US BUSINESS SERVICES: VALUE IN A UNIVERSE OF EXPENSIVE COMPOUNDERS

Research evidence excerpt

US BUSINESS SERVICES: VALUE IN A UNIVERSE OF EXPENSIVE COMPOUNDERS

PORTFOLIO MANAGER'S SUMMARY

We are often asked: “What is Business Services?” A sector comprising many different end-

markets, customer types, and business models is an unsatisfying answer that often raises more

questions than it answers. Drawing themes across them is equally difficult, but we walk away

with two. First, scale begets scale. Across all our coverage industries, we favor industry leaders

— size creates network effects, enabling above-market growth which, in turn, deepens the moat.

Second, our coverage industries are fragmented to the benefit of industry leaders’ organic and

inorganic growth. Competing against small local operators supports organic growth and creates

ample opportunity for inorganic growth through bolt-on M&A. Together, scale and industry

fragmentation leave us more optimistic on large incumbents than consensus.

Waste Industry: We are positive on the Waste Industry, which we believe stands ahead of an

inflection point in FCF growth, trading at a decade-low relative valuation. The core solid waste

business is set to improve, while new non-core renewable natural gas (RNG) and recycling

investments become incremental to profitability through 2027. Execution risk is front of mind

for investors. Waste Management’s integration of Stericycle, Waste Connections’ resolution of

Chiquita Canyon Landfill (CCL) issues, and progress on non-core investment targets should

materialize over the next year. We see upside to consensus estimates and potential multiple

expansion in 2026-27, contingent on solid execution.

Industrial Distributors: The Industrial Distribution sector has high dispersion with company-

specific drivers that make it ripe for stock picking.