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Onshoring, AI and the regulation of water – a research trip to Boston
I recently travelled to Boston for an in-depth research trip, with management meetings and site visits to 18 companies across the industrials, technology, pharmaceutical and medical technology (medtech) sectors. The companies were a combination of existing holdings and potential new investment opportunities.
The trip highlighted a number of central themes transcending multiple industries which have far reaching impacts for us as investors, US supply chains, and customers. These are:
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The acceleration of onshoring
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The role of AI in medtech
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Regulation of the waste and water landscape
The ongoing shift towards onshoring to de-risk supply chains to geopolitical tensions
US legislation over the past few years has created reshoring incentives for strategic industries, notably the Inflation Reduction Act, the CHIPS and Science Act. With Trump in office, the speed and scale of reshoring is likely going to accelerate and widen, particularly as a more dovish interest rate policy stance is adopted.
Onshoring has gained traction in recent history – Company mentions of onshoring through August 2024
Source: William Blair, as of 30.09.24. AlphaSense, BofA Global Research, William Blair
The role of AI in medtech
The role of artificial intelligence in the medtech space was a central focus of my visit. Much ink has been spilt about AI’s transformational potential within medtech, but while there’s no shortage of anticipation, we are just at the beginning of AI adoption in the industry and concrete examples of its existing impact are often fairly elusive. However, in women’s health medtech devices company Hologic, I saw tangible examples of where AI is helping to diagnose cancer faster, more accurately, and in a value accretive way, addressing the global shortage of cytologists (scientists that study cells).
Specialising in women’s health – a historically underfunded area of healthcare – Hologic is a medtech company focusing on devices for diagnosing breast and gynaecological diseases. During a site visit, I saw evidence of how its medtech devices, which analyse swabs to highlight areas of concern such as potential tumours or abnormalities, use AI to help lab workers diagnose diseases including cancer in under 10 seconds, versus up to 10 minutes previously. They also reduce the likelihood of false positive and negative tests. Having brought net leverage down to 0x and with the tough comparisons post Covid behind it (Hologic manufactured PCR kits during the pandemic), integrating AI into the product set is becoming an increasing focus for the company.
Regulation of the waste and water landscape
Perhaps inevitably, companies were reluctant to comment on how the regulatory landscape in their industry might evolve depending on the outcome of the election. One such area is regulation of PFAS – man-made ‘forever chemicals’. Under the Biden administration, the US Environmental Protection Agency (EPA) set PFAS limits in drinking water to four parts per trillion, the most ambitious of the major geographies. Despite previous election-related uncertainties, there is no sign of deacceleration in the race to develop scalable, economical PFAS destruction technology, which waste incineration player Clean Harbors and water testing products manufacturer Veralto are both in the running for.
Meanwhile, as we navigate a world generating vast amounts of polluted waste and water, the pursuit for innovative solutions to manage our refuse has never been more urgent. Clean Harbors owns more than 500 permits and 100 waste management facilities in a space with complex regulatory requirements. Incineration has always seen good pricing power and Clean Harbors claims to have historically been able to price above inflation. With an infrastructure network that has a high fixed cost base, significant operating leverage is possible, enabling the company to expand operating margins from 5.6% to 11.3% in the past five years.
I also met with the management of our global and US portfolio holding Veralto. With the stock up over +45% since we first took a position in autumn 2023, we recently slightly reduced our holding size to take profits while still maintaining a position. Most of the water business is part of a customer’s operating expenses rather than their capex, a quality that has driven resilience in a higher interest rate environment. Despite the company being one of the later beneficiaries of the water part of the infrastructure bill – it hits the most ageing infrastructure first, the water ‘movers’ which include pipes and pumps, while Veralto operates in the water testing space – this resilience has prevailed.
The management of both Clean Harbors and Veralto spoke about their intentions to develop a scalable PFAS destruction technology. Veralto did not rule out M&A in the area given the difficulty of developing an organic solution to this issue. Clean Harbors currently conducts initial testing to determine the quantity of PFAS in an area, to dig it up and dispose of it, but like many companies, it is part of the arms race working on destruction technology.
A ’scuttlebutt’ approach
In the spirit of ‘scuttlebutt’, a word coined in the book ‘Common Stocks and Uncommon Profits’, we believe there’s great merit in speaking to competitors, customers and suppliers of stocks we’re invested in. This serves as having our finger on the pulse ready to make changes if a valuation becomes stretched or an investment thesis changes over time, or more generally, to gain a broader view on the market a company operates within. With scuttlebutt in mind, it was interesting to meet with Cognex, a competitor of our portfolio holding Keyence which has been a strong compounder in the global funds for over five years and is up over +110%. Like Keyence, Cognex is a specialist provider of machine vision products which help reduce resource intensive and low paid labour tasks in factories. Sporting a mid-teens ROIC (return on invested capital) with no debt and a capex light model, it was notable to hear Cognex’s intention to move down the value curve to become less reliant on swings in cycles of its highly consolidated customer mix, which have historically impacted revenues and margins through operating deleverage. This is high risk for Cognex and somewhat make or break, given the low value space is where Keyence’s expertise is.
Company engagement
Finally, meeting with management provided me with a good opportunity to engage with existing and potential holdings on a variety of topics. I engaged with ThermoFisher on API (active pharmaceutical ingredients) discharge, encouraging the company to start publicly reporting levels adhering to local limits within its biopharma services. Biopharma services provide manufacturing services, including the production of APIs for biopharmaceutical companies, so this is where the company has the ability to control its impact on biodiversity. With Clean Harbors, I expressed that it would be helpful if it began reporting what percentage of sites it conducts biodiversity impact assessments on before beginning waste disposal.
Conclusion
The trip provided valuable insights into the forces shaping the future of industrials, technology, and healthcare. Onshoring, AI, and evolving regulations will continue to influence our investment choices, as we aim to navigate these shifts and capture long-term value.
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