Loar Group, Align Orthodontists, BFIT France, CPRT International, Casey's, RMV, Storskogen

Published Last Week

1. Loar Group: Portfolio Quality

2. Align Technology: Orthodontist Practice Operations

3. Basic Fit France: Gym Market Challenges

4. Copart: UK, Germany, Finland, & India Market Opportunity

5. Casey's, Murphy USA, Circle K: US Convenience Retailer Market Dynamics

6. Zoopla: Competing with Rightmove

7. Storskogen Group: M&A Strategy & Challenges

Loar Group: Portfolio Quality

Last week, Loar Group, a holding company of aerospace parts and manufacturing companies, raised $330m and listed on the NYSE. The strategy laid out in its S-1 is scarily similar to TransDigm’s S1 in 2003:

TDG S-1 2003:

close

Zoom InZoom OutReset

Loar Group S1 2024:

close

Zoom InZoom OutReset

A deeper comparison between the two companies is interesting: both listed with ~$350m in revenue but with a different mix. In 2003, 75% of TDGs revenue was from 'sole source' products, 66% from the aftermarket, and 90% from 'proprietary products'. In FY23, Loar generated 52% of revenue from the aftermarket and 85% from 'proprietary products'. There wasn’t one mention of sole source in Loar’s filing. The differences in revenue mix underpin differences in margins: in 2003, TDG earned 44% EBITDA margins compared to Loar’s 36% run-rate EBITDA margin.

A more interesting question surrounds the definition of ‘proprietary’ for both companies. And, more importantly, how this translates to the company's moat and pricing power.

Although on the surface LOAR seems similar to TDG, the underlying asset quality and intellectual property ownership is different. In the first interview in a series on LOAR, we interviewed a Former VP at the company to explore the quality of the portfolio in more detail:

I'm really curious. That was the biggest question I had after reviewing the S-1. Not that I'm suggesting they are lying or misleading, but I believe they mean something different than what most people would assume. When the typical person reads that and thinks of TransDigm, they might think it implies being the sole source or having a very strong competitive position. I can only think of two or three of their businesses that truly have such a strong position. The rest are built to print, where their proprietary capabilities lie in the number of machines they have, their capacity, and their ability to maintain high quality control, but they aren't doing anything that can't be done by someone else. They manufacture someone else's product in whatever quantity the customer orders and then they're done with it. - Former VP at Loar Group

Align Technology: Orthodontist Practice Operations

This interview with an experienced Orthodontist, who runs 2 practices with ~800 case starts per year, walks through the process of serving clear aligner and wire patients and how he optimises the economics of his practice:

I have many different price points, three of which I mentioned to you. They vary based on complexity levels and so on. Metal braces are the cheapest for me to buy, so I put them on, and it's a bread and butter. Many people want it, so we're happy to offer it. Clear braces cost just a tiny bit more, about $5 more per bracket. But, you know, we tend to charge $500 more, though we're only paying about $50 more because the consumer is happy with that recognition and clearness. Clear aligners, of course, we sell them as the clear and invisible option, less painful and all that fanciness. Technically speaking, clear aligners should be twice more expensive than braces because the lab bill is so high. However, we try to use the volume business decently. - Orthodontist Practice Owner

Clear aligner patients seem to have shorter chair time than wire brace patients:

Clear aligner patients basically have zero chair time, right? They walk in, and three minutes later, they're gone because they're very quick and efficient. I love it. Braces patients, on the other hand, are not. They do use up more time. We both book them for 20-minute appointments, but an aligner patient could come 10 minutes late, and I can still get the job done. If a braces patient is 10 minutes late, I can't finish my job. So, yes, it does take more time. - Orthodontist Practice Owner

But shorter chair time doesn't mean it's effective for orthodontists to move to 100% clear aligner customers. Wire braces in combination with aligners are important to drive more patient throughput:

I've always believed that aligners can do a great job. My perspective on what's smart to do with aligners has evolved. Any case can be treated with either aligners or braces. However, I believe the future of orthodontics lies in smart orthodontics. Smart orthodontics involves finding ways to reduce unnecessary steps when using braces. Nowadays, braces are our main focus. I do 80% of the initial treatment with braces and then switch to aligners to finish. If I use aligners and it's not working, I'll tell the family that we need to switch to braces. This is because you might spend too much time trying to rotate a premolar, extrude a tooth, or level a bite without making progress. - Orthodontist Practice Owner

Basic Fit France: Gym Market Challenges

France is Basic Fit's largest market and has been the slowest EU country to recover from COVID. This has pressured BFITs recent organic growth. There are also questions around the collection risk on outstanding receivables in France; the collection time is over double Spain or Benelux and, unlike other EU countries, BFIT can't add the collection cost to the original receivable amount in France.

close

Zoom InZoom OutReset

This interview with a Former Franchise Owner of Fitness Park, one of the largest competitors to BFIT, explores the history of the French low cost gym market and BFITs competitive challenges.

