Hidden Value Stocks issue for the third quarter ended September 30, 2023, featuring an update from McIntyre Partnerships, discussing their current top investment idea on Sotera Health Co (NASDAQ:SHC).
McIntyre Partnerships Idea: Sotera Health
McIntyre Partnerships is a fund that’s featured a few times in Hidden Value Stocks. The firm and its founder, Chris McIntyre, have an excellent track record of finding undervalued small-cap growth stocks, and the fund’s returns speak for themselves.
Since its inception at the beginning of 2017, the fund has produced an annualized net return for investors of 15.9%, giving a cumulative return of 161%.
In comparison, the Russell 2000 Value index has added just 4.7% annualized over the same period or 34.7% overall.
In his second-quarter letter to investors, Chris outlined his current top investment idea and explained why it’s “difficult to envision a scenario” in which the business does not grow:
“SHC is the fund’s largest holding. As the investment is changing from one driven by legal considerations to a GARP one…I believe a brief overview of our thesis and the primary drivers of the businesses is warranted. While legal risks remain…the highest risk portion of SHC’s legal troubles has passed with the settlement of the Illinois litigation.
On my estimates, which are slightly ahead of the Street, SHC is currently trading 13x 2024EV/EBIT and 15x 2024 P/E. I often compare this to peer STE, which currently trades 19xand 25x respectively, as it implies 40-70% upside…I believe SHC is a highly probable 10%or better EBIT growth story, which combined with SHC’s earnings yield results in a mid-to-high teens IRR with a decade or longer runway. While some of that growth requires capex, slightly lowering the impact of buybacks or M&A, I believe the highly predictable and minimally cyclical nature of SHC’s growth is exceptional. SHC is diversified across pharma and medical device manufacturers. SHC works with 9 of the 10 largest pharma manufacturers and 40 of the top 50 medical device manufacturers, with a 100% renewal rate across its 10 largest customers and an average customer relationship of 25 years.
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With a diverse healthcare customer base and minimal competition, the primary driver of SHC’s growth is overall medical procedures, along with the additional growth from continued innovation in medical devices, further outsourcing, and SHC’s consistent 3-5%price increases. Perhaps most importantly, it is difficult to envision a scenario in which SHC does not grow. Without a major competitor launching from scratch or a shift towards insourcing sterilization, neither of which is happening, the only thing that could drive a significant decline in SHC’s revenues would be a decline in the number of medical procedures.”
