Dream Within a Dream
Lindbergh SpA, $LDB.MI investment thesis
Hey there. If you follow me on Twitter, you must have noticed that my portfolio turnover has been unusually high this year. Fortunately, I keep finding enough attractive (dare I say no-brainer) new ideas to compensate for all of this recent selling.
As I've mentioned in the Unique interview, my newest buy is Lindbergh.
Let me start with this. I haven't noticed this many bad takes or this many misconceptions about a particular business model on fintwit in a long time. So this article is likely going to be a longer one and will be my way of letting you know why I think Lindbergh is an impressive business model and an attractive stock, no matter the uninformed comments.
$LDB.MI
2023 was the year when I became more attracted to distribution business models. The distributors with leading market positions, no customer/supplier concentration, and who are rolling up their respective markets. As these companies scale, their bargaining power grows and the moat widens, making it almost impossible for others to compete with them.
So…while reading Lindbergh's brief description, I assumed it was an obscure Italian 18M market-cap distributor serving a small, attractive niche, and, of course, I had to do more work on it.
Well…it turns out that Lindbergh is nothing close to this type of distributor. Nonetheless, the more I read about it, the more I liked the model and appreciated all of its different nuances from traditional distribution.
As much as I would like to send you a one-page write-up, unfortunately, unlike my other holdings, you cannot explain Lindbergh in a few sentences. It's not because the business is complex; it's because the business is different.
Almost any investor who has done some work on the distribution industry or studied a certain successful distribution model will likely have some wrong preconceived notions about Lindbergh and quickly dismiss it as a „subscale distributor.“
I believe that is the primary reason for so many bad takes on it on the internet. The proper explanation of Lindbergh's model, which you'll likely only find in the prospectus, is both long and boring.
It appears Michele Corradi, the CEO, agrees with me. This is what he had to say about these misconceptions.
Well…Challenge accepted!
As Leonardo Di Caprio in Inception likes the phrase dream within a dream the same way I like to explain Lindbergh as a distributor within a distributor.
The customer
Lindbergh's customers, who sign multi-year agreements with Lindbergh, are multinational companies mostly operating in the Field Operations Market.
These companies employ a large number of so-called maintenance technicians who do maintenance, repair, and installation work for their customers. These companies and their field service engineers (another term for a maintenance technician) operate in various industries such as cargo handling and intralogistics, earthmoving, supply of equipment for large-scale distribution, printing, manufacturing, lifts, and escalators, and so on. However, the end user of Lindbergh's services is not the company, but the maintenance technician inside that company.
Now the question is how Lindbergh serves these technicians.
The company operates through three different business units. The first one is called…
Network Management.
The network management unit makes up roughly 80–90% of Lindbergh’s revenue, and its core service is the overnight delivery of spare parts straight to the technician’s van.
To better illustrate the delivery process, I'll try to simplify a typical transaction between Lindbergh and its customers.
First, Lindbergh's customer gets a call from their own customer saying a part of certain machinery needs to be replaced, fixed, or upgraded. Lindbergh's customer then delegates this work to one of the many technicians it employs, or more simply, they tell Giuseppe that the elevator on 5th street is not working properly and needs to be checked. This is where Lindbergh comes into play.
Giuseppe then places an order with Lindbergh using the T-LINQ mobile app, requesting a spare part or some other tool/device that he needs to do his maintenance on the elevator. That request is made around 12 hours in advance, and Lindbergh, with its own truck driver workforce, guarantees Giuseppe that he'll have his spare part accessible by 7 a.m. the next morning.
Now. What makes this so attractive or different?
For starters, Lindbergh doesn't carry any spare parts inventory. Instead, after receiving an order, Lindbergh collects that inventory from the customer's warehouse. Secondly, it uses its logistics hubs to inbound the collected spare parts, sort them out by the driver/route, and prepare necessary invoices and other administrative documentation for truck delivery. These logistic hubs are spread throughout Italy, guaranteeing coverage of the entire Italian mainland.
