Card Factory: Deleveraging

What were the last results of Card Factory ($CARD)?

On May 3rd, Card Factory published its annual report for FY 2022.

The revenue went up by 27.8% year-over-year, reaching GBP364.4 million. But, this is not a good comparison because last year, several stores were locked down due to the COVID-19.

Like-for-like sales, considering locked-downs, decreased by 3.9%, but it is achieving its pre-pandemic level in a year without restrictions.

Online sales went down, but they are still higher by 30% than before the pandemic. According to the Management, this is due to three factors:

  • Expansion of product range
  • Improved customer experience
  • Change in customer behavior

The main message the Management sends is that despite the hard times of the retail closure, Card Factory has remained the leader in UK greeting cards sales. Its market share was reduced to 20% in 2020, but in 2021 it achieved 24%, and they expect to achieve its pre-pandemic level of 33% soon.


Card Factory Market Share 2021


Below we can see the revenue distribution among the different channels.


Card Factory Mix 2021


What is the primary Strategy of Card Factory ($CARD)?

The Management points out three main strategic lines:

  • Increasing breadth of product offering
    • It means adding additional products or complements used in greeting parties or given as presents.
  • Create a full omnichannel offer
    • This is a trend we also saw in Inditex. Integrating the physical stores with the online business can give Card Factory a significant advantage over its competitors.
    • They are also implementing features such as purchasing online and collecting in the stores.
    • Combining both worlds in a sector with so many references and at the same time with an enjoyable experience in the stores can increase loyalty and recurrent revenues.
  • A robust and scalable central model
    • Another strength Card Factory can use against the competition is its vertical integration.
    • Its cards and products are designed, manufactured, and retailed in-house, which gives them more control over the products and more information to exploit.


What is the Outlook for Card Factory ($CARD)?

The Management has confirmed its expectations of returning to FY2020 results (GBP451.5 million in revenue, an increase of 24%).



What is the intrinsic value of Card Factory ($CARD)?

The intrinsic value will vary widely depending on how much growth we are willing to input in the calculation. If according to the Management, CARD returns to FY2020 results, we would be talking of GBP76 million of Operating Profit.

Considering the expected growth and history, we could expect a multiple of 15. So multiplying the forecasted Operating Profit by the multiple, removing the current net debt (GBP192.3 million), and dividing it by the number of shares (342.37 million), we would get a target price of GBp276.81 (almost four times the current market price).




Inditex: Back to normal

What were the last results of Inditex ($ITX)?

On June 8th, Inditex released its first-quarter results, where basically, they disclosed a significant rebound due to the increase in traffic in its stores.

In the report, first of all, they remind us of the three main strategic pillars that guide their operations:

  • Store & online integration
  • Digitalization
  • Sustainability

Even being quite schematic at this point, I like that they refer to them. It helps clarify and emphasize the culture the management wants to impress in the organization.

During this quarter (from February 1st to April 30th), the revenue has grown by 36%, reaching €6.7 billion. The online business decreased by 6% year over year due to the high watermark achieved last year when it grew by 67%). They expect online revenue to increase further and surpass 30% of total sales by 2024.

In terms of geography, they highlight that the strong growth continues in the US (which is good news due to the size of this market) and that apart from the close of stores in Russia in Ukraine, 67 stores were locked down in China during this period. By the date of this release, only four remain closed.


What is the outlook for Inditex ($ITX)?

About the outlook, they now expect to come back to pre-pandemic growth. Currently, 90% of the 6,423 stores they own are open.

Concerning the next quarter, Spring/summer collections were well received during May and June with a growth of 17%.


The capex for 2022 is expected to be around €1.1 billion.


What is the Capital Allocation of Inditex ($ITX)?

The approval of a regular dividend of €0.93 for this must be added to the €0.40 to be paid with charge to 2021 results.

Both types of dividends make a total of €1.33, which at the current market price of €22.8 would give us a return of 5.8%.


What is the Intrinsic Value of Inditex ($ITX)?

Given the financial history of Inditex, we cannot argue that we are talking about quality. Currently, according to TIKR, it has a Return of Capital of around 20%, but historically it was more frequently above 30%.

