YouSaid · the spoken record

Eric Mandelblatt

lines on the record: 72
first: 2022-03-01
most recent: 2022-03-01
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Was a painful exercise. I'll be candid. David was tough. He was tough but fair. He was always very transparent with me, very candid with me. And I remember he used to have a sofa in his office. I'd get the phone call like, come see me. And I was like, I got a problem here. And he would basically sit down next to me. And frankly, I'm not a good writer. And that was something I struggled with. And he would just sit down and he would literally edit line by line with me and explain to me the logic, the thought process on why he didn't like the way I was writing. And he was persistent with it. So I think the combination of a true rooted desire to make me better, he invested his time, his effort, his mentorship in me, and he was very consistent and persistent in doing that. I'm still not a good writer, but I think he kind of got me over the hump and allowed me to excel in areas, thankfully outside of writing that I was probably.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“And I'm forever grateful for that. Unfortunately, he passed away about two years ago, but David was just a huge inspiration to me. And he gave me my shot. And all I can do is say thank you.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Before I answer, let me just thank you again, Patrick. Really enjoyed the conversation specific to your question. The guy that gave me the shot in this business, so we didn't get into this, but I grew up in South Florida. I went to the University of Florida and never thought I'd get a shot on Wall Street. I sent out 400 resumes in the fall of 1997 hoping somebody would call me back. I got two callbacks. Both were from Goldman Sachs on the investment banking side and the equity research side. And I ended up interviewing with the lead natural gas analyst and MD at Goldman Sachs, David Fleischer, and he took a liking to me. He mentored me. He hired me, most importantly. I believe I was the first analyst hired in my class, the 1998 analyst class. And it was really David saw something in me. He gave me a shot. I didn't think I'd have the opportunity to be at Goldman coming from the public school background. But David really leaned in. He took a liking to me. He mentored me.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Logistics capacity, the infrastructure they built. We love the mode around the business. And we think it's going to be one of the great five to ten year compounders in our portfolio.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“And we kind of look out a few years and we say, where do we think margins are going to be on this business? And our personal view is we're heading into the mid singles and ultimately this is a business that should have the capacity to generate at scale 10% even margins. It's at 1% today. And we just think that the runway of growth around the retail business and the ultimate profitability is dramatically greater than probably the average investor. And if you believe that and you start looking at the look through profitability of the business at higher margin structures, Amazon's a very inexpensive stock on our numbers. The stocks at mid-20s times Cal 23 earnings, and we're underwriting about a 4% EBIT margin. We don't think that's the ultimate landing point. So we think there's a lot of look through profitability on the retail business that's going to be on leashed in coming years. And the dominance this company has in retail, we think they're going to destroy the Walmart, the targets of the world.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Business in our portfolio today is Amazon retail. And I would just frame it this way the street consensus is underwriting, business is doing 600 plus billion dollars of GMV. And if you look at the EBIT that the street and investors are largely anticipating, it implies that this is like a 1% eBit to GMV margin business. That's like what's embedded in consensus forecast. And we just think there's massive high margin revenue streams here. The ads business, the subscription business that ultimately we think that Amazon retail, they're massively, massively investing. You've probably seen the stats on the square.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“23. This is like if it's not the best business in the world, it's got to be in the top five. Why would we not be there? Why would we not have a big position? The world loves software. But on our numbers, Cal23, Microsoft's trading at 22 times earnings. It's the best software business in the world. To us, that has to be a big part of what we're doing. Those two positions combined are over 20% of our capital base today, 20 to 25%. I think Amazon's more complicated in some ways, but it's probably got more right-tail gearing in the sense. Our view is AWS's downside bounding us. We run 10-year DCF models on AWS. We think that business is worth some version of a trillion and a half dollars. And Amazon's market cap is slightly above that today. Enterprise value is slightly above that. And then we got to pick through the retail business. And what I say to our investors, and they look at me like I have four eyes, is the single most misunderstood.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“We own Microsoft Amazon Alphabet. To me, the Microsoft and Alphabet piece is actually pretty simple, which is whether it's Google search or whether it's almost every part of Microsoft. Like these incredible incumbency, massive barrier to entry, high margin, high growth businesses, we're paying some version of a market multiple for it. It's a head scratcher to me. It's kind of the gift that keeps giving. In some ways, we wish the stocks massively rerated, but the fact that they haven't means we just stay here and we're allowed to get the 20% rolls every year. We look at an alphabet and you make just very small adjustments, the $150 billion of cash they have, maybe some adjustments on their other bet losses like Waymo, maybe some adjustments on GCP. Like you're buying the core there, search and YouTube business for maybe slightly above a mid-teens multiple 16, 17 times earnings.