Chit Chat Stocks - Leandro From Best Anchor Stocks Returns To Pitch An Underfollowed Biopharma Winner (Stevanato, Ticker: STVN)

Episode Date: July 23, 2025

On this episode of Chit Chat Stocks, we speak with Leandro from the Best Anchor Stocks newsletter on a biopharma stock he recently researched. We discussed: (00:00) Introduction and history (04:31) Understanding the Pharmaceutical Supply Chain (07:30) Exploring Business Segments (12:06) High Value Products vs. Bulk Products (14:24) The Impact of AI on Drug Development (17:17) Current Industry Cycles and Demand Dynamics (21:24) CapEx Expansion and Future Capacity (24:04) Drivers of Demand for Products (26:33) The Impact of GLP-1s on Business Dynamics (29:27) Navigating Tariff Impacts in the Pharmaceutical Supply Chain (32:21) Understanding Competition in the Pharmaceutical Packaging Industry (36:45) The Advantages of Vertical Integration (41:41) Valuation Insights and Market Perception (47:38) Identifying Risks and Challenges Ahead (51:54) Exploring Best Anchor Stocks and Investment Strategies Leandro's Twitter: https://x.com/Invesquotes Best Anchor Stocks: https://www.bestanchorstocks.com/ ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by TSOH Investing Research. Long-term equity research with 100% portfolio transparency.  Subscribe Today: https://thescienceofhitting.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. You are listening to the Chit Chat Stocks podcast, the place where we help you find your next great investment. My name is Brett Schaefer, joined as always by Ryan Henderson, and we have one of our regular recurring guests, Leandro from Best Anchor Stocks, a great Substack newsletter that we will link to in the show notes. And we are talking a company

I had never heard of before Leandro mentioned it today. It is actually one of his complimentary research reports he has a five-part series plus a quarterly update uh on this company that you can go check out we'll link directly to that in the show notes you can go read more about his research the company is called stevinato it is in the healthcare supply chain pharmaceutical supply chain we're going to get into the details of that but leandro welcome back to the show take us through stevanato's history how this italian company started out not a century ago but close to it and got to where we are today thank you guys for having me again i don't know if it's the fifth time maybe fifth or sixth time i i can't remember

anymore a couple times a year at this point yeah i think so so yeah um i think it's a good place to start with the history of stevanado so the company was founded around 70 years ago as a specialty glass manufacturer so basically that's the fancy name to say that they manufactured glass bottles and they were founded initially in venice i don't want to say the name of how they were founded because i think i'm gonna get it wrong and maybe there's some italian um listener so i think it It was Sofieria Stella was the name of the initial company. Then some years later, the company transitioned to a company called Ompi, which was in the same sector of specialty glass manufacturing. But not only did they do bottles, but they jumped into more primary packaging, so more broader than the initial company.

And then probably one of the most important milestones came in 1971. when they founded a company called Spami, which manufactured the glass forming technology that they use to manufacture the glass, right? So this allowed the company to vertically integrate and focus more on the quality of their glass, which eventually allowed them to jump into the healthcare industry where quality is a very important characteristic. And throughout the 2000s, after they were already operating in the healthcare industry, but they started specializing much more uh in in healthcare and throughout the the 2000s they started investing both organically and inorganically into that let's say healthcare glass segment organically they built some of the

current products which we'll talk about later like uh is filled that is the ready to fill um containment solutions that they have today that was around the year 2008 and then they also grew through acquisitions, but that was mostly for their engineering segment more than for the containment solution segment. They acquired a couple of companies that manufactured the technology necessary to become a fully vertically integrated company, right? And then the company eventually IPO'd in 2021 in the height of the pandemic, which a lot of people, when they see the chart, will think it's bad, right?

Because the stock is still down or maybe marginally up since 2021. But I take it as a very positive capital allocation sign because they took advantage of a very good moment to raise capital, right? Because everyone was like, all the healthcare industry was booming due to COVID and obviously their numbers took very good during that time. So, to kind of summarize there, started as a glass manufacturer, and then it sounds like they've sort of evolved into a healthcare industry supplier sort of naturally, just driven by demand specifically from that industry. Let's talk about the overall supply chain slash value chain for the pharmaceutical industry. I, myself, would be a novice in this. I think a lot of people probably don't have that great of an understanding of it. So what does the overall value chain look like and where does Stevanado fit?

