Eurofins (EPA:ERF)
Lost Credibility
Testing is important, it’s like having a fire detector.
Gilles Martin, Eurofins’ Founder and CEO
After successes and, above all, mistakes, I have become increasingly comfortable with my current (and now more polished) investing philosophy: searching for good businesses (not necessarily great) trading at reasonable valuations that are run by (preferably) outsiders. Sounds easy enough, right?
Outsiders are understood by some as a synonym of “polarizing managers” (love them or hate them), but my definition of an outsider is the following:
Someone who is able to swim against Wall Street’s current and that simply “gets it.”
Capital allocation is a simple enough topic to understand (invest as much cash as possible in value generating projects, return the rest to shareholders), but yet very few executives of publicly traded corporations apply rigorous and counter-cyclical capital allocation (in many cases because they don’t even know what their business is worth and they are not incentivized to know it). I believe that, when an investor finds the rare combination of…
Someone who “gets it”
That is meaningfully aligned with shareholders
That is willing to unlock shareholder value (typically the outcome of combining (1) and (2))
In a company that is trading at a more-than-reasonable valuation
…that investor is likely to do well over long periods of time. I firmly believe today’s company satisfies each and every one of these characteristics.
The investment thesis in Eurofins is pretty straightforward. It can be summarized across the following bullet points which will be discussed in more depth later in the report:
Eurofins is a well-managed and (very) resilient business
It’s run by an outsider who owns a significant stake and is willing to unlock value for shareholders (maybe, just maybe, because he remains the largest one)
It trades at a demonstrably low valuation
The thesis is not free of risks and execution has not been perfect, but one thing outsiders have in common is that they don’t let their mistakes get in the way of countercyclical capital allocation. This report will go over the following:
Section 1: What Eurofins does
Section 2: The growth levers and the lost credibility
Section 3: The transformation (?) of the financials
Section 4: Management, Incentives, & Capital Allocation
Section 5: The valuation
By the end of this report you should understand why I believe Eurofins is poised to deliver a >15% IRR for its shareholders.
Without further ado, let’s jump right into the first section. I’ll share the PDF below.