The market’s story is AI is coming for engineering software, and Bezos has raised $18B to do it.

Here’s the business the market is burying.

Their software builds working replicas of jets and cars inside a computer so companies can test them against real world physics before building a real world prototype.

Will the wing hold?

Will the passenger survive the crash?

Boeing and BMW bet billions on the answers before a single part gets made.

Through the entire decline, revenue, earnings, and free cash flow all grew.

And after all that, down 65%+ with a business still growing, it’s a pass. Because the price still isn’t low enough.

Welcome to 📉DeepValue Capital📈

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years.

24K+ subscribers and 259% returns from Jan 2024 to June 2026. I buy turnarounds and good companies at great prices.

Subscribe now

How Dassault Makes Money

Dassault did €6.2B in revenue in 2025, serving 390,000+ customers across manufacturing, pharma, and retail. It started inside a French fighter jet maker in 1981 and has been selling virtual engineering for decades.

Three companies dominate engineering software globally, Dassault, Siemens, and Autodesk, and Dassault built the category.

What Customers Are Buying

Dassault sells four things.

The brand names get confusing fast, so here’s the map. Everything they sell does one of four jobs, for one of three customer types.

Industrial Customers (~50% of revenue): The Boeings and BMWs and their suppliers, paying for the platform their entire engineering department runs on. When Airbus designs a jet, the engineers on that program work inside Dassault’s software, and so do the suppliers building its parts.

Mainstream Customers (~23% of revenue): They pay for lighter ready out-of-the-box versions, mostly SOLIDWORKS. The machine shop designing a bracket runs it the same way the giants run CATIA, at a tenth of the price.

Pharma Companies (~17% of revenue): They pay MEDIDATA to run the data behind clinical drug trials, the patient records and study results that decide whether a drug gets approved.

Services (~10% of revenue): The consultants who install the software and train the engineers.

Underneath all four, what customers are really buying is avoided cost. Every design flaw caught in software is a physical prototype that never gets built and a recall that never happens.

That’s why a company will pay thousands of dollars per engineer per year, decade after decade. The bill from Dassault is a rounding error next to what it prevents.

How They Charge Customers

Seats, ~74% of revenue. One engineer, one subscription, one year. A SOLIDWORKS seat runs a few thousand dollars annually, a high-end aerospace seat many times that, and large customers sign multi-year contracts covering hundreds of seats. Everyone pays upfront, so Dassault runs on its customers’ cash.

Old licenses, ~16% of revenue. A one-time license plus annual maintenance, and the most deferrable purchase a customer makes, which is why this line took the hardest hit in 2025 when auto budgets froze. Underneath the cycle it fades slowly anyway, since everything new Dassault sells, the cloud platform, Medidata, the AI layer, is subscription, so new money flows to the subscription line while this one lives off its installed base. This is the one true transition in the numbers, gradual and mostly by mix rather than by decree.

The new AI layer, <1% of revenue. Announced this February, read by the market as Dassault tearing up its pricing model, and a part of why the stock got repriced. What it actually is, and how the market got it wrong, matters enough that it gets its own section.

The Economics

The economics of all this are hard to beat.

Gross margins run 84%, because once the software exists, the next seat costs Dassault almost nothing to deliver. The one big real cost is building the software itself, with roughly 20% of revenue going into R&D every year.

And since customers pay upfront, the cash arrives before the work.

That combination, sticky software at 84% margins with a fifth of every sale funding next decade’s product, is the reason the stock has commanded a median 30x EV/FCF over the last 20 years.

Where New Customers Come From

Large manufacturers arrive through multi-year enterprise deals, and often they aren’t so much won as inherited. When Boeing runs CATIA, Boeing’s suppliers run CATIA.

Small manufacturers don't buy from Dassault directly. They buy from local resellers around the world, which handle the sale, the training, and the support in their own markets.

