I’ve had the opportunity to travel the world, learn about different cultures, and develop my passion for art and investing. I’m grateful for these opportunities and am now at a juncture where I know how to use them to make a difference in the world. 

My father was a successful investor and philanthropist who instilled in me a strong sense of civic duty and lasting commitment. As a family, we often traveled on educational tours of wildlife and cultural expeditions to national parks in the Americas. My three brothers and I joined an archaeological dig on the French Polynesian island Tahuate. I later returned to that island as an anthropology student to participate in the still-active dig site. In another instance, I took a pre-dawn walk on a beach in Tortuguero to observe green sea turtles laying their eggs in the sand. Today, I am on the Board of a sea turtle conservation group with a base of operations on that very same beach. 

I give my time and energy to philanthropic causes not just to ‘check a box’ but because these institutions are critical platforms to enact meaningful change. I work hard for platforms whose values and long-term goals align with mine. Similarly, I invest with a long horizon in companies and businesses whose management demonstrates forthright and reliable values and apply them to businesses with growth potential. 

This form of value investing is concerned with long-term success rather than short-term profits. I learned this method through working at the family office, first in 2011 and again in 2017. My father and brother did not offer direct instruction but instead handed me a book: Benjamin Graham’s The Intelligent Investor. In studying this book, I learned the foremost recommendation from value investors like Warren Buffet and Seth Klarman, advocating critical principles like the margin of safety and intrinsic value to guide all investments. It is next to impossible to know precisely what the future may bring, but forward-looking predictions about intrinsic value can yield more than satisfactory results when given a sufficient margin for error. 

I’ve spent the last 10+ years training in academic painting and drawing, a traditional art technique focused on realism, achieved through technical skill and aesthetic refinement. I have been commissioned for my work and solicited to teach at ateliers worldwide. This immersion has allowed me to live out my passion and provided a vantage point as to how this art form has deep intrinsic value yet is currently under-appreciated by today’s art market. Data shows more significant numbers of people studying academic painting, new schools opening every year, and a reemergence of interest in this work. This evidence of increasing popularity leads me to believe substantial business opportunities exist in this space. 

While growing in popularity, academic drawing and painting are currently out of vogue. It needs supporters who understand its importance and realize its prospects. For much of the twentieth century, the public and critical importance given to technical proficiency has decreased, yet its intrinsic value remains: works in museums of old masters continue to be appreciated. One metric of a successful outcome would be establishing an academic drawing and painting program at a top-tier art university. Currently, the only way to receive superior technical training is to attend an atelier. 

I have firsthand examples of the outsized effect that highly focused philanthropy can have on niche subjects. For instance, my experience with the Clay Mathematics Institute (CMI) has demonstrated the asymmetric effect capital can have in supporting talent as it matures and creates valuable dividends in the form of new thoughts and ideas. 

I aim to do the same for the art world. I want to invest my capital in galleries and schools that promote academic painting and drawing. I will create a foundation that supports the development of top-caliber artists and outreach to people who may have yet to access this type of art.

Dec 6, 2023

Introduction:

Somero Enterprises (SOM). This London-listed company trades at a market cap of $206.5 million. It is based in Fort Meyers, Florida, but its main factory is in Houghton, Michigan, and it has offices worldwide, with minimal revenue generated in China. Somero designs, assembles, sells, and services patented laser-guided equipment (screeds) that automates the placement of concrete horizontal floors.

A laser screed levels concrete precisely and quickly. Contractors purchase and use these screed machines in large and small projects, from warehouses and roads to houses and skyscrapers. Larger and more expensive projects require higher degrees of precision. 

Somero holds patents (90+) on its inventions and recently released an entirely new line of screeds designed specifically for skyscrapers (2019).

Investment Thesis:

As pundits declare interest rates likely to decline, and there is a Western national trend towards on-shoring and friend-shoring, there is likely to be a surge in industrial and distribution construction. Chips Act and Inflation Reduction Act offer billions in incentives to build supply infrastructure in the United States. Massive concrete slabs must be laid to build those complexes, warehouses, and centers. The market capitalizations of materials suppliers Cemex (70%+), CRH (50%+), and Eagle Materials (30%+ YTD) demonstrate that raw materials (especially concrete) are in demand. 

There is a lag between this demand for concrete and the start and completion of new projects. The disconnect, as Somero CEO Jack Cooney puts it, is a skilled labor shortage, especially in trained drivers. He gives the example that if a project requires 40,000 pounds of concrete, but only 10,000 pounds can be delivered that day due to driver shortage, the contractor must delay the project until the full amount is delivered in a single day. Pours are all or nothing. Speed and precision of concrete screeding are key performance measures  for concrete-pouring subcontractors. Consequently, Somero’s laser screed vehicles and devices are preferred for higher-end products.

A 2023 high-rate environment lowered the frequency of project starts, as the depressed stock price indicates. Developers pushed off or delayed projects and, by extension, discouraged sub-contractors from purchasing new or refurbished machines. 

2022 was a record year for industrial starts, and the fall-off in construction starts of 26% between 2022 and 23 corresponds to the roughly 30% drop in market capitalization between mid-year 2022 and 12/2023 market capitalization. 

