TIVP053: Exor NV (EXO): Too Good To Be True? w/ Shawn O’Malley & Daniel Mahncke

26:51And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. I mean, actually, Exo delivered quite a good example of those frictional costs you just mentioned. In February 2022, Exo paid about 850 million euros to Italian tax authorities to settle a dispute over a so-called exit tax, which Exo needed to pay after moving its legal headquarters, as you mentioned, to the Netherlands from Italy in 2016. And that's a little different from what you were describing. But the point is that with these conglomerates, there are just a lot of layers of complexity that contribute to you almost certainly never realizing the value of the underlying holding to one to one and nearly 850 million years to settle as a tax dispute was a very significant hit to NAV.

27:38And the question for us is, okay, you know, what is a fair discount to pay considering these variables like taxes and trading costs and capital allocation risk with management and so on. And well, the reason I'm pitching the stock today is because I think a 60 % discount to NAV is just unfathomably large. Even if you shave 20 % off the net asset value due to these frictional costs, which be a pretty steep shave, and then hesitations about the capital allocators at the top of Exor, and then maybe you say that the private investments are overmarked by as much as 50%, which would be a very, very dramatic markdown, the total discount to NAV in that case should still be, what, 25 % or 30 %?

28:23And actually, that is much closer to what Exo's discount to NAV has historically been. But at 60%, I mean, come on, you're getting Ferrari shares for half off, basically. That's just absurd. Well, I think this raises some questions about why you would even invest in holding companies in the first place over their underlying holdings. And the answer, as far as I see, is mostly for the accretive buybacks, assuming the stock is trading at the discount to NAV. And the promising thing about Exxor is that they have done some buybacks at scale in the last year, and they may continue to do so aggressively if this white discount that we currently see in comparison to the NAV actually persists.

29:05And Elkan might or might not be a genius, but judging from his just opportunistic buyback actions, taking advantage of the NAV discount in the way he does, he does seem to understand the creative buybacks, which makes him pragmatic as a capital allocator and puts him ahead of many CEOs that we've covered here on the show before when we looked at some of those companies. And honestly, with no understanding of why and when to do buybacks, we see that all the time. So just by doing that, I think you can probably say that he knows what to do with the money that they're getting in Exo. Bad buybacks is a pet peeve of ours, for sure.

29:42And so it was really interesting how they approached their buybacks. They did this thing called a reverse Dutch auction. Sounds really fancy for a 1 billion euro buyback. And so what they did was rather than buying back shares in the open market in the way that you and I would when we're buying stock, they instead sent a proposal to shareholders with a range of prices and asked those investors to basically submit their asking price, what it would take for them to sell their shares. And then they ranked the prices that people submitted and executed the lowest cost orders to maximize the cost effectiveness of the buyback program, essentially.

30:22And so I haven't really seen that done at this kind of scale and practice before, but I actually love it. So yeah, you would think that things like this would earn John Elkin more points with investors in terms of being shareholder friendly than it seems that they have. It certainly is a smart way for the Bibex to be even more efficient than they would be otherwise. And speaking about this wedding discount, I can't help but think of Berkshire. It will be so interesting to see whether Berkshire shareholders will have the same concerns, at least to some extent, about Able and whether he will change Berkshire in a way that investors say, hey, maybe the same discount that some other companies get is actually also applicable now to Berkshire.

31:03And we don't want to pay this premium anymore that we have paid for for quite a while. And just last week, we learned that Todd Combs will leave Berkshire and join JP Morgan. And some other roles in the management team have been changed as well. And I don't know, I must admit, I didn't think we would see that much change before Abel actually takes over. But apparently, Berkshire will look very different when that's the case. And to some extent, at least, that makes it even more interesting to me in terms of what direction Berkshire will take from now. And who knows, perhaps we'll get a couple of interesting announcements in a few months at the shareholder meeting in Omaha.

31:35That would mean lots of stuff to discuss for both you and me and also all the members of the Intrinsic Value community who can make the trip and join our private events over there. And yeah, how about we actually zoom in on John Elkin a bit more though, since he does seem like such an important part of the story here. Unless I'm missing something, it seems like the market must think that he's absolutely horrible at his job, or maybe even their private investments are just dramatically overmarked. Although, as you said, that's a small piece of the puzzle if you look at the actual value of it compared to the NAV.