This funnel matters more than its size would suggest because customers grow through it. The startup that begins on a SOLIDWORKS seat becomes the mid-size manufacturer that buys the platform, so today’s small accounts are part of where tomorrow’s large ones form. That gets important later in this article.

Pharma companies arrive study by study. Every new drug trial needs a data platform, and MEDIDATA gets picked for more of them than anyone else.

Why Businesses Choose Dassault and Why They Stay

Companies choose Dassault because it has become the standard.

Its software has handled the largest, most complex machines in the world for four decades, regulators accept its test results because of the validation history behind them, and engineers still come out of school already trained on it.

When a company picks Dassault, it’s picking the proven certified path engineers were trained on.

Why they stay is even easier to explain. The software keeps getting more useful the longer a company runs it.

Every part ever designed, every test ever run, every certified version lives inside these systems, so each year of use makes the next year more valuable. Twenty years in, that history is one of the company’s most important assets, and it lives in Dassault’s software. Switching would mean walking away from it, retraining every engineer, and re-validating years of work, just to move to a tool that generally does the same job.

All that means renewal is the default, and it shows in the numbers. 82% of software revenue is recurring, €4.6B that arrives before a single new deal gets signed.

The best part is that staying put still generates growth, because a big piece of the growth comes from existing customers upgrading or growing. Thousands of companies still run Dassault’s older standalone tools, and Dassault is moving them onto the connected 3DEXPERIENCE platform, where design, testing, and records work together and the subscription costs more.

That platform revenue grew 10% in 2025, against 4% for the company overall, excluding currency. And the upgrade is still early. By Dassault’s own measure, only 41% of the revenue that could be on the platform is there today. The other 59% is the runway.

What Went Wrong

First, the shape of the fall.

The stock peaked in late 2021 at ~55x EV/FCF. 2022 cut that hard as rates rose, and then it traded flat from late 2022 until mid-2025. That's when growth estimates started taking real hits, and it has been sliding on weaker outlooks ever since.

Growth Slowed

Dassault's growth broke in 2024. The company grew 9% in 2022 and again in 2023, then 5% in 2024 and 4% in 2025, all excluding currency. February's guidance came in at 3 to 5% for 2026, the third step down in a row.

Three drivers sit under that slide.

Their biggest customers cut spending. Transportation & Mobility is Dassault’s largest industry vertical, and European automakers spent 2025 slashing engineering budgets.

Medidata broke. Pharma companies started fewer clinical trials for the second year running, and Medidata bills study by study, so fewer studies means less revenue, immediately. Life Sciences, a fifth of the company, fell 2% in 2025, its second consecutive decline.

The low end keeps leaking. Autodesk’s Fusion sells for roughly $700 a year against a few thousand for SOLIDWORKS, and it’s winning the newest, smallest shops. Dassault’s Mainstream segment grew 2% in 2025 while Autodesk’s manufacturing products grew 17%, and even after adjusting for an accounting change that flattered Autodesk’s number, the gap is wide.

Price is only half the attack, though. The other half comes from Onshape, which was built by the same people who created SOLIDWORKS in the first place. SOLIDWORKS is desktop software from the Windows era, where one engineer works on a file at a time and sharing means file servers and emailing versions around. Onshape runs in a browser like a Google Doc, with the whole team working in the same model at once. A five-person startup with no IT department doesn’t agonize over that choice.

Listen to how users complain about SOLIDWORKS and you’ll notice they almost never say it can’t do the work. They say it crashes before saves, that rebuilding broken models eats real hours, and that setting it up feels like software from a different era. Even the loyal base is uneasy. Each year’s list of new features keeps getting shorter, and longtime users openly ask whether Dassault’s development dollars have quietly moved to the platform.

The part that compounds is the pipeline. For twenty-five years, engineering students graduated fluent in SOLIDWORKS and asked for it at their first job, which is a big part of how it became the default. Now high school robotics teams and university programs are teaching Onshape and Fusion instead, because they’re free and run in a browser. That flywheel took decades to build, and it’s starting to spin for the other side.