By doing this delivery during the night hours, Lindbergh's truck drivers can avoid traffic and always be punctual. By 7 AM sharp. Moreover, there's an immense level of trust between Lindbergh and its customers. As a result, Lindbergh is given the keys to the technician's vehicle, to which the spare part is delivered, without the need for Giuseppe to be present.
Finally, Giuseppe can begin his busy morning schedule without needing to go off-route for the necessary equipment, which speeds up his delivery process. One of the few things that all his customers care about.
Additionally, this kind of trust and loyalty allowed Lindbergh to introduce new services to clients that would complement this overnight spare parts delivery and make technicians' lives easier and their service of a higher standard.
Today, Lindbergh offers the supply of personal protective equipment (gloves, overalls, work shoes, etc.) and other tools (these two do require holding inventory), the collection, washing, and return of uniforms and work clothes, offering storage for some of the spare parts owned by the customer, the collection of returned materials/parts for inspection or repair and the supply of backup spare parts, calibration of equipment and tool testing, and other customized services.
„We like to say that logistics is not the ultimate goal of our business, but "only" the means through which we want to do business“ annual report, FY2021
These service add-ons are what enable Lindbergh to have much higher margins than other distributors as this growth is low-cost, low WC, and capex-free most of the time. What this means is that Lindbergh doesn't have to pay its drivers a higher wage in order to charge for this wide range of service add-ons, nor does it have to buy more fuel. Instead, these services are provided via the same route, the route that costs Lindbergh the same as it did before.
For instance, Lindbergh will also deliver PPE to the van during the same overnight delivery; it will collect the technician's dirty clothes and deliver new ones within that same delivery.
All in that same delivery…
In other words, your delivery costs aren't proportional to the number of services offered; rather, the more service add-ons there are, the higher margins Lindbergh has and the more integrated into its customers' business model it becomes.
Another, smaller part of the Network Management unit in Italy is the so-called In-Day division, that handles the installation of traction batteries for forklifts and the cleaning of these same forklifts.
Even though this type of service may be irrelevant to the thesis, it serves as a good example of how, the longer you are one of Lindbergh's customers, the more likely it is that you'll be applying for new personalized services such as this one.
After all, the bread and butter of Lindbergh's model is to be technician-centric or to act as a one-stop shop for its customers, offering them as many useful services as possible.
This way, the customers are happy because they don't need to wrap their heads around the unprofitable and non-core part of its business model, while Giuseppe is more productive and can focus on his craft, rather than worrying when to clean his clothes or remember to bring his special gloves to the van in the morning.
The Network Management unit (actually all units) is supported with the, already mentioned, T-LINQ app. This app was developed by Lindbergh and has numerous useful functionalities, especially for technicians. For example, they can schedule spare parts deliveries for a specific date, postpone deliveries due to absence, change destination addresses, assign different levels of priority to deliveries, and track in real-time where your packages are or at what stage the repair of a device is.
In addition to Italy, Lindbergh does business in France as well. Also guaranteeing widespread coverage of mainland France.
The business model there is more flexible as they use third-party drivers to make the deliveries. However, these drivers are coordinated by Lindbergh, so they can achieve the same level of service offered in Italy. Maybe it's best if Michele further explains France.
But, more on France's entry through M&A and successful turnaround can be read in the 2021 shareholder letter.
Let's rather discuss the second business unit.
Waste Management
This line of business is the one that Lindbergh has been running for more than 15 years now. It accounts for 10–15% of revenue, and as the name implies, it takes care of waste produced by customers in Italy.
For example, consulting to choose the best disposal solution for the client, taking care of all the obligations required by constantly evolving waste legislation, collecting waste to be sent for disposal or recovery at specialized plants, and guaranteeing maximum transparency and traceability of waste required by the law through the T-LINQ platform.
The Waste Management business can also be considered as another margin-accretive service add-on since Lindbergh is able to collect special waste produced by a technician during the same overnight delivery of spare parts.