32:07So maybe it's a mix of both because if you say the historic discount is closer to 20%, I don't really know how to explain the current 60 % discount that we have at the time of recording. And from looking at the space myself, I must say that 40 % to 50 % discounts are not unusual. I actually own the holding company in Italy. There's also quite capable management teams that still trade it at 50 % discounts all the time. But apparently, Exo has no history of such high discounts. Well, it definitely gives me pause when I'm thinking about the thesis here involving some kind of closing of the discount.

32:40And you're telling me that this is not uncommon for European holding companies, which is why I think we make a good team because I can definitely bring the American perspective, maybe the ignorant American perspective, But Daniel brings a great European perspective to balance things out. And so anyways, John Elkin is essentially the leader of the Agnelli family now. But he has been so for a long time. He assumed chairmanship of the company in 2007 at 32 years old after he had previously been nominated as Gianni Agnelli's successor at just 22 years old in 1997. And so in interviews, he's talked about what it takes for a company to actually survive for 100 years.

33:22And something like 45 public companies in every thousand are even close to enduring for that long. But what he inherited, he believes, was really a bit of a mess compared to where it is today. And so let's just listen to Elkin describe things himself and what the family did, as well as what happened to Fiat to turn around Exer's trajectory. How dire was the situation when you took over? incredibly dire. I mean, if you look between the financial and operational difficulties that the company was facing back then, the likelihood of us not making it were extremely high. So what did you do? We were...

34:00Because you talk about the different phases that you've been through in XO after you took over. So what's the first thing you do? You come into that situation, it doesn't look great. What do you do? We ended up as a family investing in the company. So we committed capital, which strengthened the balance sheet and renegotiated with the banks. That allowed us to have headroom. We were fortunate to appoint Sergio after having appointed four different CEOs before within those two years who did not work. And Sergio gave the company a complete projection with a turnaround we worked on. and the moment in which we launched the Fiat 500 in 2007, just 50 years after it had launched being the first time, was really a moment where we felt the company was actually flourishing.

35:01So, yeah, in the early 2000s, things were looking bleak for Exeter. And now, in my eyes at least, Elkin's track record speaks for itself. Exeter survived the financial crisis, and its subsidiaries really turned their businesses around, especially fiat. And so over nearly the last decade, Exeter's NAV has compounded at 13.5 % a year. And if we look from 2009 to 2024, NAV compounded 18 % per year versus the MSCI World Index, which returned only 12 % annually. So a decade of outperforming MSCI by 600 basis points, six percentage points. a year. And that is no joke. And so I'm really not sure then why the market is so hesitant to give Elkin any credit.

35:51I mean, I have some theories, but boy, it doesn't line up. And I guess the criticism is that some people see this outperformance as being entirely thanks to decisions made in the past, like with Ferrari, because that's a decision that goes back five decades. And with Fiat's turnaround, that actually had more to do with the actual CEO of Fiat. So So again, you can see how people are willing to not give Elkin credit. But then I would say if Elkin is the one who selected the CEO that turned around Fiat, I see that as being an important and successful allocation decision, right? I mean, picking the right people to put in place is not always easy to do.

36:29And so on top of all that, being able to write out a bet like the one they've made with Ferrari without ever panicking or selling should be worth something too. But that's just not how everyone sees it. So anyways, I mean, since Exxon first spun off Ferrari out from Fiat Chrysler, Ferrari has delivered a total shareholder return of over 11x, while the MSCI world delivered just a three times return in that same time frame. And so as a result of the strong performance from Ferrari, the stock has gone from comprising 15 % of Exxon's net asset value back in 2015 to nearly 50 % today, as we've talked about.

37:07Another thing we talked about prior to the recording here is that to some extent, the concern with just any family-owned company is the first generation or maybe the first two will have the work ethic to run the business well and appreciate the opportunities before them, while later generations will become more spoiled and maybe just lose that hustle. And I actually love this quote, though. It comes from Giovanni Agnelli, who passed on the torch to Elkin when he died in 2003. And he said, groups like ours typically go through three stages in their development, a time of strength, a time of privilege, and a time of vanity.

37:41For me, the first is the only one that counts. And as we heard in that clip a minute ago, when Elkin took control of the company, it was in rough shape with large debt loads, high uncertainty, and just tough conditions at a number of their industrial companies in the face of the financial crisis. And it looked like a time of vanity had consumed extra at that point and just hollowed out its intrinsic value from the inside out. And since then, I don't have any issue with saying that Elkin has been just terrific at his job. And he has led what I think, this rare resurgence that you don't normally see in these European family holding companies.

