← Chit Chat Stocks
Chit Chat Stocks
Leandro From Best Anchor Stocks Returns To Pitch An Underfollowed Biopharma Winner
00:53:01
Loading summary
Transcript170 lines
- [00:00]
Ryan Henderson
Foreign.
- [00:05]
Brett Shafer
Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.
- [00:33]
You are listening to the Chit Chat Stocks podcast, the place where we help you find your next great investment. My name is Brett Schaefer, joined as always by Ryan Henderson and we have one of our regular recurring guests, Leandro from Best Anchor Stocks, a great substack newsletter that we will link to in the show notes. And we are talking a company I had never heard of before. Leandra mentioned it today. It is actually one of his complimentary research reports. He has a five part series plus a quarterly update on this company that you can go check out. We'll link directly to that in the show notes. You can go read more about his research. The company is called Stevenado. It is in the healthcare supply chain, pharmaceutical supply chain. We're going to get into the details of that. But Leandro, welcome back to the show. Take us through Stevinato's history, how this Italian company started out not a century ago, but close to it and got to where we are today.
- [01:36]
Leandro
Thank you guys for having me. Again, I don't know if it's the fifth time, maybe fifth or sixth time, I can't remember anymore.
- [01:44]
Brett Shafer
Couple times a year at this point.
- [01:46]
Leandro
Yeah, I think so. So yeah, I think it's a good place to start with the history of Stevanado. So the company was founded around 70 years as a specialty glass manufacturer. So basically that's the fancy name to say that they manufactured glass bottles and they were founded initially in Venice. I, I don't want to say the name of how they were founded because I think I'm gonna get it wrong and maybe there's some Italian listeners. So I think it was Sofia Stella was the name of the initial company. Then some years later the company transitioned to a company called ompi, which was in the same sector of specialty glass manufacturing. But not only did they do bottles, but they jumped into more primary packaging, so more broader than the initial company. And then probably one of the most important milestones came in 1971 when they founded a company called Spami, which manufactured the glass forming technology that they used to manufacture the glass.
- [02:56]
Guest Speaker
Right.
- [02:56]
Leandro
So this allowed the company to vertically integrate and focus more on the quality of their glass, which eventually allowed them to jump into the health care industry, where quality is a very important characteristic. And throughout the 2000s, after, they were already operating in the health care industry, but they started specializing much more in healthcare. And throughout the 2000s, they started investing both organically and inorganically into that, let's say, healthcare glass segment. Organically. They built some of the current products, which we'll talk about later, like is fill. That is the ready to fill containment solutions that they have today. That was around the year 2008. And then they also grew through acquisitions, but that was mostly for their engineering segment more than for the containment solutions segment. They acquired a couple of companies that manufactured the technology necessary to become a fully vertically integrated company.
- [04:01]
Guest Speaker
Right.
- [04:02]
Leandro
And then the company eventually IPO'd in 2021 in the height of the pandemic, which a lot of people, when they see the chart, will think it's bad because the stock is still down or maybe marginally up since 20. But I take it as a very positive capital allocation sign because they took advantage of a very good moment to raise capital, right? Because everyone was like all the healthcare industry was booming due to Covid and obviously their numbers look very good during that time.
- [04:32]
Ryan Henderson
So to kind of summarize, there started as a glass manufacturer, and then it sounds like they've sort of evolved into a health care industry supplier, sort of naturally just driven by demand, specifically from that industry. Let's talk about the overall supply chain, slash value chain for the pharmaceutical industry. I myself would consider, would be a novice in this, and I think a lot of people are probably don't have that great of an understanding of it. So what does the overall value chain look like? And where does Steven Autofit?
- [05:11]
Leandro
Okay, so when you're developing. There's several stages when you're developing a pharmaceutical, right? First you have drug discovery, which is basically all the R and D that goes into discovering a drug. Then you have the clinical studies. When you have a drug that you think might work, then you have to go and you get approved by the regulator to go through the clinical studies. You start to try it first in animals and then in humans, right? So then you have the preclinical research is more the animal testing, and then you have the clinical research, which is testing on animals. Then you have to go. If you go through all the phases, which are three phases, phase one, phase two, phase three, you go through the regulatory approval of the drug. If the drug is approved, then you have to go to scale manufacturing, because you have to manufacture the drug in large scale to, to meet the needs of the of the patients. Then you, that's where you, you'd find Danahers, Artorious, Repligen. That would be in scale manufacturing.
- [06:07]
Guest Speaker
Right.
- [06:09]
Leandro
Then you go into packaging which is basically either if it's a small molecule that goes, it's an oral drug, then you package it into your cardboard box inside the like. Well, I think everyone knows how appeal is packaged. And then if it's an injectable, the packaging is in a glass container.
- [06:32]
Guest Speaker
Right.
- [06:32]
Leandro
And that's where Stevanado operates, it's glass packaging company. It's known as fill and finish.
- [06:41]
Guest Speaker
Right.
- [06:41]
Leandro
So it's more in the late stages of the pharmaceutical value chain. And the only thing that's left after packaging is basically the distribution, right. That is done by other companies. So I think that knowing that it stands at the end of the value chain is also important in the context of risk aversion.