Essentially, for its large clients, Lindbergh acts as a middleman, using its own fleet for the collection of micro-waste produced by technicians. Or, on occasion, bringing in sub-contractors that can collect larger quantities of waste at the customers' warehouse or that can collect more specialized waste. Once more, these subcontractors are managed via the app.
In Italy, Lindbergh currently has four warehouses authorized for waste management. They utilize them to consolidate the micro-waste gathered from technicians and then get rid of it when the „pile gets large enough.“
According to management, it would be extremely difficult, if not impossible, for a competitor to replicate this service economically without these warehouses and the micro-waste consolidation.
Another barrier to entry are the authorizations for the warehouses, and it took Lindbergh years to obtain them.
In addition to this, managing waste is something that cannot be done in-house and always has to be outsourced to „professionals“. Virtually all customers want waste management services, especially when a company you employ can guarantee widespread coverage of the territory.
Onto the next one.
Warehouse management
The third business unit is a small one (a couple percent of total revenue), and it has only been in business since 2021. Lindbergh serves only a single client and provides damage detection, functionality checks on used forklifts in the warehouse, washing, painting, and assembly services, as well as management of the forklift warehouse (deposit+delivery).
This service was requested on behalf of their largest customer, is a result of Lindbergh's growing know-how on the market, and is carried out by trained professionals employed by the company. One could argue that this BU could be interpreted as a lack of focus, but I don't think it's the worst business practice to build goodwill with your largest customer.
Following this longer but very necessary business description, I'd like to highlight one more thing.
Loyalty
Lindbergh is likely a business with the highest level of customer loyalty I have ever seen. Once customers choose Lindbergh, they don't go back.
So when three-quarters of your revenue comes from customers who have been with you for 5+ years, my job as an analyst becomes much easier in determining the sustainable level of earning power.
Additionally, the more service add-ons you provide, the more you profit off of the existing client base, especially if the services you offer are tailor-made and cannot be found anywhere else on the market.
Furthermore, the number showing historical customers as a percent of total revenue was even higher before Lindbergh entered France in 2021 as virtually all of newer Lindbergh's customers came from there.
Actually, in the 5-year period prior to expansion in France, the same client base in Italy grew from €4.7 million of revenues in 2016 (88% of the total revenue) to €13.31 million of revenues in 2021 (98.8% of the total), at a CAGR of 23%.
Customer retention in most years is 100%.
I didn't confirm this, but according to the only sell-side research available on the Internet, Lindbergh has only lost two customers in its history, both insignificant. One client in 2018, which was 0.1% of revenue at the time, and one in 2020, which accounted for 1.5%. Now that I think about it, I should have asked Michele the reasoning behind it (or whether it really did occur) since I read in one presentation that Lindbergh has never lost a customer.
I'm inclined to trust Michele, but until you or I confirm this, take it with a grain of salt.
Anyways…
There was a big test to this customer loyalty that I'm preaching in 2022.
Usually, the contracts Lindbergh offers guarantee a 30% gross margin for Network Management and 35% for the Waste Management unit. However, these contracts are adjusted semi-annually, so when the rapid inflation hit in 2022, Lindbergh wasn't able to save themselves from fuel costs, eating up their margins month after month.
In the aftermath, Lindbergh quickly managed to talk it out with the customers, and even though contracts didn't warrant it, clients adjusted them and allowed Lindbergh the same profit levels as in the past.
“When a new customer starts to use our services, not only does he never leave us, but he increases the work month after month, connects to our IT systems, asks us to implement new processes that he has not found on the market.” ~letter to shareholders, FY 2022
Many investors worry about customers leaving Lindbergh or imposing unfavorable terms on them, however, the historical data suggests otherwise.
I believe the case here is not a matter of bargaining power or the question of whether customers will cut them or not. It's a matter of value-added vs. costs for customers and a matter of how much more business existing customers will do with Lindbergh.
