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  • Chris Mayer

International “Outsider” CEOs


Today, I’ll share the list of potential international “outsiders” readers submitted. We’ll also take a look at IBKR’s earnings report.


First, “outsiders”…


“Outsiders” has become a handy (trendy?) way to talk about a kind of CEO. The term stems from William Thorndike’s 2012 book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.


As usually happens when an idea becomes popular, the nuances of the idea tend to get washed out. In his book, Thorndike set the bar high. The stocks of his eight CEOs beat the S&P500 by over twenty times.


In order to explain these outsized returns, Thorndike focused on capital allocation. A CEO has essentially five ways to allocate the capital of a business: buy other businesses, pay dividends, pay down debt, issue stock and/or buy back stock.


How a CEO plays these cards is critical. As Warren Buffett put it: “after ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.”


Thorndike’s select insiders were masters at the capital allocation card game. They “seemed to live in a parallel universe, one defined by devotion to a shared set of principles…” Among these, Thorndike points to the following:


* Capital allocation is the CEO’s most important job.

* Cash flow, not reported earnings, determines long-term value

* Decentralized organizations

* Independent thinking (i.e., no catering to Wall Street)

* Knowing that sometimes the best investment is your own stock

* Patience with acquisitions, coupled with occasional boldness


As I mentioned in last week’s post, Thorndike’s book dealt only with the CEOs of companies based in the US. He plans an added chapter or two covering CEOs in the rest of the world. Who might make the cut?


I don’t know, but readers had their own ideas. Below is the list, with occasional notes from me. (Note: I mention returns down below, but I’m just eyeballing it. I’m not counting dividends. And if there were spinoffs, etc., I missed those too. The point is not the specific returns, but that all of these guys produced big winners).


Ronnie Leten, Atlas Copco. Leten was CEO of Atlas Copco from 2009-2017. During that stretch, the stock returned something like 7-8x. Leten was not a buyback king. But he did a lot of acquisitions and dispositions. (The list is on the website. And it’s long). Over time, Atlas Copco’s margins, ROE and ROA all improved dramatically.


Leten is now Chairman of Epiroc, which is a spinoff from Atlas Copco. Epiroc sells mining equipment and related consumables.


Andrew Williams, Halma. Williams has been CEO of Halma since February 2005. The stock is up about 13x since. Halma has a “who we are” page. After I read that, I still had no idea what they do. It seems they own a lot of different companies that do a lot of different things related to diagnostics and testing. For example, sensors for infrastructure (i.e., elevator safety), various medical diagnostic stuff and environmental monitoring, etc. It’s sort of like Danaher, I suppose, in rolling up a variety of broadly similar companies.


Whatever, it’s a remarkable business with 50%+ gross margins and fat ROEs and ROAs. It’s been a steady grower, spits out cash and is capital-light. The stock has ripped and doesn’t look cheap, but “outsiders” seldom are.


Gilles Martin at Eurofins Scientific. Interesting bullet points from Forbes:


* Gilles Martin is the executive chairman of Eurofins Scientific, a Luxembourg-based laboratory services company listed on the French stock exchange.

* Martin, who founded the original lab in 1987, owns an estimated 25% of the company through the family's holding company Analytical Bioventures.

* His brother Yves-Loic owns an estimated 11% stake.

*He served as CTO from 1998 until 2015 and now is a board member.

*Eurofins has 400 labs in 41 countries and is prominent in food and pharmaceutical products testing.


Stock has been a big winner. Another acquisition machine, but hard to argue with the track record.


Mark Robson, Howden Joinery. Robson is actually the CFO. He’s been at this post since 2005. The stock is up about 5x since then, but got hit hard in the crisis. Since 2009, the stock is up ~33x. What they do is plain enough. From the annual report: “In 2018, Howdens sold over 4 million kitchen cabinets, along with 900,000 appliances, around 700,000 sinks and taps, over 2.5 million doors and close to 3 million square metres of flooring.”


Another really good business, though tied to the housing market and thus cyclical. (Take a look at what happened in 2009).


Bernard Arnault, LVMH. I don’t think he needs much introduction.


Mark Leonard, Constellation Software. Ditto.


Brock Bullbuck, Boyd Group. Not well known, but jeez. The stock is up more than 30x since he’s become CEO in 2010. Boyd runs non-franchised collision repair centers. Surprised this one hasn’t gotten more attention. Another acquisition machine. (I detect a theme).


Lars Stenlund, Vitec Software. Stenlund is the co-founder and CEO of this Swedish software company. The “business model is based on recurring revenue and we grow through acquisitions of mature software companies,” according to the website. A Swedish Constellation Software perhaps? Not surprisingly, given its business model, Vitec seems a very good business with good margins, etc.


David Cicurel, Judges Scientific. Cicurel is the CEO and founder. Judges, founded in 2002, acquires scientific instrument businesses. The stock has been a monster, up 35x or so. Looks like a very good business with 60% gross margins, etc.


Michael O’Leary, Ryanair. Needs no introduction. My goodness. The stock has been whacked. Maybe the only real value play on this list.