None of this shows up as decline yet, and it may not for years. Decades of legacy files and engineers with ten thousand hours in the tool protect the installed base, which is why the leak reads as 2% growth instead of shrinkage. But the sentiment is running well ahead of the revenue, and the gap between those two is the thing to watch.

AI Became an Existential Question

Dassault charges per seat. One engineer, one subscription. The AI fear is aimed at the heart of that model, because an AI assistant doing engineering work doesn’t occupy a seat, and if AI makes each engineer twice as productive, customers need half the seats.

In early February, that fear went from concern to panic. Anthropic launched enterprise AI agents, and the selloff that followed erased $285B across software and adjacent sectors in a single session. One week later, Dassault’s soft guidance landed and the stock had its worst day since 2002, falling as much as 22%. In June it fell again when Jeff Bezos’s Prometheus, an AI startup targeting Dassault’s market raised another $12B.

Management’s response added its own uncertainty. Alongside the February results, Dassault announced new AI pricing tied to the value delivered, the layer teased earlier.

What the company meant was an addition on top of seats. The structure has three layers over the existing subscriptions. AI assistants and automation are priced in tokens, with management describing units of knowledge and units of work as “basically a token having a certain value” that customers can cap. And for the largest engagements there are outcome-based deals, where Dassault does the engineering work itself and prices the result, like a headlamp design automation priced at a share of the engineering cost savings. The layer exists so the work gets billed no matter who does it, human or AI.

And the outcome deals are less radical than they sound. A company running hundreds of seats was never paying list price, it negotiates a custom multi-year contract every renewal cycle. Outcome pricing changes what the number in that contract is indexed to, but not how the deal gets done or who’s sitting at the table.

But that’s not the framing management led with. On the February call, their own words were that Dassault was “evolving beyond seat-based pricing toward value-based models.” The CEO was out telling press “my dream is to price the object, which has been generated automatically, based on the value.” When that’s the language, you can see what investors heard. The CFO spent the Q&A walking it back, explaining that the AI companion still needs CATIA, that it’s the one using CATIA, not substituting it. It didn’t stick.

The plainest version, that the new products “are not replacing the existing one” and the portfolio “will stay,” didn’t come until the April call, two months after the damage was done. What the market heard in between was the seat model ending. Announcing a pricing change mid-crisis, vaguely enough that investors heard replacement, turned a product launch into a forecasting problem, and markets pay less for what they can’t forecast. They also began publishing a new metric, annual recurring revenue, so investors could track the business through the shift. Companies don’t hand you new metrics when the old ones look good.

Is the Slowdown Cyclical or Permanent?

Truthfully, it is both.

Auto is cyclical, with one structural catch. Volkswagen is cutting more than 35,000 German jobs by 2030. BMW just cut its 2026 margin guidance from 4-6% to 1-3%. When your biggest customers are doing that, they postpone or downsize software deals.

Here’s the tell that this is customer health and not lost accounts. In the fourth quarter of 2025, Europe fell 5%, dragged down by French and German auto weakness. One quarter later, Transportation & Mobility was one of the main contributors to Dassault’s growth, led by the Americas. The demand came back through different customers on a different continent. Engineering seats follow whoever is doing the engineering.

What protects Dassault is that nearly everyone doing that engineering is already a customer. Volkswagen runs vehicle development on the 3DEXPERIENCE platform. BMW is building its next engineering platform on it. Volvo Cars, owned by China’s Geely, develops its EVs on it. JLR just extended it across every vehicle program worldwide. NIO designs on it, and Tesla has run on CATIA for years.

That’s the shape of the whole industry, and it means a European automaker losing a sale doesn’t destroy a seat. The engineering behind the winning car is usually running on the same two companies’ software, and often on Dassault’s. Share shifts between automakers mostly reshuffle seats inside the same duopoly.