- [07:03]
Guest Speaker
Right.
- [07:04]
Leandro
Because you have to think that a pharma company has gone through all these phases to take the drug to market and now they are getting to the packaging phase, which is arguably one of the cheapest phases. But at the same time a phase that if something goes wrong then you can go into very deep trouble.
- [07:21]
Guest Speaker
Right.
- [07:21]
Leandro
I mean if, if something is contaminated due to packaging, then basically you, you face very high legal and regulatory risk.
- [07:30]
Guest Speaker
Right.
- [07:30]
Leandro
And you can face a lot of costs and eventually go bankrupt. And it wouldn't be the first time that a company goes bankrupt because there's some sort of contamination in the drug.
- [07:40]
Guest Speaker
Right.
- [07:40]
Leandro
So I think that's also important in the context of why this space is interesting.
- [07:47]
Brett Shafer
All right, let's go through each segment. There's two of them, one's more important, which is biopharma and diagnostic solutions. And there's also engineering solutions for the listeners. If we shorten biopharma diagnostic solutions to bds, that's what we're referring to. But take us to through the two segments, how you look at them and what they're, what they're serving to their customers.
- [08:10]
Leandro
So as you said, BDS is the most important segment. It's around 80% plus of, of the current revenues. And it basically includes the containment solutions, right? Like the vials, the pens, the, the cartridges, everything like the pen cartridges that go. I don't know if you've ever seen someone who is diabetic inject themselves like the famous TLPs. Well, there goes a pen cartridge that it's classmate that comes from Steven Ado from Shot. Right. So they, that's basically the containment solutions. And then the vial is the little let's say containment solutions where you put a syringe inside and then you take the liquid out. You'll probably have seen that also in the, in the Dr. So that's included in, in BDS, right? But in BDS you also have two types of products. You have bulk products and you have high value products.
- [09:04]
Guest Speaker
Right?
- [09:05]
Leandro
So bulk products and we'll probably get into this in more detail later. Bulk products can be considered more lower quality because it's just the class itself. And then high value, high value products or high value solutions are. It's the same bulk product but Stevanato does some kind of services inside on top of that product so that it's ready to use by the customer.
- [09:28]
Guest Speaker
Right.
- [09:29]
Leandro
So it's basically washing and sterilizing the product and that becomes from that go from bulk to high value products just due to washing and sterilizing. Washing and sterilization was something that the customers typically did in house. So they would order a bulk product or a bulk vial from Stevanado and then they will take it. They would take it in house and they would have their own washing and sterilization lines and they'll go through that process. But now they are sort of outsourcing that capex to Steven ato. So Steven does it in house and then when they ship the product it's already ready for. For to fill with the pharmaceutical.
- [10:11]
Guest Speaker
Right.
- [10:12]
Leandro
Then we have engineering which is a much lower portion of revenue. But it's also important in the thesis because engineering basically is the segment through which Steven Arrow sells equipment for assembly and for vision solutions and everything. So that product is going to be at the customer. It's going to be responsible for assembling like the, the containment solutions can go into a delivery device. For example the example the diabetic, that's a delivery device that contains a containment solution. So then Stead also sells the systems that allow the companies to put that together.
- [10:51]
Guest Speaker
Right.
- [10:51]
Leandro
Also to inspect the containment solutions. And obviously Steven also uses this equipment in house. So that can be thought of as a less sexy business than bds. But at the same time it's what allows Steven Auto to vertically integrate.
- [11:10]
Guest Speaker
Right?
- [11:10]
Leandro
Because Stevenado can offer from the containment solutions to everything that's necessary until that containment solutions is ready to use in a patient.
- [11:20]
Ryan Henderson
Are you tired of moving money between your bank account and brokerage account? Well, with Interactive Brokers there's no longer a need to have a separate high yield cash account. Interactive Brokers offers up to 3.83% interest on instantly available cash. That means if you've got some cash sitting in your brokerage account and you're waiting to deploy that money until you find your next great investment, now it's actually going to be earning something in the meantime. This is just one of the hidden advantages that comes with being an IBKR customer. They simply do not cut corners. And I constantly find myself surprised by just how much they're willing to do for customers that other brokerage platforms are not. If you're interested in checking them out, head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC. So let's double down here on the high value products versus the bulk products. It was a good description. In terms of the difference there it looks like high value products have basically double the gross margins of the bulk products. Is there one side of that that customers, is there one side of that that's growing quicker? I guess what are the margin dynamics like there?
- [12:30]
Leandro
So high value products is growing much quicker than bulk and the main reason is that biologics are taking share of small molecules and biologics are injectables that are pretty, pretty sensitive. So they need better requirements. At the same time there's a trend in the pharma, in the pharma industry to outsource everything that's not core to their business. So they prefer to outsource that to Stevenado than to keep it in house. So they do have double the gross margins but it comes at a cost for Stevenado in the sense that they need to bear the capex now.
- [13:05]
Guest Speaker
Right.
