


Timothy Hartch (Brown Brothers Harriman)

Embedded below is his full slideshow presentation:



Dentsply (XRAY): Number one company in the dental industry, trades at a discount to “intrinsic value.” Sells consumables to dentists, equipment to labs, and orthodontists. Very attractive industry. Aging population, rising standard of care in emerging markets, private pay in the US.

Big secular story is instead of pulling teeth in emerging markets, they are saving teeth. Dental is private insurance, or out of pocket, so supply and demand determine prices. Over time, there have been 1-2% price increases on top of volume growth. Very fragmented supply market, XRAY has number one, but fewer than 10% market share, can keep making tuck-in acquisitions. Customers are very fragmented, 2-3 person dental offices- no buying power.

Competitive advantage: scale, dominant brands, 2800 person sales force, customer relationships.

Key risks: macro economic weakness, large presence in Europe, integration of Astra Tech acquisition, still recovering from disruption of Japanese supplier.

Revenue declined 2% in 2009. Average rate is 6-7% growth rate over last 20 years. Stock flat over last 5 years, down from 40 to 32 recently on Europe fears.

Valuation: Currently trades at $32, has a $44 target price, 13x 2012 FCF. He says multiple doesn’t look that low, but for this high quality, steady business, this is a good price.



Energy Solutions (ES): Stock has been in total collapse since LBO IPO’d the company. Number one nuclear waste disposal company in the US. Disposal city an hour outside of Salt Lake City. Near-monopoly for disposal of commercial nuclear waste in the US, 95% of it goes through this site in Utah. It has a 30-year remaining life for the current facility.

May have contracts in Japan for their clean up. They have life-of-plant contracts with 84 of 104 reactors in the US. Other 20 they do business. Doing the dismantling of the Zion plant owned by Exelon. There are 12 waiting to be dealt with, and several plants are closing over the next few years.

Obvious risks: political risk, waste risk. Leverage, but generating 40M in cash flow to pay down debt.

Potential Upside: additional contracts with the other 20. Acceleration in large component removals. International opportunities.

Stock trades at $3, they say value $8+ with low single digit revenue growth, modest de-levering.


Q&A Session:

1. How does XRAY create value? Answer: further small acquisitions they can roll up, and stock buybacks

2. How do they measure/predict intrinsic value? used EBAY as an example, they like it, own it now, say intrinsic value over 40. Steady business is easier for them to value.

3. Why XRAY vs. Henry Schein? XRAY is leading manufacturer, not only distributor. Likes the Henry Schein as well.

4. ES public at $23, now $3, how does it get back to $8? Answer- it was promoted as a growth story and the volumes declined instead of growing. Nuclear industry is under a cloud, but this is actually an opportunity for them.


About Timothy Hartch: He manages the fund that won Lipper 2008 large cap fund of the year in 2008.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.