Okay, so when you're developing, there's several stages when you're developing a pharmaceutical, right? First, you have drug discovery, which is basically all the R&D that goes into discovering a drug. then you have the clinical studies when you have a drug that you think might work then you have to go and you get approved by the regulator to go through the clinical studies you start to try it first in animals and then in humans right so then you have the pre-clinical research is more the animal testing and then you have the clinical research which is testing on animals then you have to go if you go through all the phases which are three phases phase one phase two phase three You go through the regulatory approval of the drug. If the drug is approved, then you have to go to scale manufacturing because you have to manufacture the drug in large scale to meet the needs of the patients.

Then that's where you'd find Danaher's, Artorius, Repligen, that would be in scale manufacturing, right? then you go into packaging which is basically either if it's a small molecule that goes it's an oral drug then you package it into your cardboard box inside the like well i think everyone knows how a pill is packaged and then if it's an injectable the packaging is on a glass in a glass container right and that's where stevanado operates uh it's a glass packaging company it's current it's known as fill and finish right so it's more in the late stages of the pharmaceutical value chain and the only thing that's left after packaging is basically the distribution right that are that is done by by other companies so i think that knowing that

it stands at the end of the value chain is also important in the context of risk aversion right Because you have to think that a pharma company has gone through all these phases to take the drug to market. And now they are getting to the packaging phase, which is arguably one of the cheapest phases. But at the same time, a phase that if something goes wrong, then you can go into very deep trouble, right? I mean, if something is contaminated due to packaging, then basically you face very high legal and regulatory risk, right? And you can face a lot of costs and eventually go bankrupt. And it wouldn't be the first time that a company goes bankrupt because there's some sort of contamination in the drug. Right. So I think that's also important in the context of why this space is interesting.

All right. Let's go through each segment. There's two of them. One's more important, which is biopharma and diagnostic solutions. And there's also engineering solutions for the listeners. If we shorten biopharma diagnostic solutions to BDS, that's what we're referring to. But take us through the two segments, how you look at them and what they're serving to their customers. So as you said, BDS is the most important segment. It's around 80% plus of the current revenues. And it basically includes the containment solutions, right?

Like the vials, the pens, the cartridges, everything. Like the pen cartridges that go. i don't know if you've ever seen uh someone who is diabetic inject themselves um like the famous glps well there goes a pen cartridge that it's glass made that comes from stevanado or from shot right so they that's basically the containment solutions and then the vial is the little let's say containment solutions where you put a syringe inside and then you take the liquid out you'll probably have seen that also in the in the doctor so that's included in um in bds right but in bds you also have two types of products you have bulk products and you have high value products

right so bulk products and we'll probably get into this in more detail later bulk products can be considered more lower quality because it's just the glass itself and then high value high value products or high value solutions are it's the same bulk product but stevarato does some kind of services inside on top of that product so that it's ready to use by the customer right so um it's basically washing and sterilizing the product and that becomes uh from that goes from bulk to high value products just due to washing and sterilizing washing and sterilization was something that the customers typically did in-house so they would order a bulk product or a bulk vial from stevanado and then they will take it they would take it in-house and they would have

their own washing and sterilization lines and they'll go through that process but now they are sort of outsourcing that capex to stevanado so stevanado does it in-house and then when they ship the product it's already ready for for to fill with a pharmaceutical right then we have engineering which is a much lower portion of revenue but it's also important in the thesis because engineering basically is the segment through which stevanado sells equipment for assembly and for vision solutions and everything so that product is going to be at the customer is going to be responsible for assembling like the the containment solutions can go into a delivery device for example the example of the diabetic that's a delivery device

that contains a containment solution so then stevanato also sells the systems that allow the companies to put that together right and also to inspect the the containment solutions and obviously stevanato also uses this um this equipment in-house so that is can be thought of as a less sexy business than BDS. But at the same time, it's what allows Stevanado to vertically integrate, right? Because Stevanado can offer

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by just how much they're willing to do for customers that other brokerage platforms are not. If you're interested in checking them out, head on over to ibkr.com restrictions apply interactive brokers is a member of sipc so let's double down here on the high value products versus the bulk products it was a good description in terms of the difference there it looks like high value products have basically double the gross margins of the bulk products is there one side of that that customers is there one side of that that's growing quicker? I guess, what are the margin dynamics like there?

