The heatwave has been quite something. I’ve been trying to make the most of it, but unfortunately the timing has coincided with a very busy period for me at work. I’ve also become acutely conscious of just how unprepared London’s infrastructure is for heatwaves. Commuting has been particularly unbearable. It’s been more difficult to take advantage of this time to work on the blog. Hopefully the hot weather hasn’t been clouding my judgment, as I think I’d been becoming overly bullish about near term market prospects. That is until Thursday’s and Friday’s falls in US tech stocks brought me back down to earth.
This was a very busy week for results for the companies in my portfolio. I had results from three of my biggest positions: Burford Capital, Mastercard and Moncler, all of which were ahead of expectations. Burford Capital’s results were spectacular in exceeding analyst forecasts, a feat it has been achieving consistently for several years now. Moncler’s results also thrashed expectations. However, instead of rising the share price actually took a bit of a hit, as some investors apparently were spooked by cautious comments made by the COO about ‘very challenging comparatives’ for the second half of the year. This reaction seemed perverse to me and likely to be short-lived, so I added to my position. Possibly on reflection I was a bit hasty to do so. It might have been better to wait and see.
I also had results from Moody’s, Howden Joinery and new holding Paypal. Howden’s results were ‘in line’ with expectations but frankly a little disappointing so I sold out quickly, aborting my short-lived trade at about break-even. Moody’s and PayPal’s results both marginally beat expectations and looked pretty decent. In addition to Paypal, I’ve also started a new position in Pharmagest, a French company I’ve had my eye on for a while now.
PayPal needs little introduction. Originally spun out of Ebay, it provides an online payment system platform. In the last few years it has made a number of small acquisitions to increase its capabilities. I am very bullish on the payment platform sector in general and it makes sense to add PayPal to my portfolio to complement my existing holding in MasterCard.
- Business economics: as a payment platform, you’d expect PayPal to benefit from excellent economics: good cash flows, low marginal costs and big economies of scale should mean very high profitability. PayPal has respectable profitability, with both ROCE and operating margins in the mid teens, but not as high as you might expect. I think this is because it is a newer business than something like MasterCard and is still investing heavily in capex and acquisitions to enable future growth. It is also likely to have quite a bit of latent pricing power it is yet to exploit. I would expect profitability to improve substantially over time.
- Track record: PayPal only split from EBay fairly recently in 2015, so it’s track record is not long. However, it already had a lot of success as part of EBay and has shown fast and consistent growth since the split.
- Competitive advantage: PayPal benefits from the excellent combination of being a first mover in a two-sided market. This means it can benefit from network effects. There are also likely to be significant switching costs on the merchant side. The markets for online and mobile payments are new and dynamic and PayPal does face competition from innovative new competitors. However, I’m pretty confident that PayPal’s scale and first mover advantage will give it an enduring edge. It is also employing the sensible strategy of buying out innovative new competitors while they are still relatively small (e.g. notably Venmo) to add to its own capabilities.
- Growth prospects: despite already being a very large business I think the growth prospects are the real draw. The overall market for online and mobile payments is still pretty nascent and likely has a huge growth runway ahead as they are increasingly adopted across the world. PayPal is the business that I’m most confident should be able to take an increasing share of this market in the longer term. I think its platforms will also give it a lot of opportunity to branch out into selling other complementary services to merchants.
Momentum is good. I bought as the share price was breaking out to new highs and shortly before Dan Loeb of Third Point waxed lyrical about the growth prospects here. However, in the last two days the share price has pulled back following its results, despite these being ahead of expectations. The valuation is on the high side but appears reasonable to me given the long term growth prospects.
Pharmagest is a French company that provides various software tools to the healthcare sector. Its main business by far is in software for French pharmacies, where its suite of software tools help with various functions such as stock management, billing, profit optimisation and group ordering and patient monitoring.
- Business economics: Pharmagest has a capital-light and profitable business model. Its operating margins and ROCE are consistently in the twenties and its cash flows are healthy. Most of its revenues are recurring.
- Track record: the track record is exceptionally impressive, with revenues and profits growing very consistently for a number of years. Growth in profits have far outstripped growth in revenues over time, possibly indicating a high level of operational gearing. I’m particularly impressed that the 2008 financial crisis had little impact on the share price, indicating a stable and defensive business.
- Competitive advantage: Pharmagest’s competitive advantage looks to be very solid to me. It is a pretty obvious monopoly in its core French pharmacy market (about 75% of its revenues). It is the number one player covering about 40% of pharmacies in France. Provided it maintains quality, I expect that its customers would be very reluctant to switch to competitors given the importance of avoiding any disruption to their business. It is a smaller player in its less established markets, though these generally appear pretty fragmented.
- Growth prospects: there are not immediately highly exciting growth prospects but I think the long term growth runway is very good. The markets for software services to pharmacy and healthcare more widely are highly defensive and likely to experience secular growth for years to come. In addition, while Pharmagest already has a very high share of the French pharmacy market, it is also making some headway in a few other geographies and related healthcare markets.
The business is currently performing well, issuing a positive trading update back in May. The share price momentum is good over the medium term, but in the shorter term I’m buying a dip in this case rather than a breakout. The valuation is fairly high but I think justified by the longer term prospects and defensiveness of the business.