- [13:05]
Leandro
So Seattle was more capital light before high value products than it is today. I always compare this case to TSMC's case because in a sense TSMC will always tell you we have high margins but we have high margins because we have high capital intensity. So when things turn, turn south we need the high margins to defend our underutilization, so to say. So Steado is somewhat similar although I would argue is less cyclical than, than tsmc. Although TSMC doesn't look to be cyclical in the last years. So that's basically what's behind the growth in high value products. Both the rise in biologics together with the willingness of pharma companies to outsource these tasks to companies like Steven.
- [13:56]
Brett Shafer
Okay. I think we Blizzard may understand the outsourcing fairly well. We've had you know, another beneficiary, beneficiary of that, Medpace Holdings, Luis Sanchez if anyone's interested. This, that's another related industry that or company in this industry that People can go listen to that episode, but I want to double click on biologics and these larger molecules. What I thought was interesting in your write up is how this could be a huge decades long, multi decade tailwind of more complex molecules benefiting from, you know, the software stuff that people can use and all the AI drug development stuff. That's about the extent, to my knowledge. It's a very complicated sector. But what are your thoughts on that? Is that a growth tailwind for Stevenado over the next 10 years?
- [14:44]
Leandro
So I think when, when you think about AI, people are automatically going to start thinking about disruption.
- [14:50]
Guest Speaker
Right.
- [14:51]
Leandro
How AI can disrupt your business, what's what it is capable of. The thing is that when I think about AI in the context of the healthcare industry, I think is a pretty asymmetric risk benefit relationship.
- [15:08]
Guest Speaker
Right.
- [15:08]
Leandro
Because it's tough for AI to disrupt, for example biologic manufacturers or the containment solutions. Because first is a physical good and second there's a lot of regulation involved. So what's difficult about 7 hours containment solutions is not to be able to manufacture.
- [15:26]
Guest Speaker
Right.
- [15:26]
Leandro
It's all the regulation that's behind it and how much a mistake can cost. But at the same time, so I see that there's low risk of disruption in that sense because these are physical goods. But at the same time I think there's a huge benefit in drug discovery.
- [15:43]
Guest Speaker
Right.
- [15:43]
Leandro
I mean probably the benefit from AI in drug discovery is to an extent, let's say overemphasized because you need good data to have good AI and data in the healthcare industry is pretty fragmented and probably it's not the best, it's not of the best quality, but I think it's going to be something that helps with more drug discovery and more drug discovery will eventually lead to more volumes and more volumes will eventually lead to more products required from Stevanado.
- [16:16]
Guest Speaker
Right.
- [16:18]
Brett Shafer
Makes sense.
- [16:19]
Leandro
Yeah.
- [16:19]
Brett Shafer
And more, what do they call it? Specific drugs for smaller subsets of the population. Maybe if you can do all that.
- [16:27]
Leandro
Yeah. So yeah. So basically now just due to how expensive is to do research, you need to have a significant population to make a drug feasible. That's why rare diseases require people putting money in because many companies are not willing, many companies are not willing to invest there. But with AI, maybe more of those get treated and then you get more of these coroner cases covered.
- [16:56]
Brett Shafer
Gotcha. Okay, let's talk through the industry specifically Stevenado's part of the industry in which I think is called, and correct me if I'm wrong, the whole bio processing supply chain. Why Are we in a depressed earnings cycle or demand cycle? Why is this industry, in your words, quote, temporarily cyclical?
- [17:17]
Leandro
So I would differentiate bioprocessing from what Stevanado does because Stevenado is including a subset of bioprocessing. But you can have. So Stevenado is more, it's entirely exposed to injectables. But if you eventually have biologics, which are the pharmaceuticals that are created in the bioprocessing process, if you eventually have oral, oral biologics, then Steven Auto will not play in that part of the market. That's going to be hard because biologics are very sensitive to our stomach, to the digestion process. So that's why they get injected, right? Because if you take it orally, then you're going to need much more of the drug to have the same impact as if you take them, if you inject them into your, into your body. So historically the healthcare industry has been, let's say, pretty stable, right? And more so in mainly because people get ill every year and people take their meds every year, right? Regardless of if there's a recession. Steven Atom all of Stevenado's BDS revenue is consumable spaced. So so long as people need to take their meds, Stevenado is going to continue to sell containment solutions. Now with COVID we had a, let's say a kind of special situation, right? Not only because Covid brought more demand, but because it wrecked supply chain. What a lot of customers did was order more right to stock because they didn't want to face supply disruptions. So then companies like Stevenado and a lot of companies in the, in the supply chain started growing above what they should. Not only because we had a pandemic, but also because there was some kind of pull forward of demand because people were increasing inventories. Now the end demand, now we've gone through at this talking, right, mainly in 2024, so the end demand was stable, but the demand for these companies was not, right? Because people were working through their inventories because they thought that they could already work with a lower level of inventories because the situation had normalized. And you also had Covid. Covid went to an endemic state, right? So those two things made this industry look like cyclical, but it was more a thing of destocking and Covid than inherent cyclicality in the industry, right? Because the industry is quite stable. I mean, Stevenado before, this is going to be quite surprising, right? But before 2024, Stevenado grew 1%. In 2024 they, I think it was since 1988 Steven Ato had not had a single year with growth of less than 10%. So 2020, wow. So 2024 was the first year below double digit revenue growth which speaks about the, let's say the how stable the industry is.