So high value products is growing much quicker than bulk. And the main reason is that biologics are taking share of small molecules and biologics are injectables that are pretty sensitive. So they need better requirements. At the same time, there's a trend in the pharma industry to outsource everything that's not core to their business so they prefer to outsource that to stevanato than to keep it in-house so they do have double the gross margins but it comes at a cost for stevanato in the sense that they need to bear the capex now right so stevanato was more capital light before high value products than it is today i always compare this case to tsmc's case because in a sense, TSMC will always tell you,

we have high margins, but we have high margins because we have high capital intensity. So when things turn south, we need the high margins to defend our underutilization, so to say. So Stevanado is somewhat similar, although I would argue is less cyclical than TSMC,

although TSMC doesn't look to be cyclical in the last years. So that's basically what's behind the growth in high value products. both the rise in biologics together with the willingness of pharma companies to outsource these tasks to companies like Stevanado. Okay, I think listeners may understand the outsourcing fairly well. We've had another beneficiary of that, MedPace Holdings, Luis Sanchez. If anyone's interested, that's another related industry or company in this industry

that people can go listen to that episode. But I want to double click on biologics and these larger molecules. What I thought was interesting in your write up is how this could be a huge decades long multi decade tailwind of more complex molecules benefiting from, you know, the software stuff that people can use and all the AI drug development stuff. That's about the extent to my knowledge. It's a very complicated sector. But what are your thoughts on that? Is that a growth tailwind for Stevanado over the next 10 years? So I think when you think about AI, people are automatically going to start thinking about disruption, right? How AI can disrupt your business, what it is capable of. The thing is that when I think about AI in the context of the healthcare industry, I think it's a pretty asymmetric risk-benefit relationship, right? Because it's tough for AI to disrupt, for example, biologic manufacturers or the containment solutions, because first, it's a physical good, and second, there's a lot of regulation involved. So what's difficult about Stevanado's containment solutions is not to be able to manufacture, right? It's all the regulation that's behind it and how much a mistake can cost.

But at the same time, so I see that there's low risk of disruption in that sense because these are physical goods. But at the same time, I think there's a huge benefit in drug discovery, right? I mean, probably the benefit from AI in drug discovery is to an extent, let's say, overemphasized because you need good data to have good AI and data in the healthcare industry is pretty fragmented and probably it's not of the best quality, but I think it's going to be something that helps with more drug discovery and more drug discovery will eventually lead to more volumes and more volumes will eventually lead to more products um required from stevanado right makes sense yeah and more uh what do they call it specific drugs for smaller subsets of the

population maybe if you can do all that yes yes so basically now just due to how expensive is to do research you need to have a significant population to make a drug feasible that's why rare diseases require um people putting money in because many companies are not willing dollars to yeah for the yeah many companies are not willing to invest there but with ai maybe more of those get treated and then you get more of these coroner cases covered gotcha okay let's talk through the industry specifically stevanato's in uh part of the industry in which i think is called and correct me if i'm wrong the whole bio processing supply chain uh why are we in a depressed earning cycle or demand cycle why is this industry in your words

uh quote temporarily cyclical so i would differentiate bioprocessing from what stevanado does because stevanado is including a subset of bioprocessing but you can have um so stevanado is more more it's entirely exposed to injectables but if you eventually have biologics which are the pharmaceuticals that are created in the bioprocessing process if you eventually have oral um oral biologics then stevanato will not play in that part of the market that's going to be hard because biologics are very sensitive to our stomach um to the digestion process so that's why they get injected right because if you take it um orally then you're gonna need much more of the drug to have the same impact as if you take them if you inject them into your into your body

