Portfolio Activity Q1 2020 - Horan Capital Management

Portfolio Activity Q1 2020
                                By Louis S. Foxwell and Matt Holman, CFA®, Research Analysts
  The following discussion mentions stocks that are widely — but not universally — held by clients of Horan Capital Management.
  Client portfolios are customized, so this commentary may or may not be directly applicable to any given client or account. Our
  intention is to provide general insight into portfolio holdings and into our overall approach and to highlight situations of interest,
  both positive and negative. The mention of any stock is neither advice nor a solicitation to buy or sell any particular investment and
  our opinions regarding securities are subject to change without notice. Investing involves risk of loss. See the legal disclosures at the
  end of this publication and on our website for more information.

BUYS
                                                                                                              Accenture PLC (ACN)
Accenture is one of the largest consulting and business process outsourcing firms in the world. Consulting is its most significant business,
primarily involving solutions related to strategy, technology systems integration, and management and technology
consultations. Accenture helps companies integrate new technologies, such as migrating IT infrastructure to the cloud. The company
benefits from strategic alliances with top software providers like Amazon Web Services, SAP, Oracle, Microsoft, Salesforce, and Workday.
Its Outsourcing business adds diversity and stability to its business. Here, Accenture offers solutions related to repeatable business
processes like procurement, accounting, and application management. These contracts are often associated with the ongoing
maintenance of older, legacy technology systems where it can offer expertise and cost-efficient solutions to in-sourced alternatives.
We are attracted to Accenture for a few reasons. First, it invests heavily in innovation and growth to stay competitive and ahead of the
innovation S-curve. It strives to hire the best talent, invest in research and development, and roll-up smaller, start-up companies in next-
generation technology fields. Second, Accenture has a strong reputation and powerful brand within the consulting industry. There are
also significant switching costs embedded in the company’s outsourcing relationships due to high up-front expenses and long-term
contracts. Finally, Accenture offers a strong value proposition, where the scope of its network enables them to provide the best solutions,
while its scale allows them to offer it at the best price.
In summary, the company checks a lot of boxes when we look to invest. Accenture is a leader in a growing industry with a long runway
for growth. It has a solid, debt-free balance sheet, avenues for future margin expansion, and several durable competitive advantages to
keep competitors at bay. Along with a plentiful amount of reinvestment opportunities, its ability to earn high returns on capital offers an
appealing runway to compound returns for its shareholders. (Matt Holman)

                                                                                  Berkshire Hathaway Inc. Class B (BRK.B)
Berkshire Hathaway is a holding company with three primary components to its business: (1) insurance businesses, (2) a collection of
privately-owned businesses, and (3) a diversified public equity portfolio. Some of the privately-owned businesses include Burlington
Northern Santa Fe, Fruit of the Loom, Dairy Queen, and Duracell (among many others). Aside from being managed by Warren Buffett and
Charlie Munger, we believe Berkshire is a superior company for several reasons. First, Berkshire’s insurance business generates a large
sum of insurance premiums – or float – that can be redeployed into attractive investment opportunities. The real value here lies in the
cost to acquire the float, which is effectively nothing. Second, Berkshire is a highly decentralized, roll-up company. This means the
businesses mostly run independently of each other, which generally leads to better growth and efficiency. Finally, Berkshire has a strong
balance sheet, including a substantial cash hoard, which we expect Buffett and Munger to put to work during this market decline.
Moreover, its shares are trading near-decade low multiples. We believe the optionality of the cash position and depressed valuation
presents an attractive entry point here. (Matt Holman)

                                                                                                 Booking Holdings Inc. (BKNG)
Booking Holdings is the world’s largest online travel agency. It owns and operates a valuable portfolio of travel and reservation sites that
includes Booking.com, Priceline, Kayak, and OpenTable. In our opinion, the company is the best operator in its industry. Its dominance in
the European travel market is the main source of its economic moat. This is because Europe is mainly comprised of boutique hotels. These
independent hotels have small advertising budgets and struggle to reach consumers without the help of a demand aggregator. Booking
is the largest aggregator in the market, which gives it powerful network effects and allows it to take a healthy cut of every hotel room
sale.

