Value Investing in Industrials with a Growth Twist

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Mowery discussed Value Investing in Industrials with a Growth Twist. Here’s an excerpt from the episode:

Kyle: Well, in this business, you often end up in things that just make the most sense to. Actually, if you look geographically on the country, a lot of financials in New York, tech out west, oil down in Houston. But I live in Chicago, transplant from LA-ish. Yeah, I just started doing industrials. It’s funny, you can get a lot of cheap prices of businesses that are, either cyclical or steady-ish and you can just understand where you are in a cycle or understand what the earnings power of the business is. And yet, there’s a lot of these businesses that are being overlooked and they have latent and growing free cash flow profiles because of new product innovation.

There’s a lot of innovation actually in the energy sector. Materials on decarbonized products or environmentally friendly products or just different ice to EV transition. There’s a lot of things to do there that fit our time profile, which is one year to three years, two years to four years on the longer-term. So, where you can study the unit economics and buy what looks like a value business, but it also has this sort of growth engine underneath the hood, and that’s a good way to get a re-rating.

Jake: So, you have an existing cash flow business inside and then also a higher upside internal?

Kyle: Yeah. Or, you can underwrite 40% to 50% higher EBITDA out two years, but you’re paying a traditional value multiple, five times, six times EBITDA, and maybe 10% to 15% free cash flow yields, net of growth CAPEX. That’s a pretty good set up, even when IWM just goes down 30% in two years.

[laughter]

Jake: Yeah. Right. Just goes one way. [laughs]

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