BFIT scaled aggressively in France specifically targeting openings near existing Fitness Park gyms to prove its model:

Imagine it's the beginning. Basic Fit arrived in France. Indeed, they became a significant threat in 2016. We were familiar with them in Belgium because we had observed all their development and how they dominated the fitness market in Belgium. So, when they arrived in 2016, Fitness Park had already been established. The first Fitness Park opened in 2009. By that time, we had around 150 gyms established. Basic Fit's first goal was to undermine Fitness Park. Whenever we opened a Fitness Park branch or franchise, Basic Fit instructed their real estate agents to find a location near ours. For every Fitness Park that opened, there was a Basic Fit opened in the area—either in front, on the side, or behind. Of course, they also opened in other areas, but their primary target was Fitness Park. - Former Fitness Park Franchisee Owner

BFITs company-owned store strategy enabled it to aggressively underprice Fitness Park franchisees who need to price their offering to earn a certain cash return to repay its bank debt:

So, when Basic Fit arrived with a very aggressive offer, they were able to offer six months free with a one-year commitment. This offer was very aggressive compared to our Fitness Park. But you have to keep in mind that Basic Fit only operates branches. It's the same group, the same pocket, so one can be profitable while the other is not because it's a balance within the group. Fitness Park, on the other hand, has franchisees. You can't do the same with franchisees because their names are on the bank loans. It's not the same strategy to develop a franchisee program compared to a branch program like Basic Fit. So, we couldn't make the same offer as us at Fitness Park at that time. And they are still in this position. - Former Fitness Park Franchisee Owner

Although BFIT had an advantage, it seems the market has changed post-COVID. BFITs offering seems to have fallen behind and a new competitor on the scene potentially poses a threat:

But in my opinion, the biggest issue for Basic Fit right now is Basic Fit itself because the equipment is poor, and the member experience is nonexistent. They haven't reinvented themselves since the beginning. It's always the same gyms, the same color, very poor on the walls, very poor in the locker rooms. There is nobody at the desk to provide information. They should have reinvented themselves after Covid, but they didn't. So no, Fitness Park is not the biggest threat. On Air should be the brand to watch in the coming years. It is already the best low-cost brand in France and is expanding rapidly. They have a lot of demand in their franchise program. Everyone wants to sign with On Air. - Former Fitness Park Franchisee Owner

The interview goes on to explore the largest risks to BFIT and how French fitness behaviour has changed post-COVID.

Copart: UK, Germany, Finland, & India Market Opportunity

This interview is with a 15-year veteran at Copart who spent 8 years expanding CPRTs model outside the US. We explore the challenges and nuances of the salvage process in the UK, India, and Germany relative to CPRTs US model:

In some countries, the policyholder believes it is their right to retain the salvage. The worst aspect is that, through personal experience, the longer the claim takes from the incident date to the point where a settlement is agreed and the salvage route is determined, the more problematic it becomes. By that time, you might have been to the bar on Friday night, and your friend might say, 'Oh, I can repair that for five grand.' But in reality, it's a BMW with an engine management system behind the rear bumper that has a cracked casing, which alone will cost four grand to replace. People often think of the old cost to repair, not today's cost. And manufacturers are very clever because they're always designing vehicles that are almost built to be disposable. - Former Director at Copart

Casey's, Murphy USA, Circle K: US Convenience Retailer Market Dynamics

Over the last decade, Casey's, the US c-store retailer, has doubled gross profit per gallon from ~19c to 34c. The company also recently guided to sustainable mid-30's fuel gross margins in 2026. A Former Director at Casey's explores the companies M&A strategy and sustainability of to fuel margins:

These smaller operators have a higher cost of operation today. Labor challenges obviously hit them harder than a larger platform like Casey's or Murphy. There are economies of scale in labor with regard to benefits and hiring capabilities. So, they're having to offset these rising labor costs and general input costs. Credit card fees and the cost of fuel are rising, which are higher input costs. To offset all these higher input costs, including carry costs and higher interest rates, the easiest lever to pull is the fuel margin lever. And they pull that lever higher. - Former Director at Casey's

Zoopla: Competing with Rightmove

This interview with a Former Zoopla Director explores how the company uses software to compete with Rightmove:

A lot of it was about trying to increase the software base. As soon as you have more software clients, you can entice them to also list their properties on the sales side, or on the marketing side as well, because there was straight-through processing from CRM directly onto the portal. That was a big play. On the sales side, the pricing was far more competitive. As soon as they could demonstrate that they had good traction with consumers, and that you would still get the same number of eyeballs, or comparable buyer leads, there was a lot of value for money analysis done. They really tried to prove, from a data perspective, the volume and quality of leads sales agents would be getting. Once that was proven, they could argue that their pricing was far more competitive than Rightmove's, being about half the price. - Former Director at Zoopla

Storskogen Group: M&A Strategy & Challenges

Storskogen is a Swedish-listed acquirer of industrial SMEs. The company listed in October 2021 and the stock is down over 80% since. This interview is the first in a series to better understand where and how these acquirer models can go wrong or face challenges. A Former M&A Director walks through the company's M&A philosophy and how it measures company quality:

I believe that uniqueness is not the main priority. This is a portfolio that is meant to keep growing. There was never any intention to sell any of the businesses they acquired. In the long term, this should have been a dividend play, with the aim of using organic cash flows to drive the acquisition strategy. As long as you have companies with high enough margins and cash conversion that are stable and contribute to diversification within this portfolio, that's what they were looking for. They were not searching for a single, unique, blockbuster company that could be sold in five years for 10 times its value. - Former M&A Director at Storskogen