The company’s market cap variation largely  follows the United States industrial starts graph.  

Financial Strength:

Somero is financially sound. It has a strong balance sheet with virtually no debt and a projected $32 million cash cushion by year-end. The company holds a comfortable 4.8 EV/EBITDA multiple and a welcoming 7.78 P/E ratio. 

Additionally, the company regularly distributes a steady 6-7% dividend yield to its shareholders. The company recently restated its dividend policy as 50% of adjusted income will be a dividend, and 50% of any profit over $25MM will be returned to shareholders as a supplemental dividend.

Market Positioning:

Somero’s leadership in the laser screed market is undeniable. Having invented the technology in 1986, they maintain an (albeit self-estimated) 80-90% market share, with competitors remaining private. This dominance suggests a strong track record of innovation and superior product quality. They hold scores of screed technology patents and have successfully defended their patents through litigation. 

Over the past five years, consistent ROE, ROA, ROC, and ROIC above 30%, often above 40%. Consistent gross margin of over 50% over the past five years, with a 30% operating margin. 

80% of revenue is in North America and Canada, and 20% in the Rest of the World. 2022 (record year revenues) revenue impact from China was $1.1MM, so an economic slowdown in China would have a negligible effect.

Product line and 2022 Revenue:

Somero sells and services concrete screeds, and trains its customers on the use of the products. It has 6,000 customers across 90 countries.  Service is included in “Other Revenue.”

A recent focus on international growth is showing promise : Australia (32%+ revenue 1H23) and Europe (46%+ revenue 1H23). The  the bulk of operations are still in the United States.

Margins remain consistently high. Furthest to the right is FY2022.

Competitors and Moat:

RAF Industries, a private PE firm, recently acquired competitor Ligchine International. Founded in 2007, Ligchine also makes laser-guided screeds. Ligchine has six patents and eight pending, while Somero has 90+ patents. They compete around the mid-to-higher price point on screeds. 

Relatively high labor costs in the United States, Europe, and Australia incentivize utilization of advanced machinery. In the recent earnings call, the company affirmed that Chinese competitors (dynamic-eq.com, http://www.vansemac.com) do not provide the precision of Somero products.  At the same time, in many other developing economies, the scale of projects and slope tolerance (precision) required need to be increased to necessitate these higher-tech devices’ higher price points. 

Tailwinds and Opportunities:

Several tailwinds are poised to propel Somero’s growth. The recent Chips and Inflation Reduction Acts in the US are pumping billions of dollars into infrastructure and on-shoring initiatives, which translates to increased demand for construction projects. Somero’s newly launched 2019 Sky Screed technology, although requiring a typical 5-to-8-year adoption cycle, holds potential for future growth. This is a screed device specially designed for crane lift onto skyscraper floors. The reason stated on a recent earnings call for lack of adoption is that it changes how floors are screeded. Although it is more efficient, it is a newer technology, so standard practice has yet to catch up. The company states that a similar phenomenon occurred when laser screeding was invented in 1986 and took several years to become the industry standard.

The company’s continued strong performance in Europe and growing Australian presence indicate potential for successful expansion beyond its current North American focus.

Customers report a large backlog of orders and project starts, indicating reasonable potential demand, but supply chain issues remain. Machines must typically be replaced every 5-7 years, indicating a consistent and repeatable demand base. 

Challenges and Headwinds:

However, Somero faces challenges. The construction industry struggles with skilled labor shortages, particularly truck drivers who can deliver concrete on time. This timing issue is incredibly challenging for concrete construction projects. This reality of concrete construction means that delays in concrete deliveries limit the number of projects contractors can undertake. 

Furthermore, a delay in rate reduction or further rate rises may dampen developers’ confidence and further stifle construction starts.

Risks:

The company recently promoted and then removed its CEO, John Yunca, after a two-year stint. The current CEO, Jack Cooney,  the previous CEO before the departed Yunca, is in his late 70’s. The company recently affirmed in an earnings call that it has a good succession plan, but there is a key-man risk. 

Catalysts for Growth:

Key catalysts could unlock significant shareholder value:

• Lower Interest Rates: Decreased interest rates could revitalize the construction industry and boost demand for Somero’s products.
• Management Change: The recent departure of the former CFO, John Yunca, who oversaw a 20% decline in share price, presents an opportunity for a fresh perspective and potentially more dynamic leadership.
• The recent 50,000 square-foot addition to the Houghton, Michigan factory increased by 50% square footage and 35% operational capacity, completed in line with the $9.5MM budget, and its Q12023 functional increased maximum capacity. 
• Utilization of the SkyScreed product line ($1.1MM in 2022) increases the product line. Look for greater industry adoption. 
• The purchase of competitor Ligchine by a private PE group raises the possibility of acquisition. CEO Jack Cooney, the largest private shareholder, owns less than 1% of outstanding shares. No acquisition offers were described as of the most recent earnings 3Q23 call. 

Conclusion:

While Somero Enterprises may not be a household name, it possesses the essential qualities of a potential value investment: a solid financial position, market leadership in a growing industry, and a path to future growth. With solid leadership and favorable economic developments, SOM could offer a compelling combination of value and capital appreciation appropriate for a longer investment horizon.

Disclaimer: I hold a long position on this stock.