- [20:28]
Ryan Henderson
Yeah, it's honestly if you just look at their biologics or sorry Biopharma and diagnostics solutions revenue, their bds, you would not know that they are, that they were a big Covid beneficiary. Like it still looks like they've just consistently grown even as they've gotten away from COVID I'm curious on the CapEx progress, you talked a lot about this in your write ups. Why are they and I guess this is part of one of the reasons. We'll get to this in a second. Why you believe they're potentially under earning at the moment. Why are they investing so much to expand capacity? And I guess follow up, is there any risk to that spending? Do you think there's any risk that they maybe create too much capacity or there isn't enough demand to meet how much they're building for?
- [21:25]
Leandro
So the short answer would be that they are investing in capacity because their customers are asking them to. So everything that's being spent on capex is based on customer commitments. I mean those are not unconcellable. So there's some sort of risk if management decides to over invest.
- [21:44]
Guest Speaker
Right.
- [21:46]
Leandro
But I would say that with what we've seen in the last couple of quarters it's quite the opposite. I mean customers are asking the company to bring forward this CapEx rather than to defer the CapEx. So the main reason why Stevenado IPO was to raise capital to expand capacity. Initially they wanted to expand capacity in China but they put that aside because their customers told them hey, we prefer if you do it in Europe and in the us. So now they are building Fishers in the US and they are also building a new Latina plant. A new plant in Latina. The thing is that what's interesting about the CapEx expansion is that it's sort of modular where you have the shell and then you can qualify more lines if you need to. But it's not like you're going all in without having volume for that capacity. Right. So both Fishers and Latina are already ramping with customer volumes and they are ramping at a good pace. So I am not too worried about a potential over expansion of capacity. Especially because Stevenado is kind of in an island here. I mean they are being super aggressive with Capex whereas their competitors are not being as aggressive.
- [23:15]
Guest Speaker
Right.
- [23:15]
Leandro
So if the growth eventually comes, Stevanado is well positioned to capture a much higher share of that new volume than they were in the past.
- [23:25]
Guest Speaker
Right.
- [23:25]
Leandro
Because they're going to have the capacity in place, especially in the, in the US A lot of customers are also asking for. This is going to be like a term for the, from semiconductors, but a geo dependable capacity.
- [23:37]
Guest Speaker
Right.
- [23:38]
Leandro
I mean they prefer to have capacity both in, in the US in the US and capacity in Europe. So I like that management is being aggressive but this is also playing a role in, in terms of headwinds.
- [23:53]
Guest Speaker
Right.
- [23:53]
Leandro
Because they have two new huge facilities that are under the company wide gross margins. So gross margins are lower than they should be due to this capacity expansion.
- [24:04]
Brett Shafer
How long will it take to grow into that capacity? I guess what's kind of the trajectory any listener should look for whether this is, you know, working or not. And what are the end drivers you mentioned the customers want them to build this, but what are the drivers for them, these pharmaceutical companies to expect more demand from Stevenado.
- [24:28]
Leandro
So on the first question I would say that it's pretty automatic. So as soon as they have the capacity in place, it starts to get filled because it's based on customer commitment. So basically when you have it, you tell the customer, hey, I have it. If you want to put volume, you can already put volume through it. Then on the question on the drivers of demand, I think we've marginally touched on them, but we've not talked about one. So the first one is the rise of biologics. These are mostly injectables, very sensitive, so good for high value products. There's another growth driver which is not exactly a biologic, which are GLP1s. So GLP1s have been huge also for Stevenado. In fact, if you look at the, at the stock price chart you'll see that even when Covid was fading, the company was breaching all time highs and it was mainly due to GLP1.
- [25:31]
Guest Speaker
Right.
- [25:31]
Leandro
So Stevenado is also aggressively expanding capacity to meet GLP1 demand. They have a great relationship with Novo Nordisk but they are also improving their relationship with Lily.
- [25:47]
Guest Speaker
Right.
- [25:47]
Leandro
So they have basically they, they do it for, for all the players, for the big players in the industry. There's also the risk of what can happen if oral GLP ones come.
- [25:58]
Guest Speaker
Right.
- [25:58]
Leandro
Because they are already coming. So Stevenado has been pretty conservative in their estimates and they are estimating more in oral GLPs in the next five years. I think it was the timeline that the industry is estimating.
- [26:13]
Guest Speaker
Right.
- [26:14]
Leandro
So that's also important to take into account because a lot of people are saying, okay, they are going to overshoot capacity because GLPs are going to transition to oral. But the truth is that this capacity already takes into account that a good chunk of future GLP1s will be orals rather than injectables.
- [26:33]
Guest Speaker
Makes sense.
- [26:34]
Brett Shafer
Ryan, do you want to go?