Alain Bédard, TFI International. Reader writes: “For a trucking company, he has done a great at increasing EPS, FCF, reducing shares, re-investing, raising dividends etc.”


Two more, from another reader:


“You asked for names of international outsiders, not sure if that would work for you because the company is listed in Israel and all of its reports are in Hebrew, but the owner-operator CEO is an Outsider in any possible way and so is the performance of the stock for over more than two decades. The name of the company is Hilan Ltd.


Another int'l Outsider-ish in a declining business but compounded very well through the years in the UK's Micro Focus. It doesn't 100% fit the Outsider script because insider ownership there isn't all that much but what they have achieved is amazing nevertheless.”


And one more from India, though again not actionable for me: Siddhartha Lal, who is “the current managing director (MD) of Eicher Motors, a director of Eicher Goodearth Limited and chairman and MD of VE Commercial Vehicles. Lal is credited with the turnaround and revival of the "Royal Enfield Bullet" motorcycle (manufactured by Royal Enfield).”


So there you go. All of these might not fit the mold of “outsider” as detailed in the book. But all seem very successful and are surely worth keeping an eye on, if not doing some work on their companies (and perhaps buying their stocks).


I’d add Prem Watsa at Fairfax Financial. (Disclosure: we’re long). The long-term track record is very good, though not so good in recent years. As far as the principles Thorndike outlines (see above), he seems to embrace all of those.


And I think it may be early to add him, but I bet people will be talking about John Elkann at Exor someday in the future as an “outsider.” (Disclosure: we also own this one).


*** Interactive Brokers


Well, IBKR’s earnings were underwhelming. (Disclosure: We own IBKR).


The growth rate at IBKR seems to have downshifted a gear. Overall, total accounts grew by 19% compared to last year. IB added more than 100,000 net new accounts. And client equity grew by more than $18 billion or 14% over the course of the year. So that’s good. But DARTs grew by only 4%. (DARTs means daily average revenue trades).


Trading activity was lower and so net revenues (backing out some non-operational items) were up only 5%. Earnings, thus, came in light. Again, taking out some of the noisy non-operational items (like the mark to market “loss” on the Tiger Brokers investment), diluted earnings per share would’ve come in at 57 cents per share – that compares to 58 cents per share last year.


So, not what you want to see in what is supposed to be a fast grower. Still, DARTs can turn around quickly when volatility returns to the market. And the valuation is reasonable for a firm that you can still expect to grow mid-teens and that has no debt (~20x earnings). Plus IB has fat gross profits, generates good cash flow and is capital light.


The challenge is account growth has slowed. In June, net new account growth was down 22% from a year ago. IB added only 6,200 net new accounts that month. To find a month that low, you have to go back to April 2017, when IB added 5,000 net new accounts.


Now, these are monthly data. You don’t want to make too much of it. Stuff changes quickly. For example, IB followed that anemic April in 2017 with 7,300 new accounts in May and 9,800 in June. In August, IB had a huge haul of 12,700 new accounts – more than double April’s total. It was a good year.


Likewise, 2019 could still be a big year. Thomas Peterffy (founder, chairman and CEO – though he’s stepping down as CEO in the fall) seems to think so. You may recall IB finally unveiled “the rabbit.” The rabbit is basically a simulated sports betting exchange. He’s very excited about this and told analysts on the call that they should try it. (I suppose I will force myself to open an account even though I have no interest in betting on sports.)


Peterffy believes will get new account growth going again. People will open accounts to bet on games. And some percentage will open accounts at IB to trade stocks, options, etc.


Maybe it’s a personal bias, but I don’t find the idea attractive. Then I again, I would be loathe to bet against Peterffy, who is, obviously, a very successful entrepreneur. Here is part of what he said on the call when asked what kind of customers he expects to get on this new exchange:


I started my career in the securities business by going down to the American stock exchange as a market maker, and I was absolutely stunned that all these professional traders on the floor, all they talked about all day long were the games. They didn't talk about the stocks. They were talking about the games and what game they are going to, and they're, of course, betting in a big way.


Even though they were betting, according to my book, with the stocks and options all the time, but they really wanted to mostly bet on the games.

So what type of customers? I mean people who tend to trade stocks tend to bet on games. I don't know why that is because I'm significantly an exemption because I never ever made a bet in my life on a game. But all these other people I was surrounded by, and that's why I kind of felt like an oddball because I wasn't like them. I never bet on the games, and I didn't even know half the time what they were talking about. But it stuck with me that people who trade like to bet on the games.


So I would be speculating if I told you what I expect. But I know that I expect a very, very substantial take-up of this. I mean I'm talking in the millions of customers.”


I bolded the part that floored me. Millions? IB has 645K accounts now. Not even one million. Well. If Peterffy is right, this stock is very cheap and the old high of ~$80 will be something it sails by with ease.


We’ll see. I’m content to hold on and see how the gaming idea plays out. IB reports monthly, as I say, so we will be able to track new account growth. If we get a “very substantial take-up” as Peterffy says, we’ll see it in new account growth.


Thanks for reading.


***

Published July 17, 2019

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