We see TMX Group being able to grow its earnings at double digit rates for a long time: Schwartz

Key Concepts

• TMX Group: A multi-billion dollar company that owns and operates the Toronto Stock Exchange, Venture Exchange, and Montreal Exchange. It is involved in derivatives and interest rate options, but its primary focus is on selling subscriptions for data and software to investors.
• Proprietary Data: Data that is unique and owned by a company, often providing a competitive advantage.
• Capital Light Business: A business that requires minimal capital investment to operate and grow, often leading to high free cash flow generation.
• Recurring Revenue: Revenue that is predictable and generated on an ongoing basis, typically through subscriptions or service contracts.
• Berkshire Hathaway B: A conglomerate holding company led by Warren Buffett, with diverse operations including insurance, business operations, and investment management.
• Succession Planning: The process of identifying and developing future leaders to ensure the continuity of an organization.
• Free Cash Flow: The cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

TMX Group: A Diversified Data and Software Powerhouse

Barry Schwarz, a portfolio manager at Baskin Wealth Management, highlights TMX Group as a compelling investment opportunity. He emphasizes that TMX is more than just the Toronto Stock Exchange (TSX); it's a multi-billion dollar entity that has successfully diversified its business model.

Key Points:

• Diversified Operations: TMX Group owns and operates the Toronto Stock Exchange, Venture Exchange, and Montreal Exchange. It also engages in derivatives and interest rate options.
• Shift to Data and Software: The core of TMX's current business lies in selling subscriptions for essential data and software to investors. This includes energy data, quote systems, and tools for creating Exchange Traded Funds (ETFs).
• Remarkable CEO Performance: John McKenzie, the CEO of TMX Group, is commended for transforming a previously stagnant business into a global powerhouse.
• Strong Financial Performance: TMX Group recently reported a "banger quarter" with 17% topline growth and over 20% earnings growth. This level of growth is considered exceptional for a company in what might be perceived as a "boring" software sector.
• Acquisition Strategy: The company is actively pursuing acquisitions and add-ons to further expand its business.
• Capital Light and Free Cash Flow: TMX Group operates as a capital-light business, which allows it to generate significant free cash flow.
• Dividend Growth: The company has a consistent history of raising its dividend annually since going public.
• Valuation Discount: TMX Group is believed to be trading at a discount compared to similar US-based exchange and data providers like Moody's or MSCI.
• Long-Term Growth Potential: Schwarz anticipates TMX Group will achieve double-digit earnings growth for an extended period, driven by its acquisition strategy and the ongoing demand for its services.

Supporting Evidence for Growth Confidence:

• High Margins in Software: The software business, which includes subsidiaries like Data Links, Vetify, and Traport, generates high margins due to the indispensable nature of the information and services provided.
• Market Correlation: While TMX's performance is tied to market conditions, its growth is not solely dependent on new listings. The company's strategy is focused on expanding its global recurring revenue software sales to financial services providers.
• Proprietary Data Advantage: Schwarz views proprietary data as a key area for growth and a strong competitive advantage.

Concerns and Cyclicality:

• Cyclical Nature: TMX Group's business is inherently cyclical. Periods of low stock market volatility may lead to less impressive results, while high volatility and increased hedging activity can significantly boost performance.
• Current Volatility: The current market environment, characterized by significant stock price swings in response to earnings reports (e.g., a penny miss leading to a 10% stock drop), is seen as beneficial for TMX Group.

Berkshire Hathaway B: Navigating Succession and Market Conditions

The discussion shifts to Berkshire Hathaway B, with Schwarz addressing a recent broker downgrade to "sell," which he notes is unusual for the company.

Key Points:

• Analyst Coverage Challenges: Berkshire Hathaway is not extensively covered by analysts due to its complex structure and the need for expertise across insurance, business operations, and investment management.
• Warren Buffett's Succession: Warren Buffett's planned, year-long transition out of his CEO role is viewed as an optimal scenario for shareholders, ensuring a smooth succession.
• Greg Abel's Leadership: Greg Abel, a long-time executive at Berkshire Hathaway, is highly regarded by Warren Buffett as one of the world's best business operators and is expected to lead the company effectively.
• Addressing "The Next Buffett" Concern: While acknowledging that there will never be another Warren Buffett, Schwarz asserts that Berkshire Hathaway will continue to thrive under new leadership.
• Insurance Market Weakness: The current weaker market for insurance operations is a concern, but Berkshire Hathaway's diversified divisions are performing well.
• Significant Cash Holdings: The company holds approximately $350 billion USD in cash.
• Future Investment Strategy: Schwarz anticipates that as interest rates decline, particularly in the US, Berkshire Hathaway will aggressively deploy its cash into equity markets and acquire new business operations.

Supporting Evidence for Future Growth:

• Diversified Business Segments: The strength of other divisions within Berkshire Hathaway can offset weaknesses in the insurance sector.
• Strategic Cash Deployment: The substantial cash reserves provide ample opportunity for strategic investments and acquisitions, especially in a declining interest rate environment.

Conclusion

Barry Schwarz presents two distinct investment opportunities: TMX Group, a company demonstrating robust growth through its diversified data and software offerings and strategic acquisitions, and Berkshire Hathaway B, a well-established conglomerate poised for continued success under new leadership, with significant potential for future growth fueled by its substantial cash reserves and strategic investments. Both companies are viewed favorably, with TMX Group offering strong double-digit growth potential and Berkshire Hathaway B representing a stable, yet opportunistic, investment.