- [26:36]
Ryan Henderson
Sure. Yeah, it makes sense. And I, I could see why that's kind of a sticking point for any skeptics of this GLP1. Well, initially Covid was a huge benefit to them. That kind of waned off. GLP1s came through. That's been a huge benefit. What happens if the primary way of intaking GLP1s is. Is oral? Could Stefan Auto be hurt? Do they split out? How much of their business is GLP1S or is it.
- [27:10]
Leandro
I. I don't think so. They. They say how much is biologics? I don't know if they include now that you say GLP wants in biologics because it's sort of like in the middle ground. But biologics is around 34% of current BDS revenue. But I don't think they talk specifically about GLP ones. But probably it's going to be a good chunk.
- [27:31]
Guest Speaker
Right.
- [27:31]
Leandro
I mean it's not the only thing that they do, but it's the, the most significant growth drivers. I think there are a lot of bears who point to GLPS1 GLP1's fading, but I think this was much more of a bear case when the stock was trading at 30 plus dollars than when it was trading at $18.
- [27:51]
Guest Speaker
Right.
- [27:52]
Leandro
I mean, sure, this can be a headwind if you're taking it into account in the valuation, but this can only be a tailwind when you're discounting it fully in the valuation.
- [28:01]
Brett Shafer
Right, Right. It depends what your time horizon is. If you're someone focusing on a couple of quarters or some sort of miss like that versus you know, riding the entire long term tailwind of I'm sure there's going to be another drug besides GLP1s that eventually come and be be a blog poster. I wanted to use a listener question here. So appreciate all the people on Twitter that asked some great questions in regard to this company. This relates to the capital spending essentially. He's asking or the Twitter account. Twitter user is asking. Everyone is concerned with tariff impacts on the supply chain, which I'm assuming pharmaceutical supply chain. It's going to been a big sticking point for, for the United States presidential administration. How much? This is what the listeners asking. How much are U.S. factories offsetting this impact and how does Stevenado sit compared to their competitors?
- [28:58]
Leandro
So Stevenado is way ahead of their of the, of its peers in building capacity in the US So I think it's comparatively better off in this tariff situation than its competitors, right? Probably. I mean these products are cents, right? So even if you put tariffs on them, probably it's not going to be super significant when you take into account the entire cost of a drug. But if it's significant, then that would be good for Stevenado, which is way ahead of peers in building domestic manufacturing.
- [29:38]
Brett Shafer
Understandable. Okay, let's talk competition in general. Why do you believe this industry that Steven Anno and its competitors is a rational oligopoly? And if I wanted to play devil's advocate, some someone might argue just looking at this from first glance, why can't someone replicate their products? And they could argue, hey, this is just commodity packaging and glass files. Why isn't there a flood of competition coming in and driving down prices?
- [30:08]
Ryan Henderson
All right folks, if you are a regular listener to chit chat stocks, then you know that we use Fiscal AI formerly known as FinChat daily. Fiscal AI is our complete stock research terminal. It's where we have our investment dashboards, it's where we create financial charts, it's where I read all the transcripts for conference calls, sell side events, shareholder meetings. And it has Morningstar's high quality reports on more than 1700 companies. And it really is the complete research platform for stock focused investors. If you use our link Fiscal AI Chitchat, you will automatically get two weeks of Fiscal Pro for free. And if you find that it's worth upgrading, which I think you will, you'll get 15% off any paid plans. With our link. Again, that is Fiscal AI Chitchat. The link will be in the show notes.
- [30:57]
Leandro
Okay, so in the industry there are three main players. You have Steado, you have Shot, which is a German company and you have Gersheimer, which I also think is a German company. I don't want to be like super, I don't want to say this, but Gersheimer is the, the shitco of the group.
- [31:16]
Guest Speaker
Right?
- [31:16]
Leandro
It's typically considered the lower quality and Shot and Stevanato typically compete more head to head. So entry barriers to the industry are pretty high for several reasons. I mean first, Pharma is pretty risk averse, so they've spent a lot of money in developing the drug. So once they get to the packaging, they are not going to take the risk of an unproven solution to save a couple of cents.
- [31:43]
Guest Speaker
Right?
- [31:43]
Leandro
Which is what they would be saving with, with, with a new, a new provider, for example. Then you have to consider that if someone new comes into the industry, they are only going to be able to win new business because past business and the recurring business is locked in by the current providers. Because these packaging solutions are typically specked into the regulatory document. So if in my regulatory document I have that, I'm going to put this in Steven Ato glass vials, then I have to do that or else I would have to go again to talk to the FDA to tell them that I'm changing this. So products can 100% be replicated. I mean it's not rocket science. But the problem is not replicating them, but selling them. So you're not going to be able to sell them even if you replicate them. And this is probably more true now with high value products because you not only have to replicate the product, you also have to give the customer the assurance that you are washing and sterilizing these products correctly.
- [32:49]
Guest Speaker
Right?
- [32:49]
Leandro
Because if you don't do that correctly then the drug can basically kill people. So it's a matter of, a matter of, of trust. And then additionally to stem and auto you have that it's a fully integrated player, right? It's vertically integrated. So they're, the relationship with the customer is not only the, the vials but also through engineering and they can offer the full value chain. I think it's very easy to replicate but very difficult to displace. I don't know if that makes sense, but I don't think that the key here is in the product, but the key here is in the trust that they've built through the decades.
