MARKET OVERVIEW
February proved to be a very eventful month. On the political front, the Trump administration announced the introduction of tariffs on Canada, Mexico and China. Eventually, both Canada and Mexico received one-month reprieves by agreeing to additional border-security measures, while tariffs on China proceeded as planned. Additionally, discussions over a potential truce in Ukraine, combined with an increase in EU defence spending and the German election, shifted attention to potentially better macroeconomic conditions for the EU economy. Meanwhile, in the US, weakness in the ISM services index and rising inflation raised concerns about the resilience of US economic growth.
Finally, the earnings season concluded on a strong note, showing solid EPS growth but also an interesting narrowing of growth differentials between mega-cap companies and the rest of the equity market.
February was therefore an unusual month by several measures. We observed many dynamics reversing quite significantly, with movements exceeding one standard deviation. For instance, the top 10 largest companies in the world underperformed the rest of the equity market in a monthly move not seen since 2022. Similarly, European equities markedly outperformed US equities, and value and low-volatility factors also showed significant outperformance.
INVESTMENT THESIS
The market is unusually concentrated and focused on near-term earnings rather than the long-term durability of earnings. Generation thinks that there are plenty of exciting opportunities out there for long-term capital allocation. Below five companies are profiled, some of which the market has left behind in recent months. For each of them, three aspects are considered: their growth, their profitability and their valuation. Generation believes that all of them are set up for long-term success.
MICROSOFT
Microsoft, the world’s largest software company, has been in the portfolio for over a decade. Generation likes the firm because its products align closely with society’s evolving needs. As the world digitises, demand for Microsoft’s tools will continue to grow. The company enjoys a wide economic moat – built on its unique market position, deep customer understanding and extensive global footprint.
Microsoft’s management team has a long-term vision. It makes bold investments in future growth, most recently in AI. Generation forecasts that the IT intensity of the economy will double over the next 15 years. Microsoft is a rare company with USD 250 billion in revenues and despite its near-term valuation appearing high, Generation believes Microsoft is well positioned to lead in the AI era, potentially doubling or tripling its market share. Additionally, Generation expects returns on capital (ROC) for its AI-related investments to match historical levels, despite market scepticism.
There are risks. Demand for AI systems may not materialise as expected, and increasing pricing power among suppliers like Nvidia could pressure margins. Still, from Generation’s analysis they see substantial long-term value in this name.
ASML
ASML, a Dutch company and a recent addition to the portfolio, is a critical enabler of the semiconductor industry. They provide advanced lithography equipment, which is essential for producing semiconductors. As demand for chips accelerates – driven by AI, electrification and broader applications across the economy – ASML stands to benefit significantly.
ASML operates in a near-monopolistic position in lithography machines, thanks to decades of engineering expertise and innovation. Over the past five years, the company has grown revenues at 20% annually. Generation expects the company’s revenue growth to moderate but continue to grow strongly, in line with the semiconductor industry. Margins are likely to expand over time, underscoring ASML’s high quality and earnings potential.
There are risks. Short-term volatility in orders, and geopolitical trade restrictions, could affect growth. Over the long-term, disruptive innovation outside of lithography poses a challenge, though Generation believes ASML’s position is secure. Generation therefore finds the valuation of the company attractive. They are confident in its ability to compound value over the coming years.
ADYEN
Adyen, a fintech company, helps businesses process payments – a field with substantial social benefits. Remarkably, 15% of online payments still fail, and Adyen is addressing this with a superior technology platform (2). With a EUR 40 billion market cap and EUR 2 billion in annual revenue, the company boasts operating margins exceeding 50%.
Adyen’s vertically integrated model delivers an unmatched value proposition. It has a rising Net Promoter Score of 65 (3). Its addressable market continues to grow, pointing to solid growth in revenues. Adyen remains well positioned to compound earnings. Although the valuation is high, it reflects the quality (1) and long-term potential of the business.
Near-term concerns about Adyen meeting guidance have created an attractive entry point. Generation believes the company’s competitive position is strengthening, with revenue projected to grow above 20% annually (4). In conclusion, Adyen offers a compelling risk-reward profile.
KINGSPAN
Kingspan, a family-founded Irish business, is a global leader in high-performance insulation solutions. Known for its innovative insulated panels, Kingspan provides products that are both structural and insulating, offering faster construction compared to traditional methods. With 40% of global emissions tied to buildings, insulation is critical for tackling climate change (5). The potential revenue opportunity is huge.
Kingspan has grown revenues at over 10% annually for many years, and earnings faster than this, supported by its exceptional operational efficiency. Despite its history of acquiring lower-return businesses, the company consistently delivers stable returns. Looking ahead, Generation sees a long runway for growth, driven by three factors. First, low insulation penetration globally. Second, stricter building regulations. And third, the possibility of the company expanding into new markets.
There are risks. Acquisition-led growth can be challenging, and sustained inflation may pressure profitability. However, Kingspan remains an outstanding operator, and is currently priced at an attractive valuation. It has significant compounding potential.
BECTON DICKINSON
Becton Dickinson (BD) is a US-based medical device company with USD 20 billion in revenue. A staple in the portfolio for 18 years, BD produces essential consumables like syringes and infusion systems. While not a flashy growth story, BD has delivered consistent 5% revenue growth per decade since the 1990s.
The company has a commanding 60% market share in its segments, providing a stable foundation for future revenue growth. Moreover, BD is improving its margins after navigating supply chain disruptions and COVID-related volatility. With its ‘pricing muscle memory’ now firmly in place, Generation expects steady earnings growth.
BD’s recent underperformance, combined with market apathy toward steady growers, creates an attractive entry point from a valuation perspective. Challenges include inflationary pressures and a mixed history with large acquisitions, but Generation is confident in BD’s ability to deliver strong, long-term returns.
(1): Generation internal analysis.
(2): Adyen, March 2023.
(3): Adyen, March 2023.
(4): Generation internal analysis.
(5) “Building Materials and the Climate: Constructing a New Future,” UN. See report https://wedocs.unep.org/handle/20.500.11822/43293.
PERFORMANCE REVIEW
Generation's process is underpinned by a bottom-up approach to stock selection, the manager refers to the stock attribution attached for the drivers of performance during the month of February.
As long-term investors that integrate a sustainability lens into their analysis, Generation is focused on their long-term outlook for the companies in the portfolio and whether their thesis remains intact, despite any near-term headwinds and share price movements.
The top performers during the month included Kingspan, Mercado Libre and Adyen. The bottom performers included Becton Dickinson, Taiwan Semiconductor and Thermo Fisher Scientific. Whilst these companies are experiencing short-term headwinds, the Generation team retains his conviction in the long-term thesis on these names and others in the portfolio.
Generation is focused on strong execution of its process and has made adjustments on areas the manager identified for improvement.
