Table IV. Top net purchases for the quarter ended June 30, 2011 Quarter End
Market Cap Amount
Micros Systems, Inc. $4.0 $27.8
Airgas, Inc. 5.5 23.6
WebMD Health Corp. 2.7 18.8
Polypore International, Inc. 3.1 18.0
LinkedIn Corp. 8.6 16.3
Rockwood Holdings, Inc. 4.2 15.0
Air Lease Corp. 2.4 13.5
HomeAway, Inc. 3.1 12.6
Perrigo Co. 8.1 9.7
Gentex Corp. 4.3 7.9
The Fund’s largest new investment was made in Micros Systems (MCRS), the leading provider of technology systems to the hotel, restaurant and retail markets. Micros’ key offering to hotels is the OPERA property management system (PMS), which is used to manage reservations, rates, customer profiles, front desk functions, rooms, cashiering, and labor scheduling. Micros’ restaurant offerings include software and hardware for point of sale (POS) transactions, kitchen displays, inventory management, labor management, online ordering and reservations, and website design, marketing and syndication.
We believe that Micros is the dominant player in a large addressable market. We believe that there are approximately 430,000 hotels globally, including 55,000 chain hotels and 375,000 independent hotels. Micros has approximately 28,000 hotels on its platform, implying market penetration of just 6.5%, and Micros is approximately eight times larger than its nearest competitor. This scale gives Micros significant advantages in research and development, marketing, and the largest trained user base. This increases barriers to entry, and it encourages new customers to consider using Micros.Within hotel chains, there are significant benefits to having a standard PMS system across the enterprise. As a result, Chief Technology Officers often select a single PMS vendor and gradually introduce the system across hotels, giving Micros an embedded growth path to 100% market share within many chains. Marriott, Hilton and Starwood continue to use internally developed software to run their North American operations, and we believe all three represent large potential revenue opportunities if and when they elect to modernize their PMS systems.
Micros is similarly well positioned in the restaurant market. We believe that there are between 1.5 to 2 million restaurants globally in Micros’ addressable market. Micros currently has approximately 200,000 restaurant customers, implying penetration of just 10-13%, and Micros’ installed base is already two-times larger than that of its nearest competitor. The restaurant market is highly fragmented, and includes products from many sub-scale vendors that have underinvested in their products during the recent recession.We believe Micros is well positioned to gain share from these vendors as existing POS systems continue to age and come up for replacement.We believe that Micros’s competitive position has been enhanced by the recent launch of its next generation restaurant system, branded Simphony, which takes advantage of recent improvements in technology to offer clients enhanced functionality with lower operating costs.
The company’s software and hardware offerings provide clients with core front and back office functionality that are used in almost every guest interaction. This has resulted in renewal rates well in excess of 90%, modest pricing power, and high barriers to entry. It also facilitates the cross-sale of new and innovative products to Micros’ loyal installed customer base. Exciting new products include a partnership with Google to allow customers to book hotel rooms directly through the Google search engine, new pay at the table capabilities for restaurants, online ordering and reservations for restaurants, and growing social media design and monitoring capabilities. These add-on products, which generate high margin recurring revenue for Micros, create significant value for customers and frequently pay for themselves within the first several months after purchase.
We believe that Micros’s operating margin is quite scalable. The company’s margins have climbed almost 10% during the past seven years, and we continue to see a long runway for margin expansion ahead. The company also generates significant free cash flow given the low capital intensity of its business. Micros has over $800 million of cash on its balance sheet (approximately $10 per share), which we expect it to use to make strategic acquisitions, repurchase stock, and potentially pay a dividend.
We initiated a position in Rockwood Holdings (ROC) during the first quarter of this year and added to the position during the second quarter. Rockwood is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials used for industrial and commercial purposes. The company has five primary segments: Lithium, Surface Treatment, Advanced Ceramics, Titanium Dioxide Pigments, and Performance Additives. We believe that Rockwood is a very “differentiated” company within the Materials sector. Rockwood has a portfolio of niche businesses with leading market positions, attractive end markets, high margins and strong growth prospects.
Rockwood is the leading global producer of lithium products and specialty lithium compounds. The company has leased brine pools from the Chilean government that has given it among the lowest cost structures for lithium extraction. Demand for lithium has been growing at a healthy clip, driven by new uses in laptop and cellphone batteries, electronics, hand tools, pharmaceuticals and greases. Over the next decade, we expect demand for lithium to increase meaningfully in response to higher production of allelectric (EV’s) and hybrid-electric vehicles (HEV’s), which are powered by lithium-ion batteries. One HEV requires about 320 times more lithium than a laptop and 3,200 times more than a cell phone. HEVs currently represent less than 1% of worldwide vehicle production, and one million HEVs (approximately 1.5% penetration of the global car market) would require 20 million pounds of lithium carbonate (LCE), or an approximate 50% increase to global demand for battery-grade LCE. We think Rockwood would likely be a key beneficiary of this demand.
In its Surface Treatment segment, Rockwood develops solutions for chemical pre-treatment of metals and other substrates. The recovery in global auto production and the general pickup in industrial activity have been important tailwinds for this business. In its Advanced Ceramics segment, Rockwood produces highperformance ceramic materials for specialized applications, including ceramic hip joints, where Rockwood has dominant market share. In its Titanium Dioxide segment, Rockwood produces TiO2, a base industrial product used to impart whiteness and durability to synthetic fibers, plastics and paints. The company is the leading specialty player in this market, with approximately 40% market share. A global supply shortage of TiO2 has resulted in unprecedented pricing power for TiO2 producers, with prices up more than 30% year-to-date. Management views this business as non-core and will likely sell it in the next few years.
Rockwood is led by a capable CEO whom we expect to use the company’s significant free cash flow for debt repayment and possibly dividends.We believe the company can grow its earnings in excess of 20% per year over the next few years. Currently, Rockwood trades at a discount to many of its specialty chemical peers, despite, in our view, a better competitive position, higher margins, and better growth prospects.
The Fund reduced its position in Southern Union, which it first began purchasing in 1998 at approximately $10.50 per share, after it became the subject of a takeover battle.The Fund sold its position in CME Group on concerns about the impact of financial industry reform measures on its business.
At the time of this letter, the market has just declined meaningfully on concerns surrounding the European fiscal crisis, the downgrade of U.S. treasuries, and the prospect of a 'double dip' recession. As discussed last quarter, we believe that the strong rebound in stocks following the financial crisis was led by outsized performance in more speculative, higher beta stocks. Many of those same stocks have sold off most dramatically during this recent market decline. We believe that Asset Fund's portfolio of high-quality companies with sustainable earnings growth should hold up well in this tumultuous market environment.