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Agree and my one added cherry on top is decarbonization because decarbonization isn't adding in a lot of cases productivity capacity, but we're literally shutting down the old, replacing it with a new and not adding productivity. That's a phenomenon we've never seen before. Normally, when you have a productive asset, you don't shut it down and build a new one because of decarbonization trends. We are doing that. And that's creating what we expect to be a multi-decade decarbonization kicker to global industrial production.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“US is going to slow, China's going to accelerate, but particularly in commodities like aluminum, steel, there's a huge China overlay bed. When we talk about global industrial production, we have to be like global industrial production plus China because China is just such a big part of the mix. Now, it's something like oil. China's consuming a teens, low teens percent of global oil demand. So they have less of an impact there. That's the 50% in steel is the 10 to 15% in oil. So it depends on the commodity. But at the end of the day, higher growth, higher inflation, those are things you're rooting for as a commodity investor.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Ultimately, these commodities are levered to industrial production. And I would just double click on that and say certain commodities, aluminum, steel are the best example of this, are particularly leveraged to Chinese industrial production. The property market, the infrastructure market, the scale of the infrastructure build out in China over the last 20 years is mind-boggling. China's consuming almost 10 times the amount of steel. The United States is consuming today. Our GDP is bigger than China. So at the end of the day, there's a big industrial production bet, and there's a particularly big bet that the Chinese industrial production, the property market, the infrastructure market are going to hold in there. So what does last year look like a good year in terms of global demand growth? X China. China was on its back. I'm sure you've read a lot about the property market there. One of the things that makes us excited about this year is we think we're going to have like a US to China handoff.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“To steal pricing and input cost. So the more iron ore goes up, the more money a US steel ultimately is going to make over time. Clearly in oil, yeah, there's going to be some cost inflation, but ultimately you're pulling for higher inflation. You're pulling for higher prices over time”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“To me, I look at our commodity exposure almost as an inflationary hedge across our portfolio. Most of the businesses, to be clear that we're investing in, I think have a lot of pricing power. And their nominal profit dollars are going to go up in a higher inflationary world. So I'm not overly concerned about the impact inflation has, at least in earnings power. The multiples may come down, but commodities are one of the few sectors that are positively correlated to rising inflation. Higher inflation is a good thing for their businesses. And that's part of the reason why their businesses didn't do so well over the last 10 plus years. But inflation is our friend here. The best example I give is if you're a steel producer, you would think, oh no, scrap prices are going up. Iron ore prices are going up. Met coal prices, these are the input into your process. If the prices of those inputs are going up, that's a bad thing for me. It turns out that steel prices are highly correlated. The spreads, the margins these companies generate is highly correlated.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Think that shows you one, it takes a lot of money, it's inflationary, but two, it takes a lot of time as well. And it's just not clear to me that the world has the natural resource base, ironically, the aluminum, the copper, the nickels of the world, to actually do the pivot at the speed and intensity that the IEA and the United Nations are talking about”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Just a lot greater than probably the world anticipates. We're not going to flick a light switch here and be able to wean ourselves off a gas, coal, and oil. It's a much longer and more capital intensive process than I think folks realize. And let me just give you one step behind that. There's been a number of studies, B of A, Goldman, McKinsey just came out with one that estimate that the trend to net zero, the decarbonization initiatives are a roughly 100 to 150 trillion dollar capital need”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“The corresponding price was four. So think about the competitive disadvantage heavy industries have in Europe. And then this has the knock-on effect of what are the big industries that consume a lot of power. It's aluminum smelters. It's nitrogen plants. It's zinc smelters. So we've seen those mine commodities, chemical industries have to shut down because they don't have enough power in Europe. And that's kind of created a cycle in the mine commodities, in chemicals. This is all circular. So my big takeaway is Europe was the canary in the coal mine. They were the grand experiment around renewables. They were by far the deepest into the renewals penetration curve. And literally the wind didn't blow and it all came unraveling. So to me, if I was a policymaker, I would be trying to learn lessons from Europe. And I think the key lesson is that the amount of time and effort and capital it takes to wean yourself off fossil fuels.