Jian Fan/iStock via Getty Images
The following segment was excerpted from this fund letter.
Lifecore Biomedical (NASDAQ:LFCR)
Our laggard Lifecore has detracted ~350 bps from performance this quarter.
In our FY 2023 letter, we noted our less-than-ideal experience with merger-arbitrage strategies, with Lifecore Biomedical being the sole remaining investment of this nature in the portfolio. We anticipated a positive outcome for this particular investment, but that proved too optimistic when Lifecore’s board of directors decided to end the strategic process without a deal. Lifecore was also a 3% position in the portfolio and, after this announcement, the stock declined from $7.5 to $4.5 per share. However, unlike our other merger-arbitrage positions, we had made the decision that we will be happy owning the stock if a deal does not materialize. We bought more shares at $4.8 per share to bring Lifecore back to a 3% position. Our average cost is $5.3 and the stock closed at $5.8 at quarter end.
Lifecore Biomedical is a Contract Development and Manufacturing Organisation (‘CDMO’) with expertise in specialty formulation, aseptic filling, and final packaging of complex, injectable medical drug products. Our previous experience investing in similar businesses has taught us that these are very difficult to operate assets, largely attributable to a single factor – compliance. FDA grants authorization and conducts regular inspections of facilities to ensure compliance with regulatory standards. When a pharmaceutical product is developed and manufactured by a CDMO, the FDA holds both the CDMO and the sponsor (the company that owns the drug) responsible for ensuring that the product meets regulatory requirements for safety, efficacy, and quality.
“You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing” -Charlie Munger
Lifecore is increasing capacity from 22 mn units to 70 mn units over the next 4 years. Not all capacity can be filled at the same price, but this means that Lifecore’s revenues can increase 2-3x over the next 4-5 years. This, when combined with operating leverage, will mean a rapid growth in earnings – perhaps closer to 3x. Importantly, most of this capacity is already paid for, potentially leading to a surge in free cash flow.
As we have mentioned before, our philosophy on portfolio construction is that we want to be concentrated enough to matter but diversified enough to survive. Even with dramatic drops in stock prices of Lifecore, our performance overall was not unduly affected. We manage risk at the business level and at the portfolio level by utilizing appropriate position sizing. In fact, these drops help us add capital to attractive opportunities. Even as the general markets are at an all-time high, we remain optimistic on the White Falcon portfolio due to business such as Lifecore in the portfolio, which we believe we have underwritten at very attractive IRRs.
|
Disclaimer Past performance is not necessarily indicative of future results. All investments involve risk, including the loss of principal. It should not be assumed that any of the transactions or investments discussed herein were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the investments discussed herein. Specific companies or investments shown in this presentation are meant to demonstrate White Falcon’s active investment style White Falcon may change its views about or its investment positions in any of the securities mentioned at any time, for any reason or no reason. White Falcon disclaims any obligation to notify the market of any such changes. The information and opinions expressed in this presentation is based on publicly available information about the securities. The letter and thesis includes forward-looking statements, estimates, projections, and opinions, as well as more general conclusions. Such statements, estimates, projections, opinions, and conclusions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond White Falcon’s control. Although White Falcon believes the data and numbers are substantially accurate in all material respects, White Falcon makes no representation or warranty, express or implied, as to the accuracy or completeness of any written or oral communication. Readers and others should conduct their own independent investigation and analysis of the thesis of any and all companies mentioned in this document. The letter is not investment advice or a recommendation or solicitation to buy or sell any securities. White Falcon undertakes no obligation to correct, update, or revise the Presentation or to otherwise provide any additional materials. White Falcon also undertakes no commitment to take or refrain from taking any action with respect any of the companies mentioned in this letter. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