so historically the healthcare industry has been let's say pretty stable right and more so in mainly because people get ill every year and people take the meds every year right regardless of if there's a recession stefanato all of stefanato's bds revenue is consumables based so so long as people need to take their meds stefanato is going to continue to sell containment solutions now with covid we had a let's say a kind of special situation right not only because covid brought more demand but because it wrecked supply chain what a lot of customers did was order more right to stock because they didn't want to face um supply disruptions so then companies like stevanado and a lot of companies in the in the supply chain started

growing above what they should not only because we had a pandemic but also because there was some kind of pull forward of demand because people were increasing inventories now Now, the end demand, now we've gone through all this talking, right? Mainly in 2024. So the end demand was stable, but the demand for these companies was not, right? Because people were working through their inventories because they thought that they could already work with a lower level of inventories because the situation had normalized. And you also had COVID, COVID went to an endemic state, right?

So those two things made this industry look like cyclical, but it was more a thing of the stocking and COVID than inherent cyclicality in the industry, right? Because the industry is quite stable. I mean, Stevanato before, this is going to be quite surprising, right? But before 2024, Stevanato grew 1% in 2024. they i think it was since 1988 stevanato had not had a single year with growth of less than 10 percent so 2020 wow so 2024 was the first year below double digit revenue growth which speaks about the let's say the how stable the industry is yeah it's honestly if you just look at their

Biopharma and Diagnostics Solutions Revenue, their BDS, you would not know that they were a big COVID beneficiary. It still looks like they've just consistently grown even as they've gotten away from COVID. I'm curious on the CapEx progress. You talked a lot about this in your write-ups. Why are they, and I guess this is part of one of the reasons we'll get to this in a second, why you believe they're potentially under earning at the moment. Why are they investing so much to expand capacity? And I guess follow up, is there any risk to that spending? Do you think there's any risk that they maybe create too much capacity or there isn't enough demand to meet how much they're building for so so the short answer would be that they are investing in

capacity because their customers are asking them to so everything that that's being spent on kpex is based on customer commitments um i mean those are not uncancellable so there's some sort of risk if management decides to over invest right but um i would say that with what we've seen in the last couple of quarters, it's quite the opposite. I mean, customers are asking the company to bring forward this CapEx rather than to defer the CapEx. So the main reason why Stevanado IPO was to raise capital to expand capacity. Initially, they wanted to expand capacity in China, but they put that aside because their customers told them, hey, we prefer if you do it in europe and in the u.s so now they they're building fissures in in the u.s and they are also

building a new latina plant a new plant in latina the thing is that what's interesting about about the capex expansion is that it's sort of modular where you have the shell and then you can qualify more lines if you need if you need to but it's not like you're going all in without having volume for that capacity right so both fishers and latina are already ramping with customer volumes and they are they are ramping at a good pace so i am not too worried about a potential over expansion of of capacity especially because stevanado is kind of in an island here i mean they are being super aggressive with capex whereas their competitors are not being as aggressive right so if the growth eventually comes stevanato is well positioned to capture

a much higher share of that new volume than they were in the past right because they're going to have the capacity in place especially in the in the u.s a lot of customers are also asking for this is going to be like a term for the from semiconductors but a geo-dependable capacity right i mean they prefer to have capacity both in in the u.s in the u.s and capacity in europe so i like that management is being aggressive but this is also playing a role in in terms of headwinds right because they have two new huge facilities that are under the company-wide gross margins so gross margins are lower than they should be due to this capacity expansion how long will take to grow into that capacity i guess what's kind of the trajectory any

listener should look for whether this is you know working or not and what are the and drivers you mentioned the customers want them to build this but what are the drivers for them these pharmaceutical companies to expect more demand from stevinato so on the first question i would say that is pretty automatic so as soon as they have the capacity in place it starts to get filled and because it's based on customer commitment so basically when you have it you tell the customer hey i have it if you want to put volume you can already put volume through it then on the question on the drivers of demand i think we've marginally touched touch on them but we've not talked about one so the first one is the rise of biologics mostly these are mostly

injectables very sensitive so good for high value high value products there's another growth driver which is not exactly a biologic which are glp1s so glp1s have been huge also for stevanado in fact if you look if you look at the at the stock price chart you'll see that even when covid was fading the company was reaching all-time highs and it was mainly due to glp1s right so stevanado is also aggressively expanding capacity to meet glp1 demand they have a great relationship with novo nordisk um but they are also improving their relationship with uh lily right so they have basically they they do it for for all the players for the big players in the industry there's also the risk of what can happen if oral glp1s come right because they are already

