Finding Companies
Ready to Rise to the Challenge

One of the main advantages of being in business for the better part of five decades is experience. Granted, there’s nothing fun about time spent experiencing the downside of a crisis, but there’s no discounting the value of the lessons learned while weathering it. Investing for growth is a long-term pursuit, one that requires perspective seasoned over time.

The global pandemic is an example of what economists call an exogenous shock, an unpredictable, economy-jolting event that develops outside of the economy or financial system. The terrorist attacks of September 11, 2001 represented the last exogenous shock to push stocks into bear market territory.

Friess Associates was founded at the start of 1974 in the midst of a 23-month bear market sparked by oil prices. During every major market downturn since then, we told clients that one day, as today’s pain fades, we will look back at this period as a great time to invest. It turned out to be well-founded encouragement for long-term investors. So, even though we know that the market’s collective resolve will be tested for some as-yet-unknown duration, we’re boosted by our confidence in the long-term opportunity that the downturn represents.

We firmly believe that investors who maintain longer-term horizons will one day, in retrospect, come to view the pandemic-triggered bear market of 2020 as an opportune time to put money to work in stocks.

That’s the future as we see it. Back to the present, we expect volatility to persist as long as the novel coronavirus lurks. We’ve all been told to prepare for the possibility that restrictive measures could be in place for an extended period.

Recent conditions foreshadow related earnings pressure. A collapse in oil prices to a 20-plus-year low lays energy sector earnings to waste. In banking, rock- bottom rates squeeze profit potential. As for consumer spending, the major driver of the U.S. economy, significant retrenchment is a given amid shuttered businesses, stay-at-home orders and mass unemployment.

Friess Associates is an active manager, so the portfolios we manage reflect the times. As we do every quarter, we highlight examples of the companies that we hold.

Zoom: An Unprecedented Near-Term opportunity

In many cases, companies that we held through this past quarter’s volatility or added during it benefit from an existing secular trend and/or company-specific attribute that became more apparent due to the way life changed as the pandemic expanded. Zoom Video Communications (Nasdaq: ZM) is a prime example.

A lot of people who otherwise might not have known Zoom now are getting quite familiar with the videoconferencing platform out of necessity. If their experience is typical, chances are they will end up wondering how they ever got by without it.

Zoom Video Communications connects people through frictionless video, voice, chat and content sharing, enabling face-to-face experiences in a single meeting place across disparate devices and locations.

Customers range from small businesses to big corporations and institutions, including Delta Air Lines, Uber, Columbia Business School and Texas A&M University. Revenue jumped 88 percent to $623 million in the 12 months through January.

Zoom earned $0.15 per share in the three months through January, more than doubling the consensus earnings estimate and representing its fourth consecutive positive earnings surprise since going public in spring 2019. Revenue rose 78 percent, aided by a 61 percent increase in customers with 10 or more employees. The company finished the period with $855 million in cash and marketable securities on its balance sheet.

Working from home was a growing trend long before COVID-19. Now, with the outbreak prompting scores to shelter in place, the trend is accelerating. Zoom, with a free basic subscription and an intuitive interface, is a prime beneficiary. As stay-at-home orders went into effect in California, New York and other populous states, iPhone users downloaded the Zoom app more than any other.

Remotely conducted commerce is a long-term trend, but current conditions offer Zoom an unprecedented near-term opportunity to showcase its product leadership in the category. Based on the consensus estimate, Zoom is expected to grow earnings 29 percent in the year ending January 2021. For more information on Zoom Video Communications visit www.zoom.us.

Papa John’s: Better Ingredients, Better Pizza

An expected surge in orders for delivery came at a similarly fortunate time for Papa John’s International (Nasdaq: PZZA). Papa John’s is pursuing profit margin expansion just as potential customers need more help than usual in procuring pizza. The operator of the world’s third largest pizza chain announced in March that it was seeking to add 20,000 new employees. Papa John’s International Inc. is the world’s third largest pizza chain. With total locations topping 5,400, the chain spans all 50 states and reaches into an additional 45 countries. Operating through a combination of company-owned stores and franchised locations, company-owned units accounted for about 40 percent of Papa John’s more than $1.6 billion in revenue in the 12 months through January.

The company more than doubled December-quarter earnings, exceeding the consensus estimate by 16 percent. Global restaurant sales grew 4.7 percent (excluding foreign currency impact) as Papa John’s turnaround following a high-profile falling out with the company’s founder continued to gain momentum.

An industry trailblazer in digital customer interactions, we believe Papa John’s is primed to benefit from a surge in demand for no-contact deliveries. This demand comes as a new management team, including a new Chief Executive joined by new leadership in operations, marketing and development, aims to build on Papa John’s record of product and service quality. Keeping with the company’s “better ingredients, better pizza” motto, Papa John’s recently introduced three new menu items, including two in February, with more to come. Based on the consensus estimate, Papa John’s is expected to grow earnings 23 percent in 2020. Visit Papa John’s Investor Relations at ir.papajohns.com.