- [33:25]
Guest Speaker
Right.
- [33:25]
Leandro
Shot is also, I don't think it's centenary, but has been operating in the industry for many decades and nobody has come in probably because first it doesn't make sense for the farmers to look elsewhere when you are spending cents and secondly, because you are not going to do that more so when you are risking so many, so, so much money.
- [33:48]
Guest Speaker
Right?
- [33:48]
Leandro
Once you get, once you have your drug approved by the regulator, the first thing you want to do is take it to market because you're wasting money. I think a lot of people think that you get the patent when you start distributing the truck, but the patent starts much earlier than the, than the distribution of the drug. So every month that you're not selling the drug, you're wasting exclusive money that's exclusive to you.
- [34:18]
Ryan Henderson
So that makes sense. And it makes sense that there's some regulatory sort of barriers to entry there in terms of getting on the, I guess FDA approved list or the being seen by the customers as a credible provider. Do they talk at all about pricing like price increases? Has that been a big driver of revenue growth for them or is it primarily volume?
- [34:47]
Leandro
So right now I think they, they probably do small price increases every, every year. But right, right now the main driver I would say besides, well, you have volume as a, as a growth driver but you also have the mix, the price mix.
- [35:04]
Guest Speaker
Right.
- [35:05]
Leandro
Because you are transitioning from bulk to high value products. So a high value product can cost up to 10 times more than a bulk product. So simply transitioning one unit of bulk to one unit of high value product is already a massive tailwind in terms of price mix to the top line.
- [35:25]
Guest Speaker
Right.
- [35:25]
Leandro
So this, the good thing about Steven, something that I like a lot is that when you're projecting a business you need to think about price, price mix and volume. Price. Depending on the competitive advantages, you can take it for granted because if it has strong competitive advantages, you can raise prices. Volume is probably the most uncertain metric of all because you need to forecast the future, which is very difficult. It's probably, probably not entirely under the company's control. And price mix in this case, I think it's also under control of the company. So here you have a company that's probably going to grow low double digits for the foreseeable future with a lot of that growth being simply transitioning from bulk to high value products. I mean most of the capacity that they're installing right now, if not all, is for high value products. So I think that's pretty attractive from the point of view of someone like me who doesn't believe I have a crystal ball to forecast the future.
- [36:29]
Guest Speaker
Right.
- [36:29]
Leandro
I don't need volumes to be incredibly high. I just need this transition to continue, which is evident that it's going to continue because customers are telling them that they are going to order more high value products in the future. So I think that's also what makes Stevanado somewhat attractive.
- [36:46]
Brett Shafer
You mentioned in the write ups that Steven Otto is the only vertically integrated player among their competitors. What does that mean? And do you think that gives them a competitive advantage in either acquiring customers or pricing power over the long term? Any sort of advantage versus competition?
- [37:06]
Leandro
So being vertically integrated basically means that Stevenado has their own glass forming technology. They provide the containment solutions. They Provide the assembly equipment, they provide the inspection equipment. So basically I think this is important because if you have a customer relationship with Novo, you're going to have the customer relationship through the BDS segment and also through the engineering segment.
- [37:32]
Guest Speaker
Right.
- [37:33]
Leandro
So you're basically offering them all of what they need to get that drug from, from the manufacturing phase to the distribution phase.
- [37:42]
Guest Speaker
Right.
- [37:42]
Leandro
So I think, I think that's important.
- [37:45]
Guest Speaker
Right.
- [37:45]
Leandro
Also, Stenado typically touts the glass forming technology as a competitive advantages advantage because they are very in control of the quality of their glass. Right. So that's also pretty important. The only thing that Steado doesn't have is probably the source of the glass, right? The initial material. That's the only thing that they don't have. But they do have the forming technology to take that glass from what they get to being a very high quality containment solution.
- [38:19]
Ryan Henderson
Okay, let's. I feel like we've covered the business pretty well. Let's talk valuation. So this is one that looks a little optically expensive and at the same time, at the moment it doesn't look like it's growing that quickly. Plus we only have so many years of visibility going backwards because it's only been public for I think three or four years now. Why, why do you think this is cheap? And maybe give us some numbers on the current face multiple so people know why it might be a little misleading.
- [38:56]
Leandro
Okay. So one of the things I look for in a potential investment is that the numbers are misleading because that means that a lot of people are basically going to skim through the numbers and just completely pass. Right? I remember that once someone told me like, okay, this is 1% growth for you're paying 40 times earnings for 1% growth. And like this is why there's an opportunity, right? Because neither the 1% growth is normalized. Is suffering from this talking and problems and engineering because there's an additional headwind for 7 auto in that the engineering segment grew so much post Covid that they have had operational problems and the margins are significantly lower than where they should be and they are already correcting those problems. So you had multiple headwinds, you had the destocking which impacted volumes. Then you have the excess capacity because they were building the capacity and then you have problems in engineering. So that means that neither the growth or the margin profile was normalized.