coming so stefanato has been pretty conservative in their estimates and they are estimating more in oral glps in the next five years i think it was the timeline that the industry is estimating right so um that's also important to take into account because a lot of people are saying okay they are going to overshoot capacity because glps are going to transition to oral but the truth is that this capacity already takes into account that a good chunk of future glp1s will be orals rather than injectables makes sense yeah ryan do you want to go sure yeah it makes sense and i i could see why that's kind of a sticking point for any skeptics of this glp1 well initially covid was a huge benefit to them that kind of waned off glp1s came through that's

been a huge benefit what happens if the primary uh way of intaking glp1s is oral could stefanato be hurt do they split out how much of their business is glp1s or is it i i don't think so they say how much is biologics um i don't know if they include uh now that you say glp1s in biologics because it's sort of a like in the middle ground but biologics is around 34 percent of current bds revenue but i don't think they talk specifically about glp ones but probably it's going to be a good chunk right uh i mean it's not the only thing that they do but it's the the most significant growth drivers i think there are a lot of bears who point to glp's one glp ones fading but i think this was much more of a bear case when the stock was trading at 30 plus

than when it was trading at $18, right? I mean, sure, this can be a headwind if you're taking it into account in the valuation, but this can only be a tailwind when you're discounting it fully in the valuation, right? Right, it depends what your time horizon is. If you're someone focusing on a couple of quarters or some sort of miss like that

versus riding the entire long-term tailwind of, I'm sure there's going to be another drug besides GLP-1s that eventually come and be a blockbuster. I want to use a listener question here. So appreciate all the people on Twitter that asked some great questions in regard to this company. This relates to the capital spending. Essentially, he's asking or the Twitter account Twitter user is asking, everyone is concerned with tariff impacts on the supply chain, which I'm assuming pharmaceutical supply chain. It's going to be a big sticking point for the United States presidential administration.

how much this is what the listener is asking how much are u.s factories offsetting this impact and how does stevanato sit compared to their competitors so stevanato is way ahead of their of its peers in building capacity in the u.s so i think it's comparatively better off in this tariff situation than its competitors right probably i mean these these products are cents right so even if you put tariffs on them probably it's not going to be super significant uh when you take into account the entire cost of a drug but if it's significant then that would be good for stevanado which is way ahead of peers in building domestic manufacturing understandable okay let's talk competition in general why do you believe this industry uh that

stevinano and its competitors is a rational oligopoly and if i wanted to play devil's advocate some someone might argue just looking at this from first glance why can't someone replicate their products and they could argue hey this is just commodity packaging and glass files Why isn't there a flood of competition coming in and driving down prices? All right, folks, if you are a regular listener to Chit Chat Stocks, then you know that we use Fiscal.ai, formerly known as FinChat, daily. Fiscal.ai is our complete stock research terminal. It's where we have our investment dashboards.

It's where we create financial charts. It's where I read all the transcripts for conference calls, sell side events, shareholder meetings. And it has Morningstar's high quality reports on more than 1,700 companies. It really is the complete research platform for stock focused investors. If you use our link fiscal.ai slash chitchat, you will automatically get two weeks of fiscal pro for free. And if you find that it's worth upgrading, which I think you will, you'll get 15% off any paid plans with our link. Again, that is fiscal.ai slash chitchat. The link will be in the show notes. okay so in the industry there are three main players you have stevanato you have shot which

is a german company and you have geresheimer which i also think is a german company um i don't want to be like super i don't want to say this but geresheimer is the the shitco of the group right it's typically considered the lower quality and shot and stevanato typically compete it more head to head so entry barriers to the industry are pretty high for several reasons i mean first pharma is pretty risk averse so they've spent a lot of money in developing the drug so once they get to the packaging they are not going to take the risk of an unproven solution to save a couple of cents right which is what they would be saving with um with uh with a new a new provider for example then you have to consider that if someone new comes into the industry they are only