ScottsMiracle-Gro Shored Up Its Supply Chain

In mid-January, ScottsMiracle-Gro Co, (NYSE: SMG) shored up its supply chain in an effort to avoid major disruption from the global pandemic. At this juncture, the company’s preparations appear shrewd. In late March, Scotts raised guidance for March-quarter sales and re-affirmed its full year forecast.

ScottsMiracle-Gro is among the largest makers of branded lawn care products in North America, including grass seed, fertilizers, soil, mulch, herbicides, pesticides, and rodent control products. In addition, through its Hawthorne segment, the company is a supplier of a broad array of products used in hydroponic gardening and cannabis growing. Brands include Scotts, Turf Builder, Miracle-Gro, Ortho, Tomcat and General Hydroponics. Sales grew 18 percent to $3.2 billion in 2019.

December-quarter earnings and sales topped consensus estimates in a seasonally slow period. Sales for the Hawthorne segment increased 41 percent, driven by demand in nearly all categories of indoor growing equipment and sup- plies. U.S. Consumer segment sales increased 8 percent due to improved listing support with certain retail partners, including Home Depot, Lowes and Costco. For the March quarter, Scotts now expects sales in its Hawthorne and U.S. Consumer segments to increase 55 percent and 12 percent, respectively.

The Friess team met with Chief Financial Officer Thomas Coleman at an industry conference and discussed the company’s preparedness for uncertain economic times. Healthy cash flow generation, recent debt reduction and consistent dividends provide financial flexibility. The company’s core segment continues to leverage relationships with retailers considered essential in all markets, while Hawthorne continues to see demand from its business customers.

For more information visit www.scottsmiraclegro.com.

Keysight Technologies: Supplier of Test Systems

Companies contributing to the push toward 5G wireless technology were not immune to coronavirus outbreak, as supply chains throughout the world faced challenges. While momentum may slow in the short term, consensus thinking about the continued progression of the 5G rollout is still upbeat and intact. Likewise, Keysight remains uniquely positioned as a supplier of test systems used throughout the communications ecosystem.

Keysight Technologies Inc. (NYSE: KEYS) makes testing tools that enable customers to design, simulate, prototype and manufacture next generation electronic products, components and networks. Keysight products facilitate development, reduce time to market, ensure product performance in production, and add significant value to customer R&D and production processes. Sales grew 8 percent to $4.3 billion in the 12 months through January.

Keysight concentrated its focus on 5G-related R&D in the early stages of the technology’s emergence, positioning the company to gain market share. January-quarter earnings grew 35 percent, topping the consensus estimate. Revenue growth also exceeded expectations thanks to ongoing strength in 5G-related investments as well as increased spending in aerospace defense and semiconductor measurement.

Chief Financial Officer Neil Dougherty talked about Keysight’s longer-term goals at a recent investor conference. The company outlined how accelerating growth in software revenue, which was 19 percent of total revenue in fiscal 2019, and recurring revenue, at 18 percent of last fiscal year’s total, could increase the profit potential of the company’s revenue stream.

Keysight set new, higher targets for gross profit margins and operating profit margins over the next three years. While Keysight’s near-term outlook is subject to change, we believe the company’s leadership and competitive differentiation in test and measurement give it an indispensable role in developing future networks and applications.

The rollout of the 5G wireless network continues, albeit at a slower pace. And, while disruptions are a distinct near-term possibility, the critical role in technology development played by Keysight Technologies (page 4) seems unlikely to change anytime soon.

Keysight provides electronic measurement solutions, putting it at the forefront of advancement in the wireless, aerospace and semiconductor markets. Keysight enables technology developers to test, measure and optimize their innovations.

For more information visit www.keysight.com.

Friess Associates was front-and-center for every calamity to befall the market over the past 46 years, and we adjusted to the realities of the moment in each instance. Going forward, we plan to capitalize on reduced valuations and emphasize companies with the financial strength and strategic positioning to capture market share as the backdrop shifts.

Editor’s Note: Friess Associates is a growth-oriented investment manager driven by individual-company research. For more than 40 years, Friess Associates has employed its bottom-up, company-by-company approach on behalf of institutions, corporations, high net worth individuals and retail investors. Friess Associates LLC serves as advisor to the Friess Small Cap Growth Fund and is subadvisor to certain mutual funds advised by AMG Funds.

For more information on Fries Small Cap Growth Fund visit www.friess.com and AMG Managers Brandywine Fund, visit www.amgfunds.com.