John Lewis, Osmium Partners — “Compounding and Engagement” and value creation

Notes from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 9, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Osmium focuses on small stocks ($100 million to $1 billion) and on long-term holdings (2-4 years, which gives you an advantage in learning more about the company).

They have a wall of fame and wall of shame in their office.

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Osmium 8 process for picking stocks and managing investment.

-low valuation
-growth ability
-good capital allocation

-understand Porter’s five forces, industry structure, barriers to entery
-customer experience, does it make sense for their customers
-good return on capital

-companies with little or no debt
-management teams with meaningful stake

Businesses blend shareholder, employee or customer interests, and sometimes this gets out of balance and the company is in jeopardy. That creates an “engagement” company where they need to change, while “compounders” can simply go along and build.

His stocks:

ePlus (PLUS) — 5X EBITDA despite huge growth in recent years.

IT services, evolving from what was an IT procurement business.

They aggregate a bunch of different verticals — distributor, value-added reseller, IT solutions, and services and integration.

They’ve had a 19% annualized return for ten years and is at a 40% discount to peers.

People discount them because they have subsstantial debt, but it’s not “real” debt — much of it is accounts payable and non-recourse.

THey have long-term vendor relationships and a big and diverse customer base, but one key risk is that Cisco is 47% of their business. These are sticky customers — ePlus really represents Cisco to their customers (Cisco brings them in to many deals, they’re one of the largest service providers Cisco uses).

They have opportunities to grow in “complex solutions” and to grow to the expand more to the west coast. They’ve been able to grow revenue/employee and /customer substantially over a decade, and Osmium thinks EPS can jump from $5 to $13+ over the next five years.

They have $500 million of capital to deploy over the next few years ($400 million is their market cap, so that’s a log), and the smaller competitors are consolidating.

ePlus has been a compounder as they’ve grown EBITDA at 13% CAGR over a decade, and it should be able to grow ...

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