The big question is if they will be able to maintain their level of growth. They have increased their revenue at a compound annual average rate of around 10% from 2005.

Given the geographical spread that they currently have, it doesn’t seem easy to grow in that dimension. But we must consider the current growth in the online business and the possibility of widening their offer. Recently they introduced cosmetics and sports apparel in some of their shops, and these are only a couple of examples of the different products they could add to their successful model.

The role of the new CEO, Óscar García, is also a concern. Although after working in the company for years, we can expect similar direction and hopefully similar outcomes.


Looking at the organic traffic for estimated by Ahrefs, we can see that the number of searches that finish in the online store grows, not spectacularly but steadily. Organic Online Traffic according to Ahrefs




Considering these points, I am confident in using a multiple of 20 with this company. If we multiply this figure by the estimated FCF by the analysts in 2024 (€4,886), remove the Net Debt expected by this year (€-10,707), and divide by the current number of shares (3,112,430), we get a target price of €34.8, which would give us a potential of more than 50% in two years.






What is Inditex ($ITX) doing in digitalization and sustainability?


Apart from the first strategic pillar, which is self-explanatory, building a platform that integrates physical stores with the online business, what is doing Inditex in the other two ones: digitalization and sustainability?




They don’t talk explicitly about digitalization, but on my last visit to the newest flagship shop in Madrid, I was able to see it in real life.


For example, below is a picture of some customers paying themselves directly for their purchased items and removing the safety tokens.



Consumers unlocking pieces of apparel in Zara new store

Consumers unlocking pieces of apparel in Zara new store


Apart from this feature, they could buy them online in advance and come to the shop to collect them on their own.


There were also QR labels where you could read with your cellular to see online the shop map and some additional info.


Finally, about sustainability, in the last results press release, they disclosed that apart from working on this subject with different start-ups, they have already committed to purchasing 30% of the production volume of Infinna, which recycles their fibers from used clothes.


There were also bins for dropping down used clothes in the new shop. Organic Online Traffic according to Ahrefs


Zumiez: Results Q1 2023

On June 2nd, Zumiez published its results for the 13 weeks ending on April 30th and held the correspondent conference call.

Results were in line with the guidance and with the results being reported for the rest of discretionary consumer businesses with significant exposure to the US. The sales were down 20.9% concerning the same period last year, and they incurred a net loss of minus $0.4 million.

The main reasons for the decrease in sales are the comparison with a period when consumers had more available cash due to the pandemic stimulus and the inflation, which restricts the amounts destined for Zumiez’s types of products.


In terms of capital allocation, Zumiez fully completed the repurchasing program. It bought back 1.9 million shares at an average cost of $43.51. There is no current authorization for more share purchases.


During the call, Rick Brooks, CEO of Zumiez, pointed out that if we skip the pandemic, they grew revenue at a cagr of 8% and EPS by 15% from 2011 to 2021. He expects to continue returning value to shareholders based on the strong brand and culture of the company. This quarter, despite the challenging conditions, it is remarkable that they could sell at full price, maintaining margins. It is also important to note that Zumiez carries a strong financial position with cash and equivalents of $173 million.


For 2022, they expect an EPS in the range of $3.55-$3.80. With a capex in the range of $30-$32 million due to the plan to open 34 new stores (15 in the US, 14 in Europe, and 5 in Australia).


My take on Zumiez

It is important to note that the International segment, where they plan to open more shops this year, has grown 13% from last year. This means that, as they say, one of the main reasons is the US stimulus due to the pandemic, but also that its business model and products are being recognized in the international markets where they are operating. So we can expect that this growth can be sustainable there.


What is the intrinsic value of Zumiez?

Analysts’ consensus tells us we can expect an FCF of $94 million for 2024. If, for rough estimation, we apply a multiple of 15 and divide it by the current number of shares (19.46 million), we would get a target price of $72.62 (137% of potential gain).

It might be 



Cranswick: Preliminary Results 2022

On the 24th of May, Cranswick plc announced its audited preliminary results for the 52 weeks ended the 26th of March 2022.