It costs its customers nothing (in comparison to their overall labor costs), and in exchange, Lindbergh gives them exceptional support in return, for which there's no substitute. Also, Lindbergh doesn't grow its margins by squeezing out its clients, but rather by adding on services and making customers more efficient than they would have been if they had done this work in-house:
Thanks to the delivery methodology, Lindbergh allows guaranteeing an economic advantage for the client equal to € 2,530.00 per year for each technician (€ 4,730.00 - € 2,200), in addition to efficiency in terms of timing, given that he does not have to go to the courier's warehouses in person to retrieve the necessary equipment. Estimating an average travel time of 30 minutes and an average pick up time of materials equal to 20 minutes, it is possible to save about 50 minutes for each of the 110 deliveries per year (on average), for a total of about 90 hours per year saved for each technician (50 minutes * 110 deliveries/year = 91.7 hours/year). ~ sell-side research, Integrae SIM
Even after entering France two years ago, Lindbergh has managed to exercise pricing power from the get-go.
Contract renewals with existing customers: by far the most difficult and tiring part of the entire project. We managed to keep all our customers, despite the complete reorganization bringing about several inefficiencies, with whom we now have a relationship of renewed trust which has resulted in contract renewals for the next few years. Within the renewals we managed to agree tariff increases, sometimes significant, especially for those customers with tariffs that were decidedly too low, the result of a lack of or incorrect previous commercial management. ~ letter to shareholders, FY 2021
Okay, now tell me about the competition.
Sure. Michele?
Just in case, here's a comparison of Lindbergh's delivery vs a traditional one.
David, you bring up Michele a lot, but who else are the jockeys involved in this business?
The two founders, Michele Corradi and Marco Pome are still running the business.
In addition to their backgrounds and the interview with Michele on my recent Substack post, another important thing to highlight is that these five men are a textbook example of shareholder alignment as they own around two-thirds of the shares outstanding and pay themselves below-average salaries.
For instance, the two founders were paid a 95,000 salary in 2022. Meanwhile, Marco owns around 5 million worth of company shares, and Michele owns around 2.5 million. Also, the situation is rather comparable for the other three directors, whose skin in the game is 13.5% of the business in total.
Instead of the fees they receive, the success of the stock price is what determines their „success“.
There are more nuances around Lindbergh's way of doing business, but I think we've covered the more important stuff between this write-up and the interview.
However, I encourage you to read the shareholder letters, as it’s pretty rare that management communicates both the good and the bad performance this well.
Value
So how much would you pay for a business such as this one?
A predictable business operating in an industry not prone to change. A business with close to 100% customer retention, an already established logistics network covering the whole of Italy and France, or a business that was already granted permissions for Waste Management that would take other players years to get (and you still wouldn't be able to compete with Lindbergh due to lack of scale).
A business that customers trust so much that they give them keys to the vans/warehouse. One with no real competitors, offering a unique set of services, a business that doesn't have to retain much earnings (if any) to grow. Run by honest management with significant skin in the game and a track record of paying low single-digit multiples for M&A after the IPO and paying around 80% of cumulative profits as dividends before the IPO.
Okay, I agree. This paragraph might be too idealistic and centered only on the bright side.
Still, if I wasn't such a cheapskate at heart, I'd certainly pay an above-market multiple for this one.
Based on the research I've done, I'm confident that Lindbergh is unreasonably undervalued here at my estimate of high single-digit EV/owner earnings (FY ’23) and that I think the growth in earnings power will cut this multiple in half in the 2-4 years after that.
I never share DCFs in my analysis and I rarely do them, and the point of this article is to make you realize it doesn't really matter to me whether I will pay 8x or 12x multiple for Lindbergh. And that I could easily argue that a proper margin of safety exists with Lindbergh even at a market multiple.
Certainly, I'm more than satisfied paying half of that.
The thing I'm also excited about in the upcoming years is:
More technicians, more services, more______
Firstly, entering France in 2021 doubled the number of technicians Lindbergh serves. Its turnaround is not yet complete and France is still a severely under-monetized market.
As was the case in Italy, the up-selling of service add-ons there, and especially the implementation of the Waste Management unit should lead to a significant increase in ARPU and margins with it.