going to be able to win new business because past business and the recurring business is locked in by the current providers because these packaging solutions are typically specced into the regulatory document so if in my regulatory document i have that i'm going to put this in stevanato glass vials, then I have to do that. Or else I would have to go again to talk to the FDA to tell them that I'm changing this. So products can 100% be replicated. I mean, it's not rocket science. But the problem is not replicating them, but selling them. So you're not going to be able to sell them even if you replicate them. And this is probably more true now with high value products because you don't you not only have to replicate the the product you also have to

give the customer the assurance that you are washing and sterilizing these products correctly right because if you don't do that correctly then the drug can basically kill people um so it's a matter of a matter of uh of trust and then additionally to stevanado you have that it's a fully integrated player right it's vertically integrated so their their relationship with customer is not only the the vials but also through engineering and they can offer the full value chain i think it's very easy to replicate but very difficult to displace i don't know if if that makes sense but i don't think that the the key here is in the product but the key here is in the trust that they've built through the decades right shot it's also um it's not i don't think

it's centenary but has been operating in the industry for many decades right and nobody has come in probably because first it doesn't make sense for the pharma to look elsewhere when you are spending cents and secondly because you are not going to do that more so when you are risking so many so so much money right once you get once you have your drug approved by the regulator the first thing you want to do is take it to market because you're wasting money i think a lot of people think that you get the patent when um you start distributing the drug but the patent starts much earlier than the than the distribution of the drug so every month that you're not selling the drug you're wasting exclusive money that's exclusive to you so uh that makes sense

and it makes sense that there's some regulatory sort of barriers to entry there in terms of getting on the, I guess, FDA approved list or the being seen by the customers as a credible provider. Do they talk at all about pricing, like price increases? Has that been a big driver of revenue growth for them or is it primarily volume? So right now I think they probably do uh small price increases every every year but right right now the main driver i would say besides well you have volume as a growth driver but you also have the mix the price mix right because you're transitioning from bulk to high value products so a high value products can cost up to 10 times more than a bulk product so simply transitioning one unit of bulk to one unit of high

value product is already a massive tailwind in terms of price mix to the to the top line right so this the good thing about stevanado and something that i like a lot is that when you're projecting a business you need to think about price price mix and volume price depending on their competitive advantages you can take it for granted because if it has strong competitive advantages you can raise prices volume is probably the most uncertain um metric of all because you to forecast the future which is very difficult it's probably not entirely under the company's control and price mix in this case i think it's also under control of the company so here you have a company that's probably going to grow low double digits for the foreseeable future with a

lot of that growth being simply transitioning from bulk to high value products i mean most of the capacity that they're installing right now, if not all, is for high value products. So I think that's pretty attractive from the point of view of someone like me who doesn't believe I have a crystal ball to forecast the future, right? I don't need volumes to be incredibly high. I just need this transition to continue, which is evident that it's going to continue because customers are telling them that they are going to order more high value products in the future. So I think that's also what makes Stevanado somewhat attractive. You mentioned in the write-ups that Stevanado is the only vertically integrated player among their competitors.

What does that mean? And do you think that gives them a competitive advantage in either acquiring customers or pricing power of the long term, any sort of advantage versus competition? So being vertically integrated basically means that Stevanado has their own glass forming technology. They provide the containment solutions. They provide the assembly equipment. They provide the inspection equipment. So basically, I think this is important because if you have a customer relationship with Novo, you're going to have the customer relationship through the BDS segment and also through the engineering segment. So you're basically offering them all of what they need to get that drug from the manufacturing phase to the distribution phase. So I think that's important. Also, Stevanado typically touts the glass forming technology as a competitive advantage because they are very in control of the quality of their glass. So that's also pretty important.

