Business Breakdowns
· Zack Fuss
[00:00:00] S0: When you kind of reflect upon your study of this business and the story of its composition and evolution, what are the lessons you take away from it and apply to other aspects of your investments?
· Chadd Garcia
[00:00:00] S1: Well, from an operational standpoint, them choosing at VITAS to be in certain markets that allows them to have margins that are top of the industry provides that business with an ample amount of protection. One of my core theses on this business is that it saves the government an ample amount of money and the government should want to support it over the long term. Over the short run, the government can act a bit irrationally and we've seen that in how slow they were to adjust the reimbursement rates in COVID. But VITAS' margin structure being 2, 3, 4 times higher than that of the bottom half of the industry provided them with ample margin of safety and the ability to take advantage of those short-term disruptions. From a capital allocation standpoint, it's often very hard to determine if a management team ex ante is going to be a good capital allocator. But I think it helps if structurally there's just a business that's set up to do it. So if you look at these two businesses. Both of them generate an ample amount of cash and they require very little to go back into it. Yes, there are opportunities to acquire franchises, but for the most part, it's small. At Roto-Rooter, yes, recently there was an opportunity to do an $85 million acquisition at VITAS. But maybe they get another one or two of those. I don't think they're gonna get too many. They're able to compound their earnings growth at a high rate and have an ample amount of cash. And then how do you manage that cash? You can do a programmatic buyback. You might see Ecolab or AutoZone, or you can just let the business build cash. And when the stock price drops below its intrinsic value, you step in in size, which is what this team has tended to do over time. I think because of their philosophy of growing their free cash flow as their reasons for existence and the minimal capital needs of the business. He could have seen a decade ago that these guys are going to be great capital allocators. And I think you can get comfortable that they'll continue to be.
· Zack Fuss, Chadd Garcia
[00:00:00] S0: As you said, old people and old homes. A unique but enduring business. A capital allocation strategy which has proven to drive total shareholder return and earnings per share growth of nearly 20% for 20 years. So nothing to scoff at there. [00:00:00] S1: This is like the get-rich-slowly strategy. [00:00:00] S0: Great. Thanks, Chadd. [00:00:00] S1: Thanks, Zack.