Secondly, more services offered inside the Waste Management BU in Italy that cover the entire circular economy of waste for customers.
Another thing management has done well in the past is inorganic growth. Michele has shared with us a clear framework, and I double-checked the multiples paid for previous acquisitions. They usually acquire for a 3-5x EBITDA multiple and have never paid a higher multiple than 6. The most recent one was 2x EBITDA hehe.
These should add to growth in H2 2023 as some of them were done in the middle of the year or after the H1 results.
Apart from the usual organic growth of acquiring technicians or offering current technicians more services that Lindbergh has done successfully over the years, there's also a growth opportunity in the thermo-hydraulic sector. However, I don't know about that one chief. There's a risk of diworsifying as this is the first time Lindbergh is doing the actual technician work by themselves.
But they did choose this sector to stay out of the markets already covered by their current customers. And the reasoning behind their most recent M&A, through which they entered the market, was to become the first national Italian operator on the market. This market is very fragmented and each player covers only a small territory. So Lindbergh's goal is to aggregate many technicians and make them more efficient e.g. consolidate the sector, become a national player, and improve already good margins.
Now, what's left is to find “the hair” and the reason…
Why does this opportunity exist?
First, the obvious. This is an 18 million euro market cap company that is 67% owned by insiders, so the float is only around 6 million. On average, there are hardly five figures worth of shares traded daily.
Lindbergh is not even listed on Borsa Italiana, the main exchange, but on Euronext Growth Milan, so many investors don't have access to it and it's fair to say that 99% of institutions can't buy it, even if they want to. Moreover, the company's filings and annual reports before H1 2023 are all in Italian.
There's only one institution covering the stock. They did a great job at portraying the company in the initial sell-side research report, though I believe their growth projections are too conservative.
Furthermore, given that Lindbergh acquired an unprofitable French business in 2021 that was losing more than 1 million euros annually, the financials on the almighty Tikr look like the business is in the stage of declining margins in 2021 and 2022, or facing significant competition. I remember the first time I looked at Lindbergh's financials and thought to myself, What kind of Italian shitco is this?
Which means your competition are lazy investors who only do surface-level research and immediately conclude Lindbergh is an expensive stock for a subscale distributor with declining profitability.
Aside from these concerns around illiquidity, which is an advantage for a poor Croatian like me, there are some other valid risks to take into account.
For instance, the business is dependent on a small number of very important clients. The top 15 customers account for around 85% of revenue, and the largest customer (Jungheinrich) makes up around 30% of total revenue. I don't think there's a scenario where these would leave Lindbergh. If that thought ever crossed my mind, I'd be heading for the exit. I do think this is a risk if the customer goes bust.
Another risk, an obvious one, is the dependency on founders and directors. But since there are five of them, I believe the other four could manage if one of them were to leave the company for any reason.
Also, Lindbergh has a „warrant situation“ in place, and it is more than likely that current shareholders will be diluted by 15% by December 2024. I'm fine with that risk as well since I'm being compensated for it at the current valuation, and I think there won't be any unnecessary dilution going forward.
Maybe my primary concern is around the quality of service. It is something I cannot judge from behind a computer and something that I wouldn't notice on time. I worry that as Lindbergh scales, they'll stop prioritizing the quality of the services offered and their technician-centric model won't be technician-centric anymore.
The last worry of mine is the success of future M&A.
All in all, I like Lindbergh.
That's all folks. Thanks for reading!
disc: 18% position
This is NOT investment advice. All content on this website is for entertainment, informational, and educational purposes only and should not be considered to be advice of any nature. Due your own due diligence.
Hi. I have a technical question. I would like to buy lindbergh on IBKR, but it shows that order quantity should be a multiple of board lot. It does not work even if i want 100 shares. Do you you something about it? Thanks
Great write up, thanks David! What do you make of the recent sell from the Chairman/CoFounder who decreased his holding from over 26.3% to 22.3%. The announcement says that two institutional investors bought the shares. Do you see this as net positive or net negative? Thanks!