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Is Europe. The lesson that we just learned this winter that the Europeans push very high renewable penetration. In fact, they're at the 20 plus percent renewable penetration that we talked about the world getting to in 30 years. They're there today. And what did they do? They're trying to shut their domestic gas industry. They shut nuclear reactors down. Look at what the Germans are doing. They shuttered coal-fired generation capacity. They lean very hard on renewables. And then what happened? The wind didn't blow. They didn't get the generation from the renewables and they're shutting down their nukes right now. So at the end of the day, they've had to increase their imports from Russia. Putin's not giving them the gas. And we've seen prices skyrocket, really spiral out of control. We in December had over $50 per MMBTU natural gas prices in Europe when in the US.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“So framing comment, it's a really risky geopolitical world. Own commodities. It's your friend. It'll squeeze supply. Just a simple example that we've been talking about in the last week. The potash industry, very, very specialized industry, 70 million metric tons globally to the biggest producers of the world are Belarus and Russia. If the Russians invade Ukraine and the Western world is sanctioning these facilities, ultimately like the world's going to be massively short potash and then you can own a developed world producer like a mosaic or a nutrient that's going to benefit from that. But I'd say overall across the energy, the food supply chain, even in industries like aluminum, the geopolitical risk, ironically, is probably your friend as a developed world producer today. Part two, I would just say to me, the canary in the coal mine, this is around heavy industry. It's kind of the energy and mining complex.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Elastic supply, the volatility is scaring capital off. It means that investors don't want these companies investing in long lead time projects. Look at fossil fuels. The largest private equity firms in the world, even in their energy funds, are not allowed to allocate money to fossil fuels. So the volatility is scarring the investor base, scarring the capital provider, and adding to this uncertainty around supply growth, this inelasticity of supply that we've been talking about.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Exaggerating a bit, but all the producers are running with virtually zero leverage on the balance sheet. So, what really kills you in a commodity business is when the cycle goes against you and you're really levered, no one's levered because we just lived through a 10-year downcycle. The windfall profits were realizing today have gone to healing the balance sheets. So there's really no knockout risk. A, B, we're at this dramatic enterprise value buy down that's happening via this free cash flow generation. The windfall profits that we think are here to stay are basically coming back to you, their dividends, their buybacks, or their deleveraging. And the other point I would just make about volatility is I think volatility is our friend in these markets from this point forward. Historically, it's our foe because it could knock us out because you were running with a lot of leverage if the cycle goes against you. You got real problems. And I think it's our friend right now that use my old example or negative 37, depositive 93. It's helping create this in a”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“I think you nailed it. First of all, we're playing a directional game. Is aluminum going to 5,000? Is it going to 4? Is it going at 35? We don't know. There's false precision there. So you're playing a directional game. What do supply and demand balances look like directionally? Where do you see prices going? But you're absolutely right. You just need a larger margin of safety. We're not making the argument that a commodity producer is Microsoft or Union Pacific. They're not. But I would make the argument if I own Alcoa here, put aside the upside optionality and prices. If I own the stock for the next five to six years, 100% of my market cap, 100% of my enterprise value is coming back to me in terms of dividends and buybacks. I'm dramatically de-risking the investment. And then we have a point of view that prices are actually going higher. So that's a long-winded way of saying it's a directional game. It's about getting your entry point right in the equities and make sure that they're embedding a low price forecast that you think there's a lot of asymmetry. What I happen to like right now is, one, all the producers largely.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“The world's aluminum, they are the marginal producer $1,200 per ton of P&L for alcohol is almost doubling what their P&L was in 2021. Said differently to make it a per share metric, $100 carbon tax is $8 per share of added earnings power at Alcoa. So if I just take this is the mega bull case, if I just take the Goldman tax $5,000 price forecast, that's $27 a share of free cash flow, I add an eight. This is ridiculous to even say, but there's nodes Alcoa is going to earn over 20, maybe over $30 per share before the share count comes down. So all the per share math is going to get better over time as well. So we look at that as a great thematic beneficiary, structural supply, undersupply, demands growing strongly, driven by decarbonization, and then the cherry on top is the optionality around carbon taxes.