- [39:59]
Guest Speaker
Right.
- [39:59]
Leandro
So that's why I think that those numbers are very misleading. And I think there's a pretty good example of what the business is capable of coming out of this in Q1 when they reported earnings, revenue grew 9% and operating so already much higher and operating profit grew 37%. So it's obvious that the margin, the margins are not normalized, right? I mean Fishers and Latina, both of the new Capex projects are still below company wide margins and they have been below 0% gross margin for a while.
- [40:38]
Guest Speaker
Right.
- [40:38]
Leandro
So they've been losing money on a gross basis also. So I think that's important to, to take into account. I don't tend to say this for many companies, but for Stevenado, I don't think that multiple expansion say of over 1000 basis points over the next 5 to 7 years is out of the question. When you see all the headwinds fading and when you join that with double digit top line growth, I think it's pretty attractive growth profile. And more than the growth profile, I think that what's also attractive is that there's plenty of visibility into this growth and also plenty of stability. Right. Because they're selling consumables in an industry that's going to be requiring these products no matter what. So the good news about, I think Covid was great for people looking at Stevenado in the post Covid era because these numbers wouldn't have been possible without Covid. So I don't want to imply that Covet was great, right? Covid was great in, in this sense, but Kobe obviously was a, was a disaster. So that said, I don't think the stock is super cheap now, but I do think it has, it was significantly, let's say it was pretty cheap when it was in the 17, 18 below $20, right. I think it was pretty cheap because when you put the new margins out, I don't have my numbers in front of me. You could see that the normalized earnings power of the business was much, much higher.
- [42:13]
Guest Speaker
Right?
- [42:14]
Leandro
So the 40 earnings multiple was in reality say 20 something, 30 times multiple. And then on top of that you add that this is a double digit grower in the future, right? So I don't think it was that high as to the what the multiple portrayed. But a lot of people will basically go to the, to, to Finchet for example, they'll see last 12 months 1% growth, let's see the multiple 40 times earnings. And even if you look at the next 12 months multiple, that's not going to be fully normalized because you're taking into account all the transition that's going to happen to high value products.
- [42:50]
Guest Speaker
Right?
- [42:51]
Leandro
So I think that's, that's why there was an opportunity Here, let's talk management.
- [43:00]
Brett Shafer
A lot of listeners asked about the high insider ownership. Some even asked if there's a thing of too much insider ownership. I think the family that owns the company has 80% or more of the shares outstanding. So what are the management incentives, the family ownership history and what do you think of their capital returns strategy if they have one?
- [43:23]
Leandro
So the business was 100% owned by the family before the IPO and they decided to sell around 17% both in the IPO and they did several subsequent capital raises to basically invest in capacity.
- [43:39]
Guest Speaker
Right.
- [43:42]
Leandro
I mean it's a lot, right. 80% owned by the family. But the family has said that in the future they expect to remain the anchor shareholders but to also improve liquidity. I think it is also important to take into account because one of the interesting things about Stevenado is that it's a very high quality company that not many large funds can own because the float is pretty tiny. So then that's also important because if that liquidity improves in the future, then a lot of more large cap or mega cap funds are going to be able to own it.
- [44:17]
Guest Speaker
Right.
- [44:18]
Leandro
Or funds with more aum. So if you look at the list of owners in Stevenado is probably funds with that have, some have significant aum, but most of them don't.
- [44:30]
Guest Speaker
Right.
- [44:30]
Leandro
Because liquidity is quite tight. The CEO is the grandson of the founder, which he is called Franco Stevenado. He currently runs the business. And management incentives are quite good. And that's for a reason. Because when Steven, I know that there was a question around governance issues also with management having, with the family having such a high percentage of ownership, I think management has done, or the family has done a pretty good job in building the right board of directors that were experimented in, in the ipo. So it's not like they want, they don't want to succeed in the stock market. They want to succeed in the stock market. I mean they brought the former CEO and former CFO of West Pharmaceuticals, which operates in the same segment, but it's not in Containment Solutions. But they do the rubber to, to close this Containment Solutions. So I think that's already an indication that they want someone with experience in the stock market.
- [45:34]
Guest Speaker
Right.
- [45:35]
Leandro
They want to do things right. They just don't want to basically sell shares and, and go to the beach. And one of the best things that this new board has done was to institute a management incentive program that was based on or that is based on organic growth and roic. And you can clearly tell that this was coming from Wes Pharmaceuticals because it's exactly the same compensation structure that Wes Pharmaceuticals had.
- [46:07]
Guest Speaker
Right.
- [46:07]
Leandro
So the good news is that seeing ROIC there, you can be more relaxed in terms of the capex because management is going to suffer if the ROIC is not appropriate. So I think incentives are very aligned here. I mean, Franco Stevenado is pretty aggressive with where he wants to take the company, but at the same time they have people in the board and the management incentives also point to them not being able to pursue cost growth at all costs.
- [46:40]
Ryan Henderson
Yeah, I think any time you see compensation metrics like ROIC being a big driver and the company is also putting a lot of money into that IC part, it's usually a good sign that that means they probably are forecasting pretty good demand for that capital.