Revenue increased by 5.8%, while ROCE was 16.9% (lower than the previous year in which it was 17.2%).

What I like about Cranswick is the steady growth it has achieved over long periods. The compounded average growth of revenue since 2005 is around 11%, and it achieved it with all the years growing except one (2019).

The ROCE does not seem typical of a commodity business. And it is in a defensive and strategic sector. In fact, we see that it was able to maintain its growth even in this challenging macro-environment as it did during the pandemic.

Shareholders also benefit from this growth. With the announcement of increasing the dividend by 8% this year, it will achieve 32 years in a row of increases.


Cranswick's Growth


What is the strategy of Cranswick?

Cranswick targets its growth in two different directions. On one side, it is widening its offer. Poultry production revenue is now 20% of total sales, with an increase of 30% during last year. Apart from that, two of the three acquisitions during the previous year were in Mediterranean products, diversifying its offer further.

On the other side, it aims a vertical integration to control the total supply chain better. The third acquisition, in the Pet foods sector, will also help this aim.


What is the Intrinsic Value of Cranswick?

It isn’t easy to put the quality of a company into numbers, especially when it also grows and still has future opportunities in the same sector.

To reflect these key factors, we could either use a higher multiple or increase the expected cash flows in the future.

In my case, and just for rough estimation, I assume that within 3-5 years, it will get an EBIT of GBP160 million. With a multiple of 15, we get GBP 2,400 million, which, divided by the number of shares (53.21 million), gives us a target price of GBp4,510.

Citi Trends: Q1 2022

What were the last Citi Trends results?

On May 24th, Citi Trends published a press release with the results for its first quarter of 2022. In it, they confirmed their previous guidance, disclosing a decrease of revenue of 27% versus the first quarter of 2021. Comparable store sales were also down 29.2%, as well as the rest of the primary metrics.

As with the rest of the retailers, the macro environment, especially the high inflation, hurts sales. In addition to that, the strength of last year’s first quarter, with significant stimulus in the US, does not help. In fact, total sales grew 1.6% if we compare them to the first quarter of 2019 (before the pandemic).

It is true that inflation, especially in food and energy, is hurting more Citi Trends’ target customers, and it probably will go on doing it in the following months. But, even though Citi Trends is still profitable. So it is not clear if, at these market prices, it deserves such a high amount of short interest (39.4%).

What is the intrinsic value of Citi Trends?

In terms of outlook, the Management expects to finish the year with a range of total sales of $860-$880 million and an adjusted operating income of $23.8-$30.6 million.

With a midpoint of operating income of $27.2 million, if we use a multiple of 10, add the current net cash ($61.66 million) and divide it by the number of shares (8.44 million), we get a target price of $39.5, which would give us a potential revaluation of around 33% from the current price ($29.76).

What is the Citi Trends Capital Allocation?

A catalyst that can make Citi Trends close the gap with its value is the repurchase of shares it is currently doing.

During the first quarter of 2022, Citi Trends repurchased 170,000 shares at a total cost of $5.3 million. That makes an average price of $31, which we could consider a reasonable price from the Management perspective.

But at $29,76, and considering that they still have an approved amount of $54.7 million for this purpose, they could repurchase around 20% of the current market capitalization.

This repurchase of shares could create a short squeeze that catapults even higher its shares’ price.


Cows: The best hedge against inflation

Last week I read an article in The Economist that caught my attention. Given the known issue with inflation in Zimbabwe, a businessman there has created a company that allows investing in cows in order to get a pension in the future.

I found it relevant because, if in anything Zimbabwe is among the top, is in inflation. So they must know a little bit about this current environment that we are living.

The most relevant characteristic of this initiative is that at the time of getting the investment back, investors can choose whether to get their assigned amount in cash or in cows. In the end, investing in cows is not different than investing in other real assets. In western markets, we can similarly buy stocks of public companies which raise livestock and it wouldn’t be so different. But being able to cash them in cows makes this investment independent of short-term fluctuations in the market (in this case in the cows’ prices).

In any case, what really reaffirms to me is that the best way to hedge our savings against inflation is to invest in real assets. Assets that produce some benefit and are revaluated on time, especially if inflation is high.