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“But ultimately, the world's going to move to a carbon quota, carbon tax system. We're not going to let the Chinese dump dirty steel, dirty aluminum, dirty fertilizers, nitrogen, phosphate in the United States, and not tax it for the carbon intensity. If you think about it, the average smelter in China today is emitting 17 metric tons, 16 to 17 metric tons of carbon per ton of aluminum produced. Alcoa's corporate average is 4.3. So take 16 minus 4. Alcoha is emitting 12 metric tons less carbon per ton of aluminum produced. So if we taxed carbon at $100 per ton, we're already taxing it higher in Europe. That basically means that the marginal producer is getting priced up by the 12 tons. That's $1,200 lower on the carbon cost curve that Alcoa is versus the Chinese. The Chinese are half”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Carrying 3850 aluminum price forecasts for 2022 and ultimately rising to a $5,000 aluminum price. I think it's in 2024. At $5,000 aluminum, Alco is doing $27 per share of free cash flow. And by the way, that's before capital allocation. The share count's coming down dramatically because they're sweeping cash now. So you have a business that's being valued at $72 per share that ultimately is probably going to generate somewhere between $10 and $30 a share of earnings and free cash flow in the next few years. You don't need a lot of $20 per share of free cash flow to eat very quickly into what's a $73 stock that has no leverage. In three or four years, this company has no market cap. If they're paying dividends and buying back stock at the rate that we anticipate. And then on top of that, we have a point of view. It's not happening tomorrow. It might be a 10 plus year journey.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Seeing the inventory draws, what's going to happen? His world's going to be short aluminum. So let me give you the alcohol examples here. Let's put aside carbon taxes. We'll come back to that. Aluminum's at $3,200 per ton today. At $3,200 aluminum, Alcoa is generating low teens EPS per share. No capital allocation. The business has zero debt at the end of the year. So just looking at the EBIT, dropping it to net income, they're doing 12 bucks, 13 bucks of earnings and free cash flow per share. The stock's at $70. The business being valued at six times free cash flow. So that's like a 17% unleveraged free cash flow yield at 3,200 aluminum. But two things. Number one, I think prices are going up. So I'll give you the Goldman Sachs, the best commodity forecasters. Nobody can do it well. None of us know exactly where commodity prices are going to land. The best commodity forecasters out there are Jeff Curry's group at Goldman Sachs.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Aluminum business. Now, what's different this time? Well, China's woken up and they've said, wait a second, the world doesn't like us emitting all this carbon. We're destroying our environment. We're making no money making this aluminum. Maybe we should not continue to grow our domestic aluminum supply. And they've created a cap, the global markets 70 million tons of aluminum, and they've created a cap, I think it's at 45 million tons, and they've said, we're just not going to build smelters beyond that. We're ultimately going to reduce our reliance on aluminum smelting as a country. The problem is there's no one taking the handoff because Alco is not building new smelters. Rio Tinto is not building new smelters. And the backdrop, aluminum is one of the highest demand growth commodities pre-decarbonization, and it's a major decarbonization winner. We've got a demand backdrop that's going to grow 4% or 5% a year. The Chinese were more than supplying all of that for the last 15 years. And now they've said, well, we're capping out supply. So what's going to happen in our opinion?”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's great. So, what do they do? They make aluminum. They make over 2 million tons of aluminum per year. They're roughly 3% supplier into the global market. Now, they were the biggest aluminum supplier in the world 20 years ago. So what happened in aluminum? I think it's an illustrative, a good illustrative market. The Chinese woke up 20 years ago. They said we have all this cheap coal. Let's turn it into power. What do we do with the power? Well, let's make aluminum. Let's make fertilizers. These are really power intensive energy intensive commodities. And let's export that all over the world. So what happened? 20 years ago, they essentially no domestic aluminum industry. Today, they're almost 50% of the global aluminum supply. It's amazing. They destroyed the aluminum business. They're very cheap, but very dirty and carbon-intensive coal. They turned it into aluminum, and they exported it all over the world. And if you were a developed world producer, if you were Rio Tinto, they own Alcan, if you're Alcoa, they destroyed your business. And we've lived in a 15-year downcycle in the”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Today, lack of immediate supply growth and a demand picture that's actually quite favorable. Oh, and then we can talk about carbon taxes, which is going to throw this whole system in whack, because carbon's in everything we consume. And certain end markets that are very carbon intensive, aluminum, cement, fertilizers, as an example, if the world moves to a carbon quota system, if the world becomes Europe, it's going to throw cost curves completely out of whack. And there's going to be certain producers, I'd highlight Alcoa in aluminum as an example of this, that are going to make windfall profits for a decade plus because of the new carbon tax regime. So it's an incredible cocktail in front of us right now.