The COVID-19 pandemic is affecting Booking more than most of our holdings because of its impact on travel-related businesses. Hotel
demand is the lowest it has been in years, with many hotels completely shutting down operations. In our opinion, Booking is well-
positioned to operate through this crisis. It holds a net cash and investment position on its balance sheet. The company’s cost structure
is mostly variable, giving it the ability to pull back marketing spend based on demand. This will allow it to adapt to the current environment
without incurring significant losses. While Booking’s short-term results will be disappointing, we are confident that its long-term earning
power remains stronger than its competitors. When demand in the travel market picks up again, we believe that Booking’s customers will
rely on it more than they did before the crisis. Until that day comes, we think its pristine balance sheet will allow it to weather the storm
longer than its competitors. (Louis Foxwell)

                                                                                          Broadridge Financial Solutions (BR)
Broadridge is one of the leading outsourcing companies in the financial services industry. Its primary business is the Investor
Communications segment. The company is tasked with distributing communications, coordinating investor meetings, and processing the
entire proxy voting process through its ProxyEdge software. Its other main business is the Global Technology and Operations segment. It
offers back-office support and automates the trade life cycle, starting with the order and execution, through settlement, custody, and
accounting. Broadridge also recently launched a Wealth Management platform designed to streamline and consolidate wealth
management services. This is an exciting growth avenue, given the company’s massive client base and ability to leverage these
relationships.

Broadridge checks a lot of boxes when it comes to the companies we typically find attractive. First, high switching costs help generate
recurring revenue, strong retention, and substantial barriers to entry. Second, the business is highly scalable and requires little
reinvestment to grow. Third, its services offer a compelling value proposition and an asymmetrical risk/reward dynamic. Broadridge’s cost
is virtually immaterial to its clients’ bottom lines. However, the downside risks of disruption, time, and regulatory focus significantly
outweigh any potential monetary upside to switching services. Lastly, its revenues tend to be insulated from the economic cycle and
resilient in economic downturns. Shares are currently selling off on the news related to the COVID-19 pandemic and fears of an economic
slowdown. However, early reports from management indicate it has been business as usual so far for Broadridge.

In summary, Broadridge is the benefactor of a unique opportunity where standardization of common tasks at a centralized operator is a
critical success factor. As a result, Broadridge operates in a legal monopoly, virtually free from competition, and can be thought of as a
public extension of the SEC. We believe Broadridge is an attractive investment opportunity that has the ability to thrive in both bull and
bear markets. (Matt Holman)

                                                                                                            Discovery, Inc. (DISCK)
Discovery creates non-fiction content and distributes it globally across multiple distribution platforms. Its portfolio of assets includes
Discovery Network, HGTV, the Food Network, the Cooking Channel, Investigation Discovery, Animal Planet, the Science Channel, TLC, and
Eurosport. The company’s business model is straightforward: create content, scale it globally, and monetize it through affiliate fees and
advertising revenue.

In a world where content creators are fighting over viewership of scripted shows, Discovery’s core competence is creating non-fiction
entertainment. Its non-fiction content is much less costly to produce, enabling excellent free cash flow conversion and operational
flexibility. Discovery has four of the top five women’s channels on domestic cable television, making it a key differentiator in the market.
It also has significant scale globally, allowing it to “double-dip” on content in international markets and enjoy high incremental returns on
its investments.

The cost of cable has become prohibitive to many consumers in the U.S. because of sports rights and retransmission fees. With direct-to-
consumer platforms (e.g., Netflix) emerging, cable customers have continued to “cut the cord.” This has forced cable content creators to
pivot to other distribution channels. In our view, the market has indiscriminately punished every company with exposure to this risk.
Discovery is among this group, but we believe that it will navigate this paradigm shift better than its competitors and emerge as a major
player in the new industry landscape. We think that Discovery will successfully pivot to a direct-to-consumer platform with its rich library
of content. We also think that there will be a re-bundling of content in the future – likely one without sports as an anchor. With its
differentiated content and niche appeal to women viewers, we think that Discovery’s portfolio will be at the core of this future bundle.
As it stands today, the company’s viewership remains much higher than its share of the industry’s economics. In our view, the
aforementioned changes will close this gap as viewers have a more direct choice of where to spend money on content.

We do not believe the company’s long-term monetization profile changes with the current COVID-19 pandemic. Short-term advertising
revenue will likely be affected, but consumer mindshare will remain unchanged by our estimation. Affiliate fees, a flexible cost structure,
and a sound balance sheet will likely afford the company the ability to keep investing in its direct-to-consumer platform during the crisis.
(Matt Holman)

Facebook, Inc. (FB)
Facebook is the largest social media company in the world. Its assets include Facebook, Instagram, and WhatsApp. The company’s
properties reach more than 2.5 billion consumers on a monthly basis, and advertisers pay Facebook for access to these consumers. In our
research, we have concluded that these advertisements are some of the most cost-effective ads on the market. We believe that Facebook
has a long monetization runway as more advertising moves to digital channels. We also think that the company has potential expansion
opportunities into other markets (e.g., virtual reality).