CARS.COM: The Car Dealers Marketplace is basically an online marketplace that connects car buyers and sellers. It was founded in 1998 and is based in Chicago.

Their main customers are local dealers. According to the last quarterly results report released on May 6th, they account for approximately 88.7% of total revenue.

An old adage about brick-and-mortar business says the three most important factors are location, location, and location. We should replace them with traffic, traffic, and traffic in online businesses. Of course, there are other important factors. But usually, the revenue correlates to the number of visitors to a shop. And if these visits don’t require a significant expense in advertising, the business can have a big competitive advantage.

I think the best moat or competitive advantage of is being able to attract so much organic online traffic. This traffic usually comes from results from search engines. In Ahrefs, we can check through which keywords a potential buyer has searched and how each website ranks or in which position it appears in the search results. If we see the main keywords through which most users arrive at the website, we get this list:


As we can see, ranks first in promising searches. It is not only necessary it brings traffic to the site but also its quality. Somebody searching “cars for sale” is likely to be thinking about buying a car, so it is definitively the correct lead for a dealer. is aware of this, and they are even offering additional services to the dealers, such as the use of promotional videos for these visits with the FUEL program. You can check how it works in the site


As long as can maintain this position in the search results and these visits numbers, it will bring value to the dealers and continue achieving the constant free cash flows they have been getting in the last years.



The main risk I can find in this business, or at least the big drawback, is growth. Currently, is selling its services to around 19,500 dealers. In the call commenting on last quarter’s results, the CEO said they still have room to grow in 40,000 dealers.

Indeed this would imply multiplying by three the current number of customers and potentially the revenue. But looking to the long term, even talking as we are about a small company (around $680 million), we cannot expect a multi-bagger if they stick to the current business. Of course, they can expand geographically or to other adjacent businesses in the future.

Their current strategy of combining the increase in their customer base with adding more services to them, like the recent purchase of Accu-Trade (for valuating vehicles) or CreditIQ (for offering loans), makes a lot of sense. As more services are used from, the switching costs to another platform will be higher. In addition, to attract new dealers, they also increase the loyalty of their existing ones.



Capital Allocation

Due to the high free cash flow that the company generates, is in an excellent position to reinvest in its business, buying adjacent services providers as commented or returning capital to shareholders through buybacks.

In fact, they have in place a repurchase program to acquire $200 million in shares. At the current market price, this amount represents almost a 30% of the company. During the first quarter of 2022, they have repurchased 0.3 million at an average price of $14.78 (currently is trading at $9.8).

Finally, it is also a good signal that some of the company officers have been recently buying shares for $9.85.


Sonos: Update of Q2 2022

Sonos Inc designs, develops, manufactures, and sells audio products and services. It distributes its products in over 50 countries.

Last May 11th, it presented its results for its second quarter of 2022 (which ended on April 2nd; the start of its fiscal year is at the end of September). They disclose an increase in revenue of more than 20% year-over-year and a bit of tension in the margins due mainly to the rise in the price of some components. The growth was driven by solid demand for their products and supply availability during this quarter. But even though they still have ended the quarter with a backlog pending to fulfill.

COVID-19 is still delaying the availability of products, which can be holding up additional sales. Moreover, it is causing an increase in component, shipping, and logistics costs, as well as longer lead times (due mainly to new lockdowns in China). The pandemic has also delayed their planned move to Malaysia to diversify the supply chain.

The conflict between Russia and Ukraine has caused further disruptions, but it didn’t have a material impact on their supply chain.

Sonos speakers revenue represented 79.5% of total revenue. It grew 18.8% year over year, driven by the introduction of Roam in April 2021.

Talking about capital allocation, they have repurchased shares for a value of $74.5 million for the first half of the year.


In the call commenting on these results, Patrick Spence, CEO of Sonos, made the following remarks:

  • The 20% year-over-year revenue growth is even more impressive if we consider that it is being compared with a 90% year-over-year growth last year and was constrained by supply.
  • He announced three innovations.
    • Ray: the new compact soundbar with new acoustic innovations that deliver balanced sound, crisp dialogue, and solid base
    • Sonos voice control: the first voice experience purpose-built for listening and controlling your music on Sonos
    • Sonos Roam: the ultra-portable smart speaker
  • They confirm that the demand for their products is strong regarding the macro environment. And it was even before the stimulus last year.