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Deep structural undersupply, real tightness in the underlying commodities, inventories, drawings, significantly to raiser tight levels. So that's the starting point. And then let's talk supply and demand. Demand? Global economy is booming. It's booming with China largely having been on its back in 2021. Now, the US is going to slow. So I think there's going to be a bit of a handoff between the US and China. But overall, U.S. nominal GDP has growing, I think, grew 12% in 4Q. So we have a pretty strong backdrop of demand. Plus, we're going to get the decarbonization spike in the coppers and the nickels and the aluminums. And then on the supply side, we have this inelasticity, the shareholder activism, the resource nationalism that we're not seeing the supply response. So it's this incredible cocktail, again, that I've never seen of deep, deep, undersupplied market.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Each commodity is different, but you're correct. These are capital intensive, they're cyclical businesses, and you're price takers. It's not a railroad that you get three to four points of price. So you have to start with understanding the commodity market itself. If you're going to invest in steel equities, you have to have a point of view on the steel cycle and the consolidation that's happening in North America or fertilizers, aluminum, copper, et cetera. The interesting thing today, this is an overly generic comment, is almost every market we're looking at is in deep structural undersupply. And we have this issue around inelasticity.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Have US shale, which is the shortest supply response, where the time to drill and spud a well is some number of days to weeks to months, but you can get a pretty quick supply response. Now, US shale in the oil market is only a low teens percent of the global oil market, but that's an example of very short cycle commodity that probably has a very low barrier to entry. You just need to own the resource base. And then you have stuff in the middle, like I would say aluminum, fertilizers. The markets are very tight and we're not seeing supply being added, but ultimately with enough capital and three, four-year timeline, new supply can be added into those markets. On one hand, the copper's nickels, some of the mine commodities, probably highest barriers to entry. U.S. shale, U.S. natural gas, lowest, and then some of the processed commodities like chemical.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Let me start by saying they don't belong in the same sentence, they're different, they're more different than they are similar. Ultimately, they're both economically leveraged, commodities much more so than railroads. But ultimately, their industrial economy, global economic growth, levered assets. We have to go commodity by commodity. I use the copper example where I think probably the barriers to entry. When I think about commodity markets are probably highest in copper. It's the hardest to add supply because the mines are really old. It takes 10 plus years. You have all this resource nationalism at play. So we might want to talk about how electric vehicle manufacturers are going to, in my opinion, backward integrate to the mine. They're going to need to secure their nickel and copper. Elon Musk can't just wake up and say, I'm going to develop a copper mine, a nickel mine. He's a really long lead time projects. Now, on the other hand, you would”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“I think you would say one, I'm bearish on industrial production, they're economically levered. Two, a high single digit percent of revenues are coal. Most people think that's going to zero. I think that's wrong because of met coal and exports, but you'd say coal. And then you'd say, three, I hear you about the shipment growth, but they haven't done it historically. They've historically been poorly run businesses. And therefore, while the theoretical market opportunity is in front of them, the TAM is large, they're not going to be able to attack that TAM because their service product stinks.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Getting five, six, seven points of capital return per year. And when you compound that out over a decade with growth, you basically are dramatically buying down your capital structure in these companies”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“About. In the technology world, there's a lot of excluding stock-based compensation math that's going on. And sorry to bring the bad news. Stock-based compensation is an expense. And value in companies ex stock-based compensation to me doesn't make a lot of sense. It's very 1999-esque. The inverse of that is the rails. You're basically buying back, paying dividends at a rate of 5% to 6% of your market cap, maybe seven per year. So just think about this over a decade based on our numbers. We estimate CSX will capital return 90% of its current market cap directionally to 70 something billion dollar market cap company, 90% of that is coming back to shareholders in the next 10 years via dividends and buybacks for Union Pacific, the number is probably closer to 80. So think about how that is de-risking your investment here because every year it's almost like a coupon on a bond.