The COVID-19 pandemic will likely lead to lower short-term advertising revenue. However, usage across Facebook’s platforms has
increased during the pandemic. This leads us to believe that the core product of Facebook is unaffected by the current demand shock.
This could create a coiled spring with increased advertising demand coming out of the crisis. (Louis Foxwell)

                                                                                                   Fair Isaac Corporation (FICO)
FICO operates two segments – Scores and Software. The Scores business represents the monetization of the FICO Score, which lenders
use to assess the credit risk of their customers. The company’s Software unit consists of niche software and customizable tools. These are
primarily used in fraud detection, risk management, and decision management.

More than 90% of all U.S. consumer lending decisions are made using FICO’s proprietary scoring models. FICO is effectively a tollbooth on
U.S. consumer credit, with minimal reinvestment requirements. We believe the company will retain its dominance as the market leader
since lenders are already comfortable with the FICO Score. There is very little incentive for these lenders to switch to a new scoring model,
as the risk of doing so outweighs the benefits. In the Software segment, FICO is the number one or two player in many of its niche
applications. For example, FICO Falcon is the leading payment card detection software, protecting 2.6 billion cards globally. The company
is currently in the midst of an investment cycle in this segment, transitioning its products to the cloud. Therefore, we think that FICO is
currently under-monetizing its assets.

FICO is primarily tied to consumer credit volumes and scores pricing. In the event of a significant economic downturn, the company will
experience a decline in scores volume. The COVID-19 pandemic may be a catalyst for such a decline; however, we think the company will
be able to mute this volume fluctuation with price increases. We also baked these pessimistic assumptions into our valuation of the
company and felt that we purchased the position with an adequate margin of safety. Furthermore, concerns over the DOJ’s investigation
into anti-trust claims gave investors pause during the quarter. We believe that it is unlikely the business model will be permanently
impaired from the outcome of this investigation. The aforementioned margin of safety compensates us for this risk as well. (Louis Foxwell)

                                                                                       Hilton Worldwide Holdings Inc. (HLT)
Hilton Worldwide owns a rich portfolio of hotel brands, including Hilton, Waldorf Astoria, DoubleTree, Embassy Suites, and Hampton. The
company primarily generates high-margin revenue from franchise fees. It sells franchisees the right to use its brands in exchange for a cut
of every room night sold. It also generates revenue by managing its branded hotels. Hilton Worldwide only owns and operates a small
number of locations, making it asset-light.

COVID-19 has impacted nearly every hotel owner. Hilton’s branded hotels are operating near record-low occupancy rates, with many
temporarily closing. This undoubtedly will have a negative impact on the company, but the asset-light model insulates it somewhat from
financial risks. HLT still owns some hotels, so it is not completely insulated, but most of the investment for maintenance and growth is
made by the franchisees rather than the parent company. The franchisees, therefore, carry the brunt of the financial risk – a trade-off
that comes with leveraging a valuable brand in a franchise agreement. That being said, the health of these franchisees is vital to the health
of the entire portfolio of brands, so we will continue to monitor their solvency. We ultimately believe that the value of Hilton’s brands
will be unaffected in the long-term, since this is not a company-specific crisis. The company’s hotel network is vital to the travel industry,
and we think Hilton Worldwide will continue to generate high-margin franchising revenue for many years to come. (Louis Foxwell)

Starbucks Corporation (SBUX)
Starbucks sells specialty coffee globally through its owned and licensed stores. It also generates a small portion of its revenue from
consumer packaged goods. We believe that the Starbucks brand has valuable consumer mind share. Many coffee drinkers are willing to
pay a little bit more for Starbucks coffee because it brings them joy and is often a cherished part of their daily routine. We view this as a
very valuable asset that will give the company long-term pricing power. The company’s stores have excellent unit economics, allowing
Starbucks to continuously expand the density of its store base with attractive returns on capital. We still see international growth as a
significant opportunity – particularly in China.

COVID-19 will have a short-term impact on revenue, in our view. Like most restaurants, Starbucks will see lower traffic until consumers
are able to go about their daily routine. Once this happens, we think Starbucks will continue right where it left off. Until then, the company
is well-capitalized and in good financial health. (Louis Foxwell)

                                                                                                              Vail Resorts, Inc. (MTN)
Vail Resorts operates mountain resorts and urban ski areas in North America and Australia. It generates revenue through lift ticket sales,
dining services, ski school, retailing, and lodging. The company continues to use its cash flow to acquire smaller resorts and increase its
market share. The Epic Pass was as strong as ever coming into this ski season, and we think that it will continue to be a lucrative source
of recurring cash flow. Vail’s moat is intact, in our opinion, and its network of resorts is an attractive value proposition to its growing
customer base.