  • They reconfirm their revenue guidance of $1.95-$2 billion for 2022 (continued 20-27% growth during the second half of the year). Based on three reasons:
    • Consumer demand signals from Q2 (offset by supply constraints)
    • Strong new product introductions
    • Pricing actions taken last September
  • Lower gross margin due to the increase in costs: 45.5-46% for the remainder of the year
  • Adjusted EBITDA in the range $290-$310 million (-2.5%)
    • Adjusted EBITDA margin in the range of 14.9-15.5%.

My takeaway

  • Currently, Sonos has 11.73% in short interest.
    • I don’t think these shorts expectations are specific to this company. Most public companies in the US discretionary consumer sector are bearing short positions.
  • It seems probable that there will be some decrease in the demand. The big question is if the market is already discounting it or if it will be more than what is discounted.

Is Sonos undervalued?

Challenging to know in the short term, but based on its long-term goals for 2024:

FY2024 Financial Targets  -$2.5B  Gross Margin  45-47%  Adjusted EBITDA Margin  15-18%

They would get an EBITDA of $412.5 million. With a conservative multiple of 10 (given the potential growth of this company), we would get an Enterprise Value of $4,125 million.

If we add the estimated net cash by analysts for that year ($1,170 million), we get an estimated value of $5,295 million. Which, divided by the number of diluted shares (139.64), gives us a share target price of $37.9.

From the current price of $19.97, this would give us a potential gain of 89.8% in two years.

SAP: Quality At A Reasonable Price In Turbulent Times


Pushed by the rest of the market, SAP SE (SAP) shares have plunged in recent days. But the long-term outlook has not changed. Both the external secular trends and the internal competitive advantages make this company a safe bet for the future. Even these turbulent times can become a new reason for an increase in customer demand for its products and services.

But we must keep an eye on the growth in the long term and make sure that the valuation is not still too high even for a quality business like this.


Whenever I start analyzing a company, the first aspect I check is how the Megatrends affect its business. With Megatrends, I refer to secular trends in the macro-environment, not affected by short-term events. In this way, even if things don’t go as expected in the short term or the valuation I calculated was too optimistic, I can expect that the long-term tailwinds will make me recover the investment. An asymmetric bet.

In the case of SAP, there are different Megatrends that will make it to be profitable for many years. In the first place, we are still in a digitalization process. All the new information that is being collected or will be in the future will be required to be integrated, processed, and presented in a useful way for making good decisions. Within this trend, we can also distinguish the current movement of many companies to externalize their data management in cloud providers, as SAP is offering with its cloud solutions. In the second place, and especially in some parts of the world, where demographics will be an issue, we can expect further requirements for automation. Again, something only possible if integrated with the main software of each company. In third place, even with some current rumors about returning back home some operations, it does not seem plausible to end the globalization trend of the last years completely. There, a global ERP provider, like SAP, the indisputable leader in the world is going to have a big advantage. And finally, the shortening of development cycles it is requiring more agility in all the different sectors. Which again requires having in place a robust and potent software with enough flexibility.


Normally SAP is presented as an example of a typical moat of switching costs. And in fact, it is. When SAP is implemented, not only the software has to be customized to the specific business, but the business itself has to adapt to it. In all implementations of the core ERP, it is required some process reengineering and the development of new interfaces with the specific pieces of software not included in the platform.

But talking only about the switching costs as the moat simplifies much the reality and it moves the attention to the key moat. In the end, if the success of SAP were only the switching costs, their competitors could invest in marketing or lower their prices, and once inside the customers they wouldn’t allow SAP to attack their market share.

In the last annual report, they summarized their business model in the following way:

We create value by identifying the business needs of our customers, then developing and delivering cloud solutions, services, and support addressing these needs. By proactively obtaining customer feedback on a quarterly basis, we strive to continuously improve our solutions, identify further business needs, and deliver enhanced value to our customers across the whole lifecycle thus increasing customer loyalty.