38:17And it's almost like he dialed back the clock from that stage of vanity to a time of strength again. And Elkin's stated goals have been to achieve strong growth in value per share and to build just great companies. And well, XO's NAV, compounding, track record, I would say speaks to him achieving that. And it's probably fair to say that Elkin is a good capital allocator and also a good selector of managers, as you just alluded to. So I don't know, who's not wedded to any specific asset in the portfolio, not even Ferrari, even though it might have been the main reason for outperformance in the last decade.

38:49And the company will frequently hold, buy, spin-off and sell wholly owned businesses and make minority investments in publicly traded companies and also in private companies. And it's very dynamic, pretty much like Berkshire Hathaway. And that's one of the things I really like to see because I wouldn't want them to buy and hold these cyclical companies. But seeing them spin-off and also selling off companies again and again is actually making me more confident in their ability to keep doing that. And the most important decision Elkin ever made, as you alluded to, was in selecting Sergio Martioni as the CEO of Fiat in 2004, who just served the company brilliantly until his death in 2018.

39:26During Elkin's tenure, Hexer acquired Chrysler in what was a pretty great deal with the US government during the financial crisis. He spun off Ferrari and then CNH Industrial from Fiat. And you'll notice that both of those are still in the portfolio and merged Fiat with Piju to create Stellantis and make it easier for the company to exit the business if they want to simply by selling shares in the now listed company that is Stellantis. And he's also overseeing the launch of a venture capital fund and some other early stage investments like this that are, in his view, meant to help bring Italy into the 21st century and beyond.

40:02It's really interesting. He almost thinks of this as it's not charity, but his investment in the public good of kind of modernizing the Italian economy. So I don't know. I don't put a ton of value on this part of the portfolio. It's probably similar to the other bets division at Google where they almost all are losers, but maybe every now and then you get something that's a big hit. And now they've got former Apple and Amazon executives helping to lead these venture investment teams, having invested some$600 million in over 100 promising companies globally, from Neuralink to the payments company Brax.

40:40And they actually host the largest tech conference in Italy. And they've taken a lot of learnings from Y Combinator, where they essentially put small amounts of seed money into these batches of startup founders. I mean, honestly, this sounds like a great story to tell. And I think it's easy to get excited about this. I still think the biggest concern here, And perhaps the reason there's this huge NAV discount in the first place is that nobody wants to see them diversify out of Ferrari holdings. I mean, that means they're looting their portfolio with lower quality businesses or also these startups, which all sound great.

41:13Let's be honest. I mean, most of them will not work out. And in the end, you only buy Ferrari at a discount if you ever see any money from these other investments that XR makes. And if that's not the case, and the stake in Ferrari is sold off to fund these other ventures, well, then the discount gets smaller and smaller. and shareholders will never actually benefit from it. So when you're telling me that they've kept stakes in Solantis and CNH and are kind of expanding into venture capital style bets, which are just notoriously difficult to do well on, then yeah, I can see why people are worried about the net asset value quality actually being diluted over time.

41:48So why don't you tell us more about this transaction they did recently to actually trim their position in Ferrari? Because I think that is what has elevated investor concerns and just caused this huge discount to an EV actually increase instead of decrease over time. In March, they completed the sale of a portion of their stake in Ferrari for about 3 billion euros. And the way they rationalized that was to say that on the back of Ferrari's really continued excellent results, the share price had increased to a euphoric amount, a really historic high, despite some of the headwinds that have been facing the luxury market that we learned about when we covered LVMH earlier this year.

42:27And so this was the exact line from John Elkin about it. He said, at Exer, when we think about our portfolio's composition, we like concentration because it encourages us to remain focused on what matters, but we also recognize that we need some balance. This transaction both reduces the concentration in our portfolio and provides the funds for a sizable new acquisition. As I underlined when we made the announcement, our support for Ferrari and our belief in the company's potential is unwavering. So there you go. And when we're talking about the stocks, discounts, and nav expanding as it has, you have to think there's a concern baked in there that they're on the trajectory of selling out of their Ferrari stake entirely.

43:10At which point, the narrative around Exxer just gets messier and honestly a whole lot less exciting. There's no crown jewel for the markets to have faith in. And that would just make me much less optimistic about their ability to continue compounding net asset value and to close that discount with the market price and valuation of those assets. And so trimming the position a bit, maybe that's fairly pragmatic, and especially the timing of it. They did sell around a high in the Ferrari shares that have since pulled back a lot. But it's hard to say. I think the timing of it looks good, but if it's something they do a whole lot more of, that would make me nervous.