- [47:01]
Leandro
And if you joined us to the fact that the family Basic basically has like 5 billion invested in the company because so I think it's pretty much most of their net worth. So obviously they are not going to burn money down the hole.
- [47:19]
Ryan Henderson
Yeah, absolutely. All right, last question. I believe unless Brett ends up having any others. It's our pre mortem. It's what we usually ask to wrap up every time. What could go wrong here if, if this investment didn't work out, what do you think would be the big reasons why?
- [47:38]
Leandro
So as I discussed in earlier in the conversation, I think one of the attractive things about Stevenado is the relative safety and visibility into the future. So maybe you're not going to generate 20% returns, well, who knows in the future, but that's not likely. But you may generate double low double digits or mid teens returns with a relatively safe profile of an investment.
- [48:05]
Guest Speaker
Right.
- [48:05]
Leandro
So I think that's also something to take into account. I always try to maximize for risk adjusted returns and I think in that metric Stevanato scores quite high, especially when I started my position. There are several things that can go wrong though. So first is the capex.
- [48:24]
Guest Speaker
Right.
- [48:24]
Leandro
I mean it's based on customer commitments, but these commitments can get canceled in the future or demand might be lower than expected. This doesn't seem to be the case right now because as I said earlier, customers are asking Stevenado to even bring that capex forward because they need the demand earlier than they expected. Then the other risk is oral. So right now biologics cannot be given in oral form because of the sensitivity they have. But who knows what will happen in the future, right? I mean, maybe there's some kind of technology that allows biologics to transform into orals and be as effective as being uninjectables and then this is also important for oral GLPs.
- [49:11]
Guest Speaker
Right.
- [49:11]
Leandro
Because GLPs are already transitioning to oral.
- [49:14]
Guest Speaker
Right.
- [49:16]
Leandro
But GLP1s are not exactly. And they are not a small molecule or a biologic.
- [49:22]
Guest Speaker
Right.
- [49:22]
Leandro
So they are kind of in the middle Then I think one of the most important risks is losing trust. So imagine now that Stefan Ato bears the washing and sterilization. Imagine if something doesn't get correctly sterilized and then there's contamination in a drug and that ends up in legal costs.
- [49:41]
Guest Speaker
Right.
- [49:41]
Leandro
I mean even if those legal costs and end up going to the pharma company that there's going to be a massive loss of trust of what Steven Otto is doing. So quality standards have to be high and they cannot be relaxed in the, in the industry. And then this is a fairly typical one which is execution.
- [49:58]
Guest Speaker
Right.
- [49:58]
Leandro
I mean maybe execution going forward is not the best. I don't think there's a reason to believe that's going to be the case because up to now in the short history in public markets management has demonstrated that they have complied to what with what they have said. I mean it's interesting, right, because when they IPO'd Steven Ado says, said okay, we're going, we're targeting a 10 CAGR in top line in revenue growth over the medium term. So then you got covet, they started growing above that and then you got the destocking and if you calculate the the CAGR now it's like 10. So even though Covid happened they basically caught the kegr. Right. So that's what they, that's what they are targeting and they've managed it for more than 20 years.
- [50:50]
Guest Speaker
Right.
- [50:51]
Leandro
To go to grow at a double digit clip and probably I didn't have the same tailwinds as they have today. So those are the risks that I see. But honestly it's a company that I find hard to find many risks and I think that's besides the growth is what makes it attractive.
- [51:14]
Brett Shafer
All right, I think that's it. Leandro, tell the listeners about best anchor stocks, where they can find your write ups and what type of companies you cover.
- [51:27]
Leandro
So I, I used to cover more the linear compounders that that was because it was easier to do that in, in the, in 2023.
- [51:36]
Guest Speaker
Right.
- [51:36]
Leandro
Or 2022 when everything was crashing. But now I'm transitioning more towards looking for high quality companies that are like Steven Otto might be misunderstood because they're going through a rough patch or their numbers are misleading. So I think we even did we do an episode on on Deere.
- [51:54]
Brett Shafer
Yes sir. Yeah. Yeah.
- [51:56]
Leandro
So that's another example of the kind of companies that I'm trying to find right now. Companies where the earnings power is not apparent to too many people and the numbers are misleading. So many people don't even bother to to dig. De and I share. Well actually Dear and Steven Otto both write ups are for free in bestankerstocks.com so if listeners want to go read them, they have them for free.
- [52:24]
Brett Shafer
Beautiful. Okay, let's hit the disclosure and get out of here. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan I or any podcast guest may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you everyone for tuning in for listening to this episode. Go check out base anchor stocks and we'll see you next time.
- [53:02]
Unknown
If you've been personally victimized by AI advertising, you're about to be pretty disappointed. You know Redis the world's fastest caching solution? Well, it turns out fast caching is a pretty good segue to fast short term memory. And it turns out fast accurate memory is exactly what you need to make AI agents actually work with your data. So don't blame us. It just makes sense. Redis for AI. The right infrastructure, the right tools, the only way to scale. Learn more at Redis IO Genais.