The only thing that Stevanado doesn't have is probably the source of the glass, right? The initial material. That's the only thing that they don't have. But they do have the forming technology to take that glass from what they get to being a very high quality containment solution. Okay. I feel like we've covered the business pretty well. Let's talk valuation. so this is one that looks a little optically expensive and at the same time at the moment

it doesn't look like it's growing that quickly plus we only have so many years of visibility going backwards because it's only been public for i think three or four years now why why do you think this is cheap and maybe give us some numbers on the current face multiple so people know why it might be a little misleading okay so one of the things i look for in in a potential investment is that the numbers are misleading because that means that a lot of people are basically going to skim through the numbers and just completely pass right i remember that once someone told me like okay this is one percent growth for you're paying 40 times earnings for one percent growth and like this is why there's an opportunity right because neither the

one percent growth is normalized is suffering from this talking and problems and engineering because there's an additional headwind for stevanato in that the engineering segment grew so much post-covid that they they have had operational problems and the margins are significantly lower than what where they should be and they are already correcting that those problems so you had multiple headwinds. You had the destocking, which impacted volumes. Then you have the excess capacity because they were building the capacity. And then you have problems in engineering. So that means that neither the growth or the margin profile was normalized, right? So that's why I think that those numbers are very misleading. And I think there's a pretty good example of what

the business is capable of coming out of this. And in Q1, when they reported earnings, revenue grew nine percent and operating so already uh much higher and operating profit grew 37 percent so it's obvious that the margin the margins are not normalized right i mean fishers and latina both of the new capex projects are still below um company-wide margins and they have been below zero percent gross margin for a while right so they've been losing money on a gross basis also So I think that's important to take into account. I don't tend to say this for many companies, but for Stevanado, I don't think that multiple expansions, say, of over 1,000 basis points over the next five to seven years is out of the question when you see all the headwinds fading. And when you join that with double-digit top-line growth, I think it's a pretty attractive growth profile.

And more than the growth profile, I think that what's also attractive is that there's plenty of visibility into this growth and also plenty of stability, right? Because they're selling consumables in an industry that's going to be requiring these products no matter what. so the good news about i think covid was great for people looking at stevanado in the post-covid era because these numbers wouldn't have been possible without covid um so i don't want to imply that covid was great right because it was great in in this sense but covid obviously was a was a disaster um so that said i don't think the stock is super cheap now but i do think it has it was significantly let's say it was pretty cheap when it was in the 17 18 below 20 dollars right i think it was pretty cheap because when you put the new margins out i don't have my numbers in

front of me you could see that the normalized earnings power of the business was much much higher right so the 40 earnings multiple was in reality say uh 20 something 30 times multiple and then on top of that you add that this is a double digit grower uh in the future right so i don't think it was that high as to the what the multiple portrayed but a lot of people will basically go to the to to finchat for example they'll see uh last 12 months one percent growth let's see the multiple 40 times earnings and even if you look at the next 12 months multiple that's not going to be fully normalized because you're taking into account all the transition that's going to happen to high-value products, right?

So I think that's why there was an opportunity here. Let's talk management. A lot of listeners asked about the high insider ownership. Some even asked if there's a thing of too much insider ownership. I think the family that owns the company has 80% or more of the shares outstanding. So what are the management incentives, the family ownership history, and what do you think of their capital returns strategy if if they have one so the business was 100 owned by the family before the the ipo and they decided to sell around 17 both in the

ipo and they did several subsequent capital races to basically invest in incapacity right um i mean it's a lot right 80 owned by the family but the family has said that in the future they expect to remain the anchor shareholders, but to also improve liquidity. I think it is also important to take into account because one of the interesting things about Stevanado is that it's a very high quality company that not many large funds can own because the float is pretty tiny. So then that's also important because if that liquidity improves in the future, then a lot more large cap or mega cap funds are going to be able to to own it right um or funds with more aum so if you look at the list of owners in stevanado is probably funds with that have um

some have significant aum but most of them don't right because liquidity is quite tight the ceo is the grandson of the founder which he is called franco stevanado he currently runs the business and management incentives are quite good and that's for a reason because when stefano i know that there was a question around governance issues also with management having with the family having such a high percentage of ownership i think management has done or the family has done a pretty good job in building the right board of directors that were experimented in in the ipo So it's not like they don't want to succeed in the stock market. They want to succeed in the stock market.

I mean, they brought the former CEO and former CFO of West Pharmaceuticals, which operates in the same segment, but it's not in containment solutions, but they do the rubber to close these containment solutions. So I think that's already an indication that they want someone with experience in the stock market, right? They want to do things right. They just don't want to basically sell shares and go to the beach. And one of the best things that this new board has done was to institute a management incentive program that is based on organic growth and ROIC. And you can clearly tell that this was coming from West Pharmaceuticals because it's exactly the same compensation structure that West Pharmaceuticals had, right? So the good news is that seeing ROIC there, you can be more relaxed in terms of the CAPEX because management is going to suffer if the ROIC is not appropriate. So I think incentives are very aligned here.

