On Markets & Investing

European Family Holdings Report (June 2024)

At Hidden Value Gems, we look for two types of investments: (i) exceptionally cheap companies relative to their current earnings and assets or (ii) long-term compounders.

We apply five criteria to find the best investment opportunities:

1. Quality business: unique and durable competitive advantages, network effects, switching costs, scale, and brand power.

2. Strong financials: high margins and ROIC.

3. Low leverage.

4. Strong management with skin in the game, long-term focus and corporate culture.

5. Attractive valuation (ideally measured as earnings yield plus long-term growth potential).

We understand that in the competitive world of modern investing, a simple low-PE stock is most likely a value trap since quantitative screens are freely available to millions of investors today.

Hence, we pay special attention to capital allocation and prefer to hunt in less popular markets with most investors (ideally far away from US large caps).

European Family Holdings seem to fit this profile perfectly. Firstly, they are often labelled as conglomerates. While it is true that many of those companies have diversified investment portfolios, the reasons for such diversification are very different. A typical conglomerate would use financial engineering to boost its EPS by acquiring a low PE business using maximum leverage. With additional scale, conglomerate management benefits from rising importance and finds reasons for a pay raise.

In the case of family companies, diversification is often the result of their long-term thinking and the strategy of rediscovering their business models.

Exor, for example, used to be an investment vehicle of the Agnelli family that held just one main asset – Fiat. However, realising the challenges of operating a single business in a competitive industry, the new leadership has successfully transformed the company into a global portfolio with a particular focus on the Healthcare, Luxury and Technology sectors.

This story is typical for many of the companies profiled in this report.

Another critical factor for successful investing is longevity. To achieve the best results, investors often focus on opportunities with the highest return, missing the point that the period over which such returns are achieved is equally important.

For example, $373,324 invested for 40 years at 15% would be worth $100,000,000 at the end of the period. A 15% rate is important, but a 40-year holding period is equally crucial.

Luckily, most family companies focus on the long term, which forces them to avoid unnecessary risk and position portfolios in sectors with long-term potential.

With an average corporate lifespan of less than 25 years (and an average stock holding period of less than a year), owning pieces of these family companies can at least add peace of mind and reduce trading costs.

As for returns, many of the companies have achieved 10%+ returns over the past decade, with some achieving returns in the 20-30% range.

Since the families behind such companies are rarely the sellers of the shares, they do not pay much attention to the short-term prices at which these shares are traded in the market. With less analyst coverage and media attention, their securities become available at more attractive prices.

Many companies have seen a new generation of managers taking over who realise the value that can be created from buying such shares at a discount. In general, we have noticed a strong desire to reduce the discount to NAV at many European family companies, especially those operating for over 100 years. Not surprisingly, about half of the companies in this report have active buyback programmes.

Having headquarters in quiet European cities is also a hidden advantage. There is much less competition for assets compared to the US. At the same time, many European businesses operate on a global scale and often generate a significant part of their revenues in the US.

Europe has developed critical competencies in machinery, engineering, mining, pharma – the sectors that are particularly important in the new “reshoring” phase for the global economy. These sectors (except for pharma) are also critical for the energy transition.

With a vast network of contacts across Europe and other regions, many family businesses have a natural informational advantage, especially over private investors.

In short, European family companies can be an interesting investment opportunity as they are wrongly associated with conglomerates, trading at an additional European discount. Yet, they are often run with conservative balance sheets and long-term focus, benefiting from lower regional competition, informational edge and structural changes (reshoring and energy transition).

You can download a free sample of the European Family Holdings June 2024 report here.