43:50I totally agree. And at the same time, it's kind of hard sitting here criticizing them for it when we didn't buy in at those prices in Ferrari either. And I don't think they would sell out of their Ferrari stake entirely. It just doesn't make much sense to me. But it gives them some pause too, to see them sell Ferrari because it is overvalued. Because in the end, if Ferrari shares drop and they simultaneously use cash from selling Ferrari to fund those other ventures that we talked about, the discount can just quickly drop because the Ferrari stake is losing value and the money is redeployed in less good businesses.

44:19And that said, this would be pretty much a worst case scenario for this stock. And I don't think the management team has done anything that would justify expecting such bad capital allocation decisions. And especially considering the buyback program, they already have set in place. And how about we take a moment to just look at the structure of the company a little more? How much of it is owned by the Agnelli family? What's the debt profile? Stuff like that. Because I do think that there's maybe not the right incentive for the CEO and the management team. if you compare it to the shareholders that basically just want a Ferrari proxy.

44:53That's right. Yeah. So 86 % of voting rights in Exit are controlled by the Agnelli family, but they hold only 55 % of the economic rights. So it's like the situations we see in Silicon Valley all the time where founders give themselves extra voting power that prevents outsiders from taking over the company or forcing them to make changes to that business. And we usually joke that depending on how much we like the founder and CEO of these tech companies, I mean, that determines the extent to which we're comfortable with that kind of asymmetry and shareholder power. Mark Zuckerberg, maybe. Snapchat's founder, maybe not as much.

45:30But in this case, I don't know if I like it. But I mean, I get it, of course. They're going to have disproportionate control over a business that has been their family's vehicle wealth for a century now. And really, you don't even ever see founders with 50 % equity in large tech companies in the US. So you could say that the Agnellis have as much skin in the game as anyone with any company we've seen. And we aren't buying this thing at 60 times earnings like we would with some hot tech company that's founder led with share classes. We're looking at a 60 % discount to net asset value. 60%. I mean, that is the total opposite of buying something at 60 times earnings.

46:11And so intuitively to me, that feels like more than enough to compensate me for, yes, being sort of a second class showholder in voting terms power. Not that we would be even able to acquire enough voting power to really move the needle anyways if we added Exeter to our intrinsic value portfolio. So, I mean, I do think it's a bit of a bad look that Elkin gets paid 11.3 million euros, or at least he did last year. maybe that's not crazy by some compensation standards but in my view my idealistic view you might say if he's essentially managing his family's money i don't know i guess it doesn't seem like you should need a ton of additional compensation to be all that incentivized i mean if you told me he got paid something like 1 million euro a year i'd be like fine that's reasonable for the time that's going into this but you know it's much more than that and that's to say nothing of the additional seven euros a year he earns from being the chairman of Stellantis and Ferrari.

47:14And fortunately, despite my kind of qualms with how Elkin is personally paid, overall, the stock-based comp of the company has not been substantial enough to prevent Exer from steadily decreasing its share count by nearly 3 % a year since 2019. And if that track record keeps going on, we're going to have to start calling them a share cannibal because it's starting to look a lot like the Ultas of the world. I hesitate to say the AutoZones of the world who have been buying back shares consistently for three decades. But yeah, they're definitely on that trajectory. Five, six years of really consistent and substantial buybacks.

47:53I would very much love to see that they continue to do that. And at a 60 % discount in net asset value, I'm sure that will continue. And then just in terms of the debt, their financial profile, I mean, it looks very modest. 95 % of their debt is fixed rate at very, very low rates. And we're talking about financing that was secured during the pandemic. And so that financial strength is reflected in their credit rating. Their long-term borrower rating is an A - as rated by S &P Global. And an A - for context is considered an upper medium grade for an investment grade corporation. It's like getting a 90, 85 on a test.

48:33It's not as good as a double A rating. And then the highest ratings are really not even accessible, but for a few institutions on entire earth, mostly governments, but then you've got some companies like Johnson & Johnson and Microsoft, which are seen as just being exceptionally financially sound. But otherwise, literally with a triple A rating, you're more credit worthy than most sovereign governments on earth, including the United States, actually. But still, as I said, A-minus, very solid for Exer as far as I'm concerned as a Dutch, Italian, holdco, very, very conservatively financed. And so, yeah, from a credit risk profile, I don't see any glaring red flags that I'm nervous about.