I mean, Franco Stevanato is pretty aggressive with where he wants to take the company, but at the same time, they have people in the board and the management incentives also point to them not being able to pursue growth at all costs. yeah i think anytime you see compensation metrics like roic being a big driver and the company is also putting a lot of money into that ic part it's usually a good sign that that means they probably are forecasting pretty good demand for that capital and if you joined us to the fact that the family basically has like 5 billion invested in the company. So I think it's pretty much most of their net worth. So obviously they are not going to burn money down the hole. Yeah, absolutely. All right. Last question, I believe, unless Brett ends up having any others. It's our pre-mortem. It's what we usually ask to wrap up every time. What could go wrong here if

if this investment didn't work out, what do you think would be the big reasons why? So as I discussed in earlier in the conversation, I think one of the attractive things about Stevanado is the relative safety and visibility into the future. So maybe you're not going to generate 20% returns. Well, who knows in the future,

but that's not likely, but you may generate double low, low double digits or mid-teens returns with a relatively safe profile of an investment, right? So I think that's also something to take into account. I always try to maximize for risk adjusted returns. And I think in that metric, Stevanato scores quite high, especially when I started my position. There are several things that can go wrong though. So first is the CAPEX, I mean, it's based on customer commitments, but these commitments can get canceled in the future or demand might be lower than expected. This doesn't seem to be the case right now because, as I said earlier, customers are asking Stevanado to even bring that CAPEX forward because they need the demand earlier than they expected.

Then the other risk is oral. So right now, biologics cannot be given in oral form because of the sensitivity they have. but who knows what will happen in the future right i mean maybe there's some kind of technology that allows um allows biologics to transform into orals and and be as effective as being an injectables and then this is also important for oral glps right because glps are already transitioning to oral right with but glp1s are not exactly and they are not a small molecule or a biologic right so they are kind of in the middle then um i think one of the most important risks is losing trust so imagine now that stevanato bears the washing and sterilization imagine if something doesn't

get correctly sterilized and then there's contamination in a drug and that ends up in legal costs right i mean even if those legal costs and end up going to the pharma company that there's going to be a massive loss of trust of what stevanato is doing so quality standards have to be high and they cannot be relaxed in the in the industry and then this is a fairly typical one which is execution right i mean maybe execution going forward is not the best i don't think there's a reason to believe uh that's going to be the case because up to now in the short history in public markets management has demonstrated that they have complied to what with what they have said i mean it's interesting right because when they ipo'd stevanado says said okay we're

going we're targeting a 10 kegger in top line um in revenue growth over the medium term so then you got covid they started growing above that and then you got the destocking and if you calculate the the kegger now it's like 10 um so even though covid happened they basically caught the kegger right um so that's what they that's what they are targeting and they've managed it for more than 20 years right to go to grow at a double digit clip and probably i didn't have the same tailwinds as they have today so uh those are the risks that i see but honestly it's a company that i find hard to find many risks um and i think that's besides the the the growth is what makes it attractive all right i think that's it uh leandro tell the listeners about best anchor stocks

where they can find your write-ups and what type of companies you cover so i i used to cover more uh the linear compounders that that was because it was easier to do that in in the in 2023 right or 2022 when everything was crashing um but now i'm transitioning more towards looking for high quality companies that are like stevanato might be misunderstood because they're going through a rough patch or their numbers are are misleading so i think we even did we do an episode on on deer yes sir yeah yeah so and that's another example of the kind of companies that i'm uh trying to find right now companies where the earnings power is not apparent to too many people and the numbers are misleading.

So many people don't even bother to dig deeper. And I share, well, actually, Deere and Stevanado, both write-ups are for free in bestanchorstocks.com. So if listeners want to go read them, they have them for free. Beautiful. Okay, let's hit the disclosure and get out of here.

We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you, everyone, for tuning in, for listening to this episode. Go check out Bay of Snackers Talks, and we'll see you next time.