We purchased more shares of MTN during the quarter as the stock traded below our estimate of intrinsic value. The COVID-19 pandemic
was the primary reason for this opportunity. Vail closed its resorts for the remainder of the ski season, which will have a temporary effect
on results. However, the company closes its operations down in April every year when the ski season ends. In a normal year, the company
loses money in the summer months. This is unavoidable due to the seasonal nature of the business, but something that we have always
baked into our valuation. This investment is primarily based on winter results, so a summer-long shutdown of operations will not have a
material effect on results. If the virus returns next winter, we will re-evaluate the situation. However, even in the event of this occurring,
we still believe Vail has adequate financial resources to get through the crisis. Lastly, we think that Vail is in better financial shape than its
competitors and may get the opportunity to acquire additional resorts at bargain prices as a result of this pandemic. (Louis Foxwell)

                                                                                                                          Verisign (VRSN)
Verisign provides mission-critical operations that are vital to a properly functioning internet. To ensure operational accuracy and
efficiency, the system must be run by a sole registry operator. Verisign is that single operator for all .com and .net domain names. All
websites must register their site with a domain registrar (e.g., GoDaddy). The name is then registered with the registry operator (Verisign),
who takes roughly $10 per year as its cut of the transaction. As the operator, Verisign creates the virtual map of all .com and .net websites
and makes sure that when you key Google.com into our browser, you navigate to Google.com and not another site. Essentially, Verisign
is the backbone of the internet and acts as a toll collector on every piece of online real estate in the .com and .net neighborhoods.

Verisign has developed a regulated monopoly in its industry. It is governed by an advantageous contract with its primary regulator, ICANN,
which designates and protects Verisign as the sole registry operator. It also outlines pre-determined price increases, which allow Verisign
to raise prices faster than inflation. The contract also includes a presumptive right of perpetual renewal with no threat of competitive
bidding. In other words, as long as Verisign does its job effectively, it will likely manage the .com registry for as long as it chooses.

Due to a definitive first-mover advantage, the .com domain is the de facto choice for new and existing websites. Unsurprisingly, this led
to the development of a powerful brand and consumer mindshare around the .com and .net domains. This brand creates insurmountable
switching costs when a domain owner registers or renews their domain name. Verisign’s business model is also inherently attractive. It
operates a lean, scalable cost structure that allows it to generate very high profit margins while requiring very little reinvestment to grow.

Verisign’s predictable recurring revenue streams with scheduled pricing power make the business less sensitive to the economic cycle and
events like COVID-19. Share prices have fallen with the broader markets on the COVID-19. However, Verisign will see very little impact
from this pandemic. An economic slowdown will likely stunt the overall growth in new domain name registrations as new business
formation temporarily slows. However, domain resellers will still purchase domains, and Verisign still retains its ability to raise prices,
which will allow them to grow revenue even while the economy is contracting. We feel this makes Verisign a very attractive addition,
especially in the context of an overall portfolio. (Matt Holman)

Visa, Inc. (V)
Visa is one of the world’s leading payment processing networks. The company operates an open-loop network where it plays the role of
a middle-man, connecting consumers with sellers and their respective banks. Effectively a toll collector, Visa takes a small cut of each
dollar that flows through its network as well as a flat fee to process data and settle transactions. In other words, the more spending
volume and transaction volume that flows through its network, the more revenue Visa makes.

Why do we find this attractive? The unit economics are highly profitable, and the business scales well, with relatively little capital
reinvestment. Revenues tend to be inflation-resistant, and Visa is well-entrenched against competition and potential disruption. The Visa
brand is one of the strongest and most recognizable in the world. The company has invested billions (and decades) into building its vast
network and relationships with global banks, which any potential competitor or disruptor would have to replicate.

Naturally, a company as strong as Visa trades at a premium to the overall market and seldom goes on sale. While Visa’s shares have traded
down with the market, we view it as one of the best companies in the world and believe the catalysts for this decline are short-term in
nature. Further, Visa’s runway for growth centers around the structural shift from cash to digital payments. We think the company is likely
to emerge stronger from the structural changes that come from the fallout of the COVID-19 pandemic. With large parts of the world
quarantined and forced to change their shopping habits, we think this could expedite the shift to a more cashless economy. In short, we
believe that Visa’s decline was unwarranted, and we took advantage of this rare opportunity to build our position in a great company.
(Matt Holman)

 SELLS
 (The positions below were eliminated in most accounts. In some cases, positions were kept in selected client accounts for tax
 purposes.)