49:18I'm more nervous about the capital allocation decisions they make going forward than I am about any kind of credit risk in this investment? I think you can work with that rating for sure. I mean, my intuition here might be off, but what is a bit more concerning to me is that I always feel like there's a limit to where skin in the game is still an advantage. So when I see a founder that has, let's say a 5 % to 10 % stake in his company, and it's clear that this company is his way to become a billionaire, to say it somewhat blatantly, then I think that stake aligns him pretty well with the shareholders and just make him go harder for that company.

49:54But when your family is already wealthy and the company seems more like a vehicle to preserve your wealth, I think incentives might not be perfectly aligned. You said it before, he diversifies because it's natural to not want all your family's wealth depend on one company, even if it's a great company like Ferrari. And the vast majority of shareholders, on the other hand, they want to be an exor because they want to own a Ferrari proxy. And I guess this is where the mismatch is mostly coming from. at the same time, this might be a great opportunity for us to capitalize on these exaggerated selling pressure because shareholders were spooked by the sale of Ferrari shares.

50:29And when you told me a bit about the pitch beforehand, and you mentioned how the company was recently reclassified in 2024, it sounded like this has actually made the company more understandable to investors or at least more transparent. And I would have thought that that maybe could lead to a narrowing in the NAF discount too. But as we know now, that has not been the case and it's probably just one more reason why it's not about the management it's not about the structure but mostly just whether you can use it as a Ferrari proxy but anyway will you maybe tell us a bit more about this reclassification that took place in 2024 yeah let me ask for some grace from the listeners just I'll take you on a quick tangent that'll be a little technical but hopefully it'll be painless and so for accounting purposes according to IFRS 10.

51:18And IFRS is essentially the international version of GAAP, Generally Accepted Accounting Principles. EXER ND has moved from being more like an industrial conglomerate company to an investment company, which means that instead of directly reporting the operating profits of their underlying companies, now they report the stock market value of their holdings. And so that's a big difference. And another way to say that is that their investments are now accounted for at fair value through the profit or loss statement, meaning any changes in the fair value of these assets are recognized in the income statement.

51:59So you could have a company that increased its profits by 10%, but if the stock fell by 10%, then it's going to show up as a 10 % subtraction on Exeter's income statement, just to grossly, grossly simplify things. And so correspondingly, like Berkshire, we can't go off the reported net income alone to understand the business's earnings, since Exeter's reported earnings can be so affected by these swings in the valuations of the stocks that they hold. Think Ferrari or C &H. And so one benefit of this, though, is that Exer will deconsolidate most of its portfolio companies so that the direct operating profits and costs of those businesses don't show up on Exer's own financial statements.

52:47And they also move to begin having their net asset value disclosures audited, which is another one of those things that's just clearly meant to increase transparency and hopefully improve the market's trust in Exeter. And in terms of the cash flow statement, this reclassification as an investment company means that proceeds from the sales of their investee companies for paying for acquisitions and dividends received from their holdings, all of that are now classified as cash flows from Exeter's own operating activities as an investment company. So just to make the point, Exor wouldn't report a prorated amount of Ferrari's income statement on its own filing.

53:28They wouldn't report 20 % of Ferrari's income as their own income. Instead, it would simply report any appreciation or depreciation in the value of their shares in Ferrari as an operating or profit or loss for Exor itself, while counting dividends from Ferrari as also part of their operations, too. And under their previous holding company status, they would report the consolidated financials of their holdings in one report, which gets very messy. And so I think we're through the worst of it. Thanks for everybody who stuck through a little bit of that explanation there. But the takeaway is that the new reporting standard better reflects Exer's reality as an investment holding company whose activity is limited to participating in companies without interfering in and managing their operations, except through periodically exercising their shareholder rights and votes.

54:25They're passive owners, and that should be and now is better reflected in their financial reporting. That's kind of the conclusion. And as you said, Daniel, it was a recent change. And again, I would have thought that logically, this helps remove uncertainties that it would have been contributing to the discount from NAV. That's just not what we've seen happen. And so that's why I continue to think the stock is misunderstood and overlooked and could actually be an opportunity or a very attractive opportunity for you and me. I guess the concerns of the market in the end just have little to do with other accounting changes or the management team and more just with the aspects that we already mentioned before that, you know, people want to own a Ferrari proxy.