Sometimes these kinds of statements might seem like standard wordiness to keep investors and other stakeholders happy. But in this case, I think it is really relevant the stress they make on customers’ needs. Especially because they have been doing this for years in thousands of big companies. 

One way in which Warren Buffet proposes to check if a company has a moat is by wondering if any other with unlimited money could take its leadership away from it. In this case, even with all the analysts and programmers workforce, we could imagine, we wouldn’t be able to build a similar platform. Because, first, we wouldn’t know what to build. Customers wouldn’t be able to detail all their requirements. And even if they did, we wouldn’t be able to debug the software till getting the robustness of SAP core software. So the key moat of SAP is its proprietary software platform developed over many years and over many different customers. And that really looks very difficult to overcome by its competitors.

But these ones are not the only moats SAP has, although in some way they reinforce each other. At the moment SAP is like a standard in big companies. There was a saying some years ago in the tech sector that said “Nobody was fired for buying IBM”. Deciding on a new ERP is a big decision that can definitely influence in the managers’ fate if making it wrong. So not many of them will risk what can be a disaster even if they can decide on cheaper solutions. Apart from that, being a so extended software create also some network effects. It will be easier to integrate new employees if they already have some knowledge of SAP. And it will be easier to find consultants, programmers, or support staff if we are talking about the leader in this kind of software. Finally, SAP, being the leader, has also some scale advantages. Being able to spend more on R&D can give it an advantage, especially with the rise of new technologies and cyberattacks.


But, there is always some drawback. Being a leader in ERP implementations in big companies for so much time raises a question. Is there still enough room to grow for a company so big in this sector?

For sure with the moats commented in the last point we can expect some pricing power. So, at least, we can expect to pass the inflation through its customers and even a little bit more. But, in order to grow significantly, it would have to increase its customer base or the products/services offered to them.

According to the website Statista, the global spending on Enterprise Software in 2022 is expected to be $672 billion. Given that SAP currently has a Total Revenue of $32 billion, it appears that there is still some available market to chase. But we must take into account that for some of that spending, the competitive advantages of SAP might not be so strong. So we should keep an eye on this.

Short-term environment

Given the above long-term analysis, it seems that the current sell-off might be due to short-term causes. Undoubtedly, the macro environment is quite challenging. High inflation, supply chain restrictions, war, energy price, and possible recession are all factors that are affecting SAP’s customers and will do it for some time.

Asking about this concern in the last call, Christian Klein, SAP’s CEO, answered in this way about the conversations they have with his customer’s managers:

Yes. So look, of course, in the conversations, concerns come up about the rising inflation and can customers really put this inflation and then the increase in their cost base always on top on the pricing side. But then the next part of the conversation is, can you help me on cash flow optimization. And then we come into the play where we say, hey, okay, we connect you with the platform with RISE to our network, we give you access to more suppliers. We have now Taulia connected to it, where we can hopefully also get better financing conditions. We have actually good ways with S/4HANA Cloud on offering, making sure you can offer much faster new services with new license models, which also can help you to drive higher customer retention and hopefully higher prices.

So, while the world becomes more complex, software is needed to overcome this complexity. And this is why we definitely don’t see a hit on our pipeline. It’s the other way around. We actually see strong multiples, and we will remain very confident also about the further acceleration of our cloud business.

If SAP is able to add value with its existing and new solutions, customers could see it as a solution, more than an expense. And this could make it not suffer even in the short term.


But even with the most compelling moats and prospects, there must be a reasonable price above which, we shouldn’t consider investing in SAP. This price is going to depend mainly on the growth SAP is able to generate in the next years.

In the last call, they confirmed that they still see feasible the long-term plan that they disclosed in 2020. In it, they expect to get a Revenue of €36 billion and a Free Cash Flow of €8 billion by 2025. So, we are going to use these figures in order to calculate a rough estimation of the intrinsic value of SAP.


2025 Ambition Plan

2025 Ambition Plan (20-F 2021 Report)

On the other hand, for this year, they are even expecting a Free Cash Flow below the one achieved last year. They expect it to be above $4.5 billion.


