Inflation: CRUX European Special Situations Fund
Recently the stock market has started to factor in a degree of economic slowdown along with rising costs. The TM CRUX European Special Situations Fund continues to have a strong focus on stocks with pricing power – i.e. companies that can fairly easily pass on inflation, which is particularly high at the moment. We favour businesses that make niche, critical products but where the cost to the customer is fairly negligible and where there are few other suppliers or substitutions. Examples include:
Brenntag: this is a chemical distributor. It has zero capital-intensive heavy chemical manufacturing, and instead has some simple mixing and blending sites. A typical customer spends less than €100,000 per annum, even large customers like Novartis, and each order is perhaps €1,000. The majority of sales orders are for small quantities which even Novartis cannot buy directly from say BASF, and usually a customer needs to speak to a Brenntag adviser about the formulation, so there is a large amount of value add and pricing is opaque but also fairly immaterial. The proof of the pricing power was seen after Brexit when sterling weakened significantly versus the euro, and all the chemical distributors raised sterling prices to offset the currency movement on all imported inputs with a few days.
Kuehne + Nagel: this is a freight forwarder, an agent in the transport system: Maersk might own the ship and the container, as well as the port infrastructure, and will likely deal directly with large customers like BMW or Samsung. However a huge number of clients require part loads or only a few containers, as well as complex transport routes and help with customs in multiple countries. Kuehne can help here, adding value, and is also fairly transparent on pricing. Being one of the larger forwarders with highly efficient IT systems and people on the ground everywhere means they can make attractive margins. When the freight price rose after COVID, Kuehne was able to fully pass this on to customers.
Wolters Kluwer: this is a professional publisher, an essential mainly online tool for healthcare (with a medical research platform called Ovid), tax and accounting, compliance and legal. The majority of sales are recurring from electronic subscriptions paid in advance. Wolters has fairly high market shares with only a few other competitors such as Relx, but as their platforms are all different and target varying applications, there is limited real competition. The main input cost is wages, where Wolters has been moving workflows to offshore areas with lower wages as well as making more of the clients move to digital services rather than print; as there is underlying demand growth as well as pricing power to push up subscription rates, Wolters can maintain their high margins. Furthermore, they can extract cost savings from the regular bolt-on acquisitions.
Trelleborg: its main division is Sealing; an example might be making O-ring seals for aircraft landing gear. This is a highly critical area and brake manufacturers are not going to shop around to save a couple of pence on a seal. Indeed the seals are usually tailored or specially designed for each application, rather than off-the-shelf. The rubber price has been volatile in the past and history shows that Trelleborg has always passed increasing costs straight onto clients, maintaining their high margins.
Stabilus: their original product is the gas spring, and an easy application to describe is in a car, where a pair of them are used to keep the boot raised open. However gas springs are also found hundreds of other industrial “dampening” applications. The high barrier to entry is making millions of perfect gas spring per year for big customers like Toyota and VW. A fault is extremely costly for the car-makers as the recall costs quickly add up to tens of millions of pounds whereas the cost of the gas spring is a mere couple of pounds each. Moreover, over the decades, the other competitors have fallen by the wayside as they could not keep up with Stabilus’s evolving technologies and expert manufacturing methods; this has left Stabilus with a near-monopoly. This is the perfect situation for pricing power, although Stabilus does often collaborate with customers to alter the design to keep price rises lower but maintaining their own margins.