55:08And if that's no longer the case, they're just not as interested in these cyclical companies that XO is otherwise owning. But it is still, despite all of that, a logical change, in my opinion, and it makes following the company just significantly easier. And maybe over time, that helps reducing a bit of that discount. And it's one of the reasons why if you look at a company like Exxor, you usually focus on NAV instead of reported earnings. And we will talk a bit more about valuation, obviously, in a bit. But there are a couple of other things I wanted to mention before we do that. And firstly, if we do invest here, we will be investing alongside one of our favorite legendary investors, which is Guy Speer, who owns Ferrari outright, but also through Exxor as well.

55:49And if we could ask him, I would just love to know how he thinks about which position to allocate more capital to when he is rebalancing. In theory, Exo should be more attractive. So why own any Ferrari shares outright explicitly? But at the same time, practically speaking, we know that Exo is a diversified company, as we have discussed now a couple of times today, and that doesn't perfectly track Ferrari and it doesn't even always trade anything close to the value of its underlying assets. So of course, if you are just truly a bull on Ferrari, you're going to want exposure to Ferrari itself and you might just use extra stock as a way to tweak that exposure on the margins.

56:27Anyway, speaking of celebrities, another name that we should mention is Johnny Ive. How is he involved in or with extra? So Johnny Ive was for a long time, the chief of design at Apple. And you might, you might describe his style as luxurious minimalism in a way. the the iphone is very clean and simple as our most apple products and a lot of the finer details behind that were designed by joanie and from the macbook the iphone apple watches airpods and ipads i mean he was pretty central to all of that and now he works with a gentleman named mark newsome to do something akin to design consulting for a range of projects that they find interesting So Ives has worked with Airbnb, King Charles III, OpenAI, and then relevant to us, he's worked with Ferrari too.

57:21And so in September 2021, Exer and Ferrari announced this long-term multi-year collaboration with Sir Joni Ives. And the partnership's first focus has been on combining Ferrari's performance engineering with the type of product and experience design that Ives is famous for. And what I've been really excited about is that their deal together says I will help explore these other creative projects with Exer and this kind of broader business of luxury. So when I hear that, the first thing that comes to mind is maybe he'll be working on Louboutin in some way. And I wouldn't say that this is a reason alone to invest in Exer or Ferrari, but come on.

58:02It adds really effectively to the story we're telling here, the picture we're painting. We're not talking about some pathetic, bumbling holding company, if you're going to say. I mean, this is a business that has outperformed the market averages for years in terms of compounding its net asset value. It's taken tangible steps to increase its transparency in financial reporting, is continuing to do major buybacks. And then last but not least, they're partnering with maybe the most iconic designer in the world. And somebody like that wouldn't expect, you know, he wouldn't partner with a company that has some terrible reputation that would justify a 60 % discount to NAV.

58:41You wouldn't think that that type of business would be able to partner with Joni Ive. But the fact that they've got his attention, to me, really validates that they own really, really high quality assets. And then what is the logical conclusion from that? The conclusion for me is, you know, what is happening in markets is just totally overlooking the underlying intrinsic value of the business here. And so, you know, this is not the kind of framework and thinking that you'd ever find in a valuation textbook. My finance 101 class would not tell you to think this way, but it's the type of common sense we like to use from time to time.

59:16It's like, yeah, you know what? Loser holdcos with, you know, like dynastic family dominance and terrible portfolios don't usually partner with people like Joni Ive. And so, yeah, I don't know. Maybe I'm naive, but that is just one of those subtle things that validates to me the quality of Exeter's portfolio of brands. I got to say, you make me curious now, what project I've had to do with King Charles. But I guess that's not for today's episode. That's for homework. We should do that, yeah. I mean, I feel like we've been doing it all episode, but let's specifically focus on valuation now. I'm not sure if you have an idea of what would be a fair discount to NAV for EXA, but I do want to hear more about how you would think about approaching an investment from you and me into EXA as part of our portfolio.

1:00:11So the way I approached the valuation was basic, which will be of little surprise to anyone who knows us. We aren't the type to make 20 tab DCFs after all. But yeah, I did a breakdown of their net asset value. And then I just mapped out what the IRR would be in what I imagine to be a bear case, base case, and bull case. So in the bear case, I assume that Exeter's valuation normalizes long term at a 50 % discount, which I think would be very extreme. But that's why it's the bear case. And in that situation, if you have their net asset value compounding dramatically slowing down to maybe 5 % a year, then maybe this kind of discount could be sustained over time.