                                                                                                  American Express Co. (AXP)
American Express is one of the big four players in the electronic payment networks industry. It operates a closed-loop network where it
assumes the roles of both banks and the connecting network. With that in mind, we are more confident and excited about open-loop
network companies like Visa and MasterCard. In these open-loop networks, operators simply act as a middle-man rather than the bank.
As the middle-man, the operator can collect higher-margin revenues with less exposure to credit risk and lower capital intensity.
Therefore, we decided to build our position in Visa rather than hold both Visa and American Express. Some accounts that already held
both Visa and American Express saw the capital swapped into other companies listed above. (Matt Holman)

                                                                                                                 Apple Inc. (AAPL)
We trimmed shares of Apple during the quarter after a quick run-up in the share price. We felt that shares were overvalued at the time
and wanted to reallocate the proceeds to more attractive opportunities. We continue to view Apple as a core holding and believe that
the value of its ecosystem and brand will be fully intact coming out of this pandemic. (Louis Foxwell)

                                                                                         Chipotle Mexican Grill, Inc. (CMG)
We sold shares of Chipotle during the quarter and swapped the proceeds into what we believed were more attractive opportunities.
(Louis Foxwell)

CH Robinson Worldwide Inc. (CHRW)
CH Robinson is a non-asset based third-party logistics company that provides logistics services to freight shippers and transportation
companies. This has historically been an attractive business model that generates strong profit margins and high returns on capital. This
attractiveness, however, brought on competition, which has partially eroded those high profit margins. Also, tech-focused companies
have come in and threatened to disrupt the model by introducing new technology and processes. Further, broadly focused companies
like Amazon have expanded and in-sourced their logistics business and have become a threat to market share. Compounding matters,
Robinson’s economic moat is marginal, and its ability to fend off competitors is weakening. Therefore, we decided that CH Robinson’s
best days are likely behind them and decided to exit the position and redeploy capital to more attractive opportunities. (Matt Holman)

                                                                                                  CVS Health Corporation (CVS)
We are intrigued by the prospect of a more vertically-integrated healthcare chain, and CVS’s Aetna acquisition could make it the market
leader here. However, there is a great deal of uncertainty surrounding the healthcare industry from both regulatory and delivery
perspectives. Further, CVS had to take on a significant amount of debt to complete the deal, and the underlying economics of the business
appear to be eroding. Therefore, we decided to exit the position and redeploy the capital into more attractive names with fewer structural
changes looming. (Matt Holman)

                                                                                                  Tencent Holdings Ltd. (TCEHY)
We sold Tencent during the quarter because we saw better long-term opportunities in the market. We viewed Tencent as a quality
company, but saw some potential risks that were becoming difficult to handicap, including uncertainty around its relationship with the
Chinese government and the general ownership structure of the investment vehicle. We felt that, with other attractive stocks becoming
undervalued in the market, we could purchase equally attractive holdings with less exposure to uncontrollable risks. (Louis Foxwell)

                                                                                               United Technologies Corp (UTX)
United Technologies is navigating a significant transition period as it spins-off its non-core divisions: Otis (elevator manufacturer and
servicer) and Carrier (HVAC equipment). It will also be integrating recently acquired Rockwell Collins (2018) and Raytheon Technologies
(expected to close by June 2020). Our primary concern regarding United Technologies revolves around these transactions. Divesting non-
core businesses and focusing on core competencies does align with our investing methodology. Still, it’s difficult to handicap how these
deals will play out. Further, there is a great deal of uncertainty surrounding the aerospace industry and its supply chains right now as a
result of the instability with the airlines, travel restrictions, and the Boeing 737 Max issues. Ultimately, we did not feel comfortable in our
ability to forecast how these factors would play out. Hence, we decided to exit the position until more clarity surfaces. (Matt Holman)

                                                                                                               Walmart, Inc. (WMT)
Walmart has been a reliable retail holding in client portfolios for years. As a core holding, we viewed it as having a high degree of
projectability and stability. That said, Walmart’s growth prospects are waning, and changes in consumer shopping habits are threatening
its economic moat. Also, we think shares have become fully valued as well as less attractive relative to its peers. Therefore, we decided
to exit the position in favor of: (1) a similarly stable company with a wider and more durable economic moat, or (2) a comparable company
in the retail space with more attractive growth opportunities. (Matt Holman)

  The foregoing content reflects the opinions of Horan Capital Management, LLC and is subject to change at any time without notice.
  Content provided herein is for informational purposes only and should not be used or construed as investment advice or a
  recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts
  provided herein will prove to be correct. Past performance is not a guarantee of future results. All investing involves risk, including
  the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.