I won’t pretend Europe itself bounces back soon. Bain finds German OEMs planning to cut R&D intensity by an average of 35% by 2027, because Chinese competitors develop vehicles at roughly a quarter of their cost. What I will say is that the engineering happens somewhere, and wherever it happens, Dassault is usually underneath it.

Medidata is already turning. Clinical trial software lags the biotech funding cycle by several quarters, and the funding cycle has turned. Biotech venture funding jumped 71% quarter over quarter in late 2025, and the big trial-running companies are reporting record backlogs. Medidata was still down 3% in Q1 because it's living off weak 2025 bookings, and management said as much, calling it a carryover while noting that new bookings in the quarter were already trending positive. The same lag means the reported numbers can stay ugly into early 2027 even if the recovery is real.

The thing that would change my mind is Veeva. If Medidata is still shrinking in late 2026 while trial activity recovers, that tells me Veeva is taking share, and I'd have to reassess Dassault’s future.

The low end has issues. Autodesk’s Fusion at $700 a year keeps winning the newest, smallest shops. Dassault keeps the professional core, since Fusion still struggles with large complex assemblies, but the bottom of the funnel is leaking, and that’s where future customers form. Mainstream did bounce 14% in the first quarter, mostly Centric recovering, but the leak was never a one-quarter story. New shops keep choosing Fusion first, and that caps how fast this segment can ever grow, and potentially the company's long-term runway with it.

And one piece is quietly working in their favor. Europe is rearming, Airbus is sitting on years of backlog, and aerospace and defense is Dassault’s deepest home turf. In April 2025, Airbus extended its partnership across all civil and military aircraft programs, which also answers the boring competitive question. The real enterprise fight is a two-horse race with Siemens, and the biggest account on the board just re-upped.

Add it up and the recurring floor grows mid single digits on its own. Auto and Medidata improving add a point or two through 2028, defense adds on top, the leak takes a point off, and the old license line, flat this year and fading slowly as new offers go subscription, gives back maybe half a point over the horizon.

Then there’s the new AI layer. €50M of backlog in six months is a €100M annual pace from a product line that didn’t exist a year ago, sold into 390,000 accounts Dassault already bills. I give it one point of growth, and whether it deserves more gets answered at November’s Capital Markets Day.

So for my numbers, 4% growth this year while the cycle bottoms, then 7% a year through 2029 as it recovers. That lands 2029 revenue around €7.9B.

One note on those numbers. Management’s target is still higher than mine. They’ve promised to double EPS to €2.20-2.40 by 2029, a target already delayed once, with the old revenue promise quietly dropped from under it.

On margins, they deserve real credit. Headcount is falling, they’re using AI to cut their own costs, executive pay is tied to cash conversion, and they’ve expanded margins through this whole slowdown, guiding another 0.2 to 0.6 points higher for 2026 in a year they only expect 3 to 5% growth. Run that pace forward and it carries a point by 2029.

The AI layer carries a second point, and the math here is worth a moment. AI credits are worse business than seats, because every AI task burns computing power that Dassault pays for, while a seat costs nothing to serve. But credits don’t add salespeople or R&D, the costs that eat most of every seat euro. So a credit euro converts to more free cash flow than the company’s average euro does today, and the mix pulls the whole margin up even while gross margins drift down. The offset is timing, since customers pay for seats up front, and outcome deals could push that cash later.

Weighing all of it, I’m using a 24% free cash flow margin by 2029, two points above the seven-year record.

Can the Moat Survive AI?

The moat has three layers, and AI is only really fighting one of them.

The drawing layer is contested. Text-to-CAD tools exist and they work, for simple parts. Independent testing found they handle brackets and gears, then fall apart on anything complex.

Bezos’s Prometheus has raised $18B with about 150 employees and no product. And the AI connectors Anthropic built work inside Autodesk Fusion, which tells you where this fight is actually happening. It's at the low