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“He passed away a number of years ago, but he went in, he took control of Canadian national 20-something years ago when they were privatized and they had a 0% EBIT margin. Today, the business has a 40% EBIT margin. And just putting in place principles on how you run your trains, how you interact with customers, how you enhance productivity of your network. And ultimately, that accrues to the benefit of the customer because they're getting a better service product. In order to be right on our thesis, these volumes are really going to start to structurally grow three or four percent a year. It's going to require the rails to actually care about their customers and interact with them in a more sensible way than they have historically show up when they tell you the train's coming at 10 a.m. show up at 10 a.m. Just to kind of conclude, we talked a lot about revenues and eBit. I just want to mention capital return because I think our view of stock buybacks versus stock issuance is something that investors are not being thought about.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Because this was a country club business and you were a monopoly, oligopoly service provider and you didn't need to provide good service because you knew your base load of volume. The only way that you were going to move the coal was via rail. You can't move it versus truck. It's so inefficient. I'm using coal as an example there. So a lot of these heavy industries are heavily reliant on rail. So the rail would show up when it wants to show up and you'd never know when your product was being delivered and they burned a lot of goodwill with customers over the last 20 years. And part of our thesis is that that was the last 20 years and next 10 years are going to look very different because the management teams have changed out the philosophy on how to run these railroads has changed. This is the Hunter Harrison phenomenon. I don't know if you're familiar with Hunter, but he brought in operating discipline to this industry. He was like the original, I'd say, productivity enhancer in the railroad business, unfortunately.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Would say that I think it's largely driven by the lack of volumetric shipment growth that they've exhibited over the last 20 years. So the margins went from 10 to 40, even with no shipment volume growth. That's being driven by pricing and productivity. But the market's fixated with top line. And when you look back and you say, well, wait, they haven't grown. They're growing top line via price, but they haven't grown top line at all via volumes. So they look a little bit tobacco-esque in that sense. I think that's totally the wrong analogy, to be clear, because if you decompose the historical volume algorithm, what you're going to see is basically a lot of the lack of volume growth is driven by coal and coal production in the United States. I don't know the exact numbers, down 70% in the last 15 years. We're at the tail end of coal.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, yeah, not in my backyard, meaning given how developed the country is at this point, Union Pacific can't raise their hands and say, hey, we'd love to run a railroad track through downtown Houston. It doesn't work like that. So the tracks are the tracks. We're not laying new tracks here. And my old firm, we used to talk about what are the businesses we'd be comfortable buying a hundred year bond from? Because it's almost the definition of incumbency, barriers to entry, longevity. To me, the railroads are my number one. When I think about what's a business, I know 100 years from now that business is going to be around. It's going to be cash flowing. Very hard to say that. Very hard to look 100 years in the future. To me, railroads are the definition of like the 100 year asset. And by the way, they're one of the very few hundred year bond issuers in the United States market. They have 100-year bonds that yield 4% today.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Businesses. I mean, to have 40 plus percent, 50% EBIT margins, this is like the Microsoft, the Visas, the MasterCards of the world that so many of your listeners love these businesses and capitalize them at very high multiples appropriately so. Railroads are trading at 18 to 20 times this year's earnings with this incredible margin structure where their shipment volumes are actually down over the last 15 years. And I think they have a lot of upside leverage to the resurgence in U.S. industrial production and the decarbonization initiatives we've talked about. And we're definitively not building more of them given NIMBY issues. You really can't build anything in this country. These tracks were laid 150, 175 years ago.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Today than they were 15 years ago, part of that's driven by cold, part of that's driven by the fact their service product has been so bad they've bled customers to trucks, but we look at CSX and UNP as having the most operating leverage. We think that their tracks are running 70-something percent capacity factor. So these are businesses, just to frame it, like our biggest position is Microsoft. It would probably surprise you when I tell you CSX and Union Pacific have higher EBIT margins than Microsoft, which we view as the best gold standard software business in the world. These are businesses that are running in kind of a downcycle right now at low to mid 40% EBIT margins. So their EBITDA less CapEx margins are over 40% today. We think as the networks get more loaded and they take more pricing that the EBIT margins are headed to 50. And EBIT is a rough proxy for EBITDA's CapEx. So these are like world class.