Hey, so I have trouble getting to your $4,100 IV estimate. This feels far too conservative?
I get the returns and reinvestment rate falling over time but that's been the bear argument for 25 years+, the spinoffs/PEMS as you mention are a fantastic way of ensuring the company can still grow while the parent sizes up. But really when you put a 10% WACC on this when the S&P is at 29x PE. It seems like a crazy penalty. CSU has had V/MA/Costco like up and to the right growth. It seems like the risk of the underlying FCF growth would warrant something far lower? Something like Costco is trading at 3x the FCF multiple with half the growth. Great work though man!
Hey! Thanks so much for the kind words, really appreciate it! 🤝
You make a good point, and honestly, I don't disagree with your logic. Each one of us should make their own assumptions!
I set up my models with conservative assumptions:
I use ~9.8% WACC less as a theoretical market cost of capital and more as my personal minimum required hurdle rate (target IRR). If I lower the discount rate to 7% or 8% to reflect a Costco or Visa-like low-risk profile, CSU’s implied fair value explodes upward. Using ~10% ensures that any implied upside in the model represents a true double-digit target return.
You’re right that fading reinvestment rates has been the wrong bear argument for 25+ years. Now, PEMS, spin-offs, and international expansion could definitely prove me wrong (I hope it does). My goal was to underwrite a scenario where CSU doesn't even need perfection to show upside today. If the CSU team post-Leonard continue executing the way they always have, our returns have a good chance to simply outperform the model's base case.
I can think of seceral reasons why I structure my models with a 40-year window (specially for serial acquirers):
1. Standard 10-year DCFs force an abrupt jump into a 2% perpetual terminal growth rate. For a serial acquirer, capital deployment doesn't(usually) hit a wall at Year 10, it slowly fades over decades. A long-horizon model lets me explicitly model that gradual glide path of ROIC and reinvestment rates decaying over time rather than dropping off a cliff.
2. Because I use a ~9-10% discount rate, cash flows in Years 20 to 40 are heavily discounted. A dollar of cash flow in Year 30 is worth only about ~$0.06 today. I’m certainly not claiming to know exact earnings in 2060 (that's anyone's guess); rather, the time value of money naturally penalizes distant cash flows while letting us capture the value of a longer reinvestment runway.
3. In my view, VMS (with 95%+ net retention rates and mission-critical workflows) has a longer structural cash flow tail than standard cyclical or horizontal tech businesses.
It’s less about predicting the far future with precision and more about modeling the rate of return degradation as these companies scale.
At the end of the day when you try to see beyond a 3-5 year window, it's more about gut feeling and assessing your inputs with historical returns of other long-lived, succesful serial acquirers.
Amazing work indeed. Thanks a lot for this. Agree with all of the things you've stated. For CSU, the spin-offs can create a lot of value that the market isn't ready to assign value to yet before they are actually trading as separate entities. Naturally, as CSU grows, it must happen due to the scale of the machine and what shareholders will benefit most from.
Hope you get 10x the following crowd due to the article =)
Hey, so I have trouble getting to your $4,100 IV estimate. This feels far too conservative?
I get the returns and reinvestment rate falling over time but that's been the bear argument for 25 years+, the spinoffs/PEMS as you mention are a fantastic way of ensuring the company can still grow while the parent sizes up. But really when you put a 10% WACC on this when the S&P is at 29x PE. It seems like a crazy penalty. CSU has had V/MA/Costco like up and to the right growth. It seems like the risk of the underlying FCF growth would warrant something far lower? Something like Costco is trading at 3x the FCF multiple with half the growth. Great work though man!
Hey! Thanks so much for the kind words, really appreciate it! 🤝
You make a good point, and honestly, I don't disagree with your logic. Each one of us should make their own assumptions!
I set up my models with conservative assumptions:
I use ~9.8% WACC less as a theoretical market cost of capital and more as my personal minimum required hurdle rate (target IRR). If I lower the discount rate to 7% or 8% to reflect a Costco or Visa-like low-risk profile, CSU’s implied fair value explodes upward. Using ~10% ensures that any implied upside in the model represents a true double-digit target return.
You’re right that fading reinvestment rates has been the wrong bear argument for 25+ years. Now, PEMS, spin-offs, and international expansion could definitely prove me wrong (I hope it does). My goal was to underwrite a scenario where CSU doesn't even need perfection to show upside today. If the CSU team post-Leonard continue executing the way they always have, our returns have a good chance to simply outperform the model's base case.
Cheers!
How do you justify a 40 year DCF? Do you have such high confidence in the industry and these companies for the next 10+30 years?
Hey! That’s a fair question, indeed!
I can think of seceral reasons why I structure my models with a 40-year window (specially for serial acquirers):
1. Standard 10-year DCFs force an abrupt jump into a 2% perpetual terminal growth rate. For a serial acquirer, capital deployment doesn't(usually) hit a wall at Year 10, it slowly fades over decades. A long-horizon model lets me explicitly model that gradual glide path of ROIC and reinvestment rates decaying over time rather than dropping off a cliff.
2. Because I use a ~9-10% discount rate, cash flows in Years 20 to 40 are heavily discounted. A dollar of cash flow in Year 30 is worth only about ~$0.06 today. I’m certainly not claiming to know exact earnings in 2060 (that's anyone's guess); rather, the time value of money naturally penalizes distant cash flows while letting us capture the value of a longer reinvestment runway.
3. In my view, VMS (with 95%+ net retention rates and mission-critical workflows) has a longer structural cash flow tail than standard cyclical or horizontal tech businesses.
It’s less about predicting the far future with precision and more about modeling the rate of return degradation as these companies scale.
At the end of the day when you try to see beyond a 3-5 year window, it's more about gut feeling and assessing your inputs with historical returns of other long-lived, succesful serial acquirers.
Great article. I'm currently invested in toi and CSU, with much more weight in the former. Looking forward to the next quarterly update.
Great job!
Thanks! Lookin forward to listening to CSU Q2 update 👀
Amazing work indeed. Thanks a lot for this. Agree with all of the things you've stated. For CSU, the spin-offs can create a lot of value that the market isn't ready to assign value to yet before they are actually trading as separate entities. Naturally, as CSU grows, it must happen due to the scale of the machine and what shareholders will benefit most from.
Hope you get 10x the following crowd due to the article =)
Thank you so much for the kind words !
Really appreciate you reading and being part of the community! 🤝
Amazing work !
Only shareholder on $CSU
Thank you very much! Glad you liked this piece, even more so as a CSU shareholder 🤝