1:00:54But even in that case, assuming a below average rate of compounding in their assets and a pretty punitive discount over an extended period of time, you could still actually underwrite an expected return of 10 % a year over the next five years from that 5 % compounding and then from some of that modest compression of the extreme discount to NAV that we're seeing today. And then in a base case, if XR's NAV compounds at an average rate of 7 % a year, which is very, very average, and the NAV discount closes further, but still remains kind of at the top of that historical range at 40%, you could expect a 16 % annual return from buying at current prices of around 72 euros a share.

1:01:41And then in my bull case, just by having Exert return to what would be a more normal 30 % discount to NAV was slightly above average compounding relative to the market historically, but still below their actual results over the last 15 years. And you'd expect to generate a return of 20 % a year over the next five years. And so this is just truly to me, what a margin of safety looks like. There is so much room for error that even with relatively poor results, not the most outlandishly bad scenario you can imagine, but a realistically bad scenario, the stock can still perform decently well from current prices, with really some serious room for upside in scenarios that are modestly optimistic at best.

1:02:29Banking on 9 % net asset value compounding in a bull case would really be most people's base case for this business based on their track record. And so honestly, that is just, it's very modest. I'm not making extreme assumptions here. So yeah, I don't know. Maybe I'm naive because it's not like we have a specific catalyst in mind, but at the same time, I also don't even factor in how continued buybacks would keep shrinking the share count, increasing the intrinsic value per share for remaining shareholders, nor do I factor in the fact that they pay dividends. So, I mean, it's a small dividend, but still I'm not even factoring that into these return projections that I gave.

1:03:06And so the total return could actually be even better than what I've outlined with the caveat being that we have no idea how long this discount to NAV will persist. And if Ferrari's business takes a nosedive, then you can imagine this discount widening further for a period of time. And that's why there's no free launch in finance. We would be opting into genuine uncertainty. And the question is just how unpalatable or how palatable do you find that uncertainty to be? I mean, Ferrari was a company we were just pretty keen to invest in previously. So yeah, for as much as this is about modeling Exo's valuation and range of returns, we also just really like Ferrari.

1:03:48And I think if we didn't like Ferrari, we would feel totally different about this opportunity and investing in Exo because at the end of the day, if you think Ferrari is too expensive, this just gives you a lot more leeway to be wrong on the valuation that Ferrari is on. And at this point, we know that literally, it's not too good to be true that we are buying exposure to Ferrari on the cheap, even if at the same time, we shouldn't expect the discount to NAV to ever close fully. I think both things can be true. You can make a lot of money with this investment without saying there's a 60 % discount to NAV.

1:04:20And my thesis is that it will go to zero over the next five years. My proposition, if you're willing to invest in XR, would be to add an exit rule. And so that would be subjectively defined. But the idea is that if the company begins to dramatically cut its stake in Ferrari, let's say going from two-fifths of net asset value to one-fifth, unless we have equally high confidence in the quality of the reinvestments they're making, then regardless of the discount and what's going on, we should just exit the position. Because fundamentally, the story is no longer about Ferrari anymore. and when it's not about Ferrari, we have a whole lot less confidence about the discount being extreme because we think Ferrari is a really good company, ultimately.

1:05:05So even with a wide margin of safety, like I said, I mean, just the investment loses its luster once you take Ferrari out of the picture. But as long as they have that Ferrari stake that's worth more than the entire market cap of Exer, then I'm happy to bet on the stock. And I would probably be comfortable at a minimum. making it a core 5 % position. If the risk and reward profile is truly the way we see it, I think you could probably argue for making as much as a 10 % bet or more. I don't want to get too carried away because I feel like there are some unknown unknowns here that I've just never bought a European family-run holdco before.

1:05:47And I'm imagining that I'm probably too optimistic about the prospects here, not because of anything wrong with the modeling, but just because there are things that can go wrong, not major things, not thesis breaking things, but there are things that can keep that discount extended for a long time. And there's just no guarantee that that will change. So I don't want to make something like a 12 % position where if there was really a catalyst, we felt good about, okay, this discount is going to narrow in the next six months. I would say we need to make a very, very big bet on that because I don't know the timeline of that.

1:06:23I would be happy to kind of hedge that and say, maybe this is a 7 % position. Maybe it's a 5 % position. But this is the part where I ask you what you think, Daniel. So you tell me. Well, as you know, I'm an old school value investor at heart. So even after 50 weeks of mostly covering compounders, I still like my value place. And this one is definitely one that fits into that bucket. I've actually owned, like I said before, an Italian holding company in my personal portfolio for a few years, and I traded at roughly a 50 % discount to NAV. And even though the investment worked out great and returns were strong, the discount barely ever moved.