Outlook 2022

Outlook 2022 (2022 Q1 Earnings Call Presentation)


In order to get to the 2025 goal, let’s assume that they achieve FCF growths of 25%, 30% and 35% for the years 2023, 2024 and 2025. We would get then approximately €7.9 billion by the end of 2025. Which after applying a multiple of 20 (given the quality and prospects of the company) we achieve an Enterprise Value of approximately €158 billion. 

Rough Valuation - SAP

Rough Valuation – SAP (Created by Author)

f we add to the current Net Debt, the Free Cash Flows estimated for these years, we will get a Net Debt of minus €11.5 billion by 2025. Which, once removed from the Enterprise Value gives us an Estimated Market Value of €169 billion. Dividing it by the current number of shares (1,170 million) we get an Intrinsic Value Share of approximately €145 by the end of 2025. This, applying the current exchange rate (1.055 $/€) makes a value in dollars of $153.

This would give us a compound average growth rate of 12% for the next 4 years. It is not too much but given the quality of this company and the possible bad scenarios that are being currently forecasted it can give us some stability to our portfolio.


In the long term, it seems difficult to be wrong in investing in SAP. There are only two major risks to take into account and monitor. One is growth. As the company gets bigger it has to increase even more its revenue in order to maintain the same growth rate. And given the extended use of the core ERP in big companies, it might have to find additional sources of growth. The other one is paying too much for its shares. Taking advantage of the current market pessimism might be an opportunity to get a good price. 

Modern Dental


Modern Dental is a family-owned company based in Hong Kong, which produces and distributes dental prosthetic devices mainly in Europe, China, North America, and Australia.

Given the growth that it has achieved in the last years, and the promising perspectives for the future. I think it deserves a higher valuation than it currently has.


On the positive side, the inversion of the demographic pyramid, especially in Europe, will likely increase the demand for Modern Dental products. An aging population will require more of its services. Beyond that, given the markets in which it operates, many of these new customers will be willing to spend on the quality products Modern Dental offers.

In addition to that, Modern Dental operates in a very fragmented market, with very small competitors. With the increasing role of technology, such as with the digitalization of scanners data, some volume scale advantages will appear, taking a good amount of business from smaller competitors. This is already causing a slow consolidation of the sector.

In fact, the pandemic has likely helped in the market share increase of Modern Dental. Small competitors with financial positions not so healthy went out of business, leaving new opportunities for Modern Dental.

Modern Dental does not operate in a cyclical market, but the global scope, gives it some additional resilience to market cycles.


Traditionally this business has been performed by local companies. So in some markets, Modern Dental can find some challenges in adapting its operations to the local cultures.

The lack of other prominent players in this segment, makes us wonder, if there might be some other reasons which make it difficult for a big player to take a big chunk of the market.

In the following slide of the presentation of the 2021 results. We can see how in some markets, like in France, with only a tiny percentage of the total market share, Modern Dental is the leader.

Market Fragmentation – 2021 Results Presentation

One of the reasons for this leadership is its position in the middle of the Global Dental Industry Supply Chain, where no other big players are operating at the moment.

Position within the Global Dental Industry – 2021 Results Presentation


The recent growth in 2021, seems to have been caused by two leading causes. In 2020 due to the lockdowns, there was a decrease in the activity. And, on the other hand, thanks to the healthier financial position, Modern Dental, must have been able to steal some market share from smaller competitors.

We cannot expect the same growth in the following years. But, we can take as a reference the compound average growth rate of Revenue of 17% in the last nine years.

If, being conservative, we assume only 10% in the following three years. And an operating margin of 10% (it was 16.7% in 2021, though smaller in previous periods). We will estimate an Operating Income of HK$393. Using a multiple of 15 (taking into account the expected growth) and removing the current net debt (HK$165), we get an intrinsic value of around HK$6. It gives us a revaluation potential of 112% in 3 years.


It isn’t easy to know the reasons for misalignments between the market price and the intrinsic value. But the current price does not seem to reflect the potential growth in this resilient busineoperate in a cyclical market, but the global scope gives it.