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Different systems. Our end markets here are aluminum, steel, lumber, paper and forest products. Some degree of the UPS at Amazon stuff that's in containers. Coal used to be a big end market. Used to be when I started covering the industry, a quarter of the industry's revenue was shipping coal. Today that's high single digit percentage of revenue because we've shuddered so much coal-fired generation capacity in the United States. So there's not a lot of coal leverage. But it's big heavy industry is basically what's moving on railroad networks. This is John Rockefeller 101. We've got two in the east, two in the west, two up north. They're all oligopolies. The networks today, the Canadian rails are largely at full capacity. So in order to grow, they need to spend money. They need to add capacity to their network, expand their plant, expand their tracks, expand their siding. What we like about the U.S. railroads are they're actually shipping less products.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, let me say this: we're not building freight railroads, which is what we're talking about. Could we build a passenger railroad? Sure.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Industrial production super cycle decarbonization super cycle that creates massive tailwinds for their businesses. So that's a big theme we have here at Sorobon. We've been investing in these companies back to my prior firm for over 15 years. And these are our sleep well at night, earn really good return type businesses.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“They price their product up three to four percent every year. And the businesses generate tremendous free cash flow. So all that free cash flow comes back to shareholders in the form of dividends and buybacks. Just to kind of frame it, these are companies that historically were growing EBIT without volume growth. We're growing EBIT 8, 9, 10% a year, largely driven by pricing, operating leverage. And now we think not only is that algorithm in place, but they're going to get a volume dividend so the EBIT growth could be faster. And then these are businesses at 5% free cash flow yields. So you get to pay dividends and buy your shares back 5% a year. Plus, you get to releverage all the growth. So you really get six points of capital return per year. We haven't built one in 150 years. They're the definition of a long dated infrastructure asset. They're priced at 5% free cash flow yields, and they're about to go into almost like.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Then I'm happy to come back to the commodity side, which is a little bit more exciting and more volatile. But the picks and shovel, the royalty company sitting on top of this resurgence of industrial production, the reassuring of manufacturing in the US, we're building all these semi-plants. We have huge decarbonization initiatives. We're going to be building LNG plants, chemical plants, aluminum plants on the Gulf Coast. The picks and shovels way to get leverage to this from our perspective is the U.S. railroads, which are the GOLAGO.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“In that vertical, and they're really struggling to run their plants right now, it's part of the energy shortage that's occurring in Europe that I'm happy to talk about, but I don't see nuclear coming to the rescue here, at least during this decade. Maybe there's a bullcase to be had 10 plus years out, but between now and then, we're going to need a lot of fossil fuels.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, three mile point. I think it was 1979, but the United States got really scared and it froze the U.S. nuclear industry. I think we've had one plant that's attempted to be built, and I frankly lost track of it over time, but Southern was building a plan, either in South Carolina or Georgia. I don't even think the thing got built. They spent 10, 15, $20 billion. We don't have nuclear engineers in the United States anymore. I think the odds that we're going to see a nuclear renaissance in the United States. I'm personally a seller of that thesis. I think that there's societal pressure against it. The capital costs are through the roof. It's not clear that we have the technology and the implementation capabilities that we can actually build this stuff. Now, China, India, it's a different story in the rest of the world. Look at the challenges France is having right now in their nuclear industry. I mean, they are in some ways the world's leader.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a long tail there. We think the plateau for oil is much longer. Gas is going to continue to grow, even coal is still growing globally, despite all the decarbonization initiative. So the world cannot switch on a dime from electric vehicles to ice vehicles. We cannot go to all renewable power and shut down all our fossil fuel generation because the base of fossil fuels in the global energy mix today is 82%.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source
“A fuel cost. Your marginal costs are basically zero. But what that means is you got to pay a lot of money up front to build that generation. It's major capital intensive. Oh, and by the way, mineral intensive. There's a lot of aluminum, nickel, copper in those solar panels. So our point of view is, of course, the world is going to see wind and solar penetration rise dramatically from the levels we're at right now. But that's going to be a really capital intensive exercise. It's going to be highly inflationary because in a lot of cases, you're taking a coal plant that was productive. You're shutting it down and now you have to spend all this money building a wind plant or a solar plant in this place. So you're not adding to productive capacity of the world. You're just taking down your carbon intensity. So our view is it's going to happen. It's going to take a lot longer. And that base of fossil fuel demand that we're underinvesting in today, that $500 billion a year of CapEx that recently has been about $300.”
2022-03-01 · Invest Like the Best · Eric Mandelblatt - Investing in the Industrial Economy - [Invest Like the Best, EP. 266] · IDENTIFIED FROM THE TRANSCRIPT · source