1:07:04Management was very capable, in my opinion. But as with Exxer, the business was controlled by just one family with most of the voting power and most of the shares. And most of the value came from selling assets at or even above their marked NAV. And with the point being that without catalysts, these discounts, at least that's what I experienced, can be more sticky, even if they don't seem to make much sense, if you just look at it. And apart from Ferrari, I don't see that many great assets in an XS portfolio, at least no big ones or ones that are very liquid. And I think Stellantis and CNH are interesting because of their prices and where they are in the cycle.

1:07:42So it will mostly depend for me on whether they sell those assets at the right prices opportunistically. And now that I know they've owned them for a while and that they were spinoffs or mergers to some extent in connection with fiat, I ask myself, what's their strategy with those assets? Will they sell them at higher prices or will they just hold on to them for the long haul? And anyway, I think my point is that there is no potential upset from selling their best asset, which is Ferrari, because investors wouldn't like that. And at the same time, I'm not sure what their strategy is for the rest of the portfolio.

1:08:15And because of that, I think I agree that making it a 10 % position is probably a bit too steep. But a 5 % to 7 % position, and maybe this sounded a bit more bearish than I actually am, I think a 5 % to 7 % allocation in our portfolio makes complete sense to me. The downside feels very well protected here. And whenever that's the case, as Joel Greenwood likes to say, the upside tends to take care of itself. And as you said, they have a phenomenal asset. but they have what seems to be a good capital allocator on top. And while I might be less naive about the discounts, the discounts to NAV, because I've seen a lot of those actually in the past, and usually they don't move that much.

1:08:55It tends to be different for companies that have historically a lower NAV discount, like Exa, for example, has. So if they're historically at 20 % to 30%, it's not unreasonable to think that they will get back to these levels. And in your model, you're not even assuming a 20 % discount. You're assuming way more discount than that. So that just makes it seem to me like you can barely lose money even though you should never say that in investing. And there's huge upside in the next couple of years. So I'm completely willing to make it a 7 % position if it's up to me. If there's a blind spot we're missing here, we would love for the audience to let us know.

1:09:29But yeah, I'm in agreement. I think the upside will take care of itself, hopefully. So yeah, this is exciting. This is the first real value play that we've added to the portfolio. I mean, we've looked at a few. When I say value, you know, we're talking about like Smith & Wesson and some of these really kind of off the grid names a bit. Companies that, for whatever reason, trade at real significant discounts to either their balance sheet assets or to kind of a normalized earnings power, like looking at cyclical businesses. we've spent a lot of time looking at quality businesses right i mean ulta is is almost like the closest thing to a value play we've really we've really made and still we bet on it because of the quality characteristics of the business in terms of the return on capital and the historical growth and all the kind of qualitative things we like about like the brand's positioning and you know we still pay like 16 times earnings for that so it wasn't like we were buying a retailer for five times earnings which i would think of as being a more like classic value play but 60 % discount to NAV Dutch Italian Holdco family owned this is some classic value stuff so I'll be excited to hear how the audience feels about it and yeah I'm excited to see how it performs and at a minimum it'll be a great learning experience and so on that note let's close things out today by having you give the audience your hints for what company you'll be covering next week well next week we will definitely not have a value play like today, but it will be a company that at least to some extent compares to today because you called Exo the Italian Berkshire.

1:11:11And there are plenty of companies that get labeled as the Asian, the South American, or basically pick your region version of something else. And the company I'm covering next week falls right into that bucket too. And it's based in South America. It's a high quality company and it follows a playbook from a company that we have already covered here on the show before. Actually, there are two companies that use the same playbook that we've covered here on the show before. And I think I won't say much more because I think it is kind of obvious already what it is. So I don't want to give it away.

1:11:42So that's it for me. Sounds good. Okay. I think it should be a fun one. Let me leave us with a quote from Enzo Ferrari himself. He says, racing is a great mania to which one must sacrifice everything without reticence without hesitation. So maybe it's a little dramatic for me to say, but sometimes I do feel that way about investing for better or worse and really consume your life. And we just happen to enjoy it. And we're very lucky to do so. So we'll see you all next week as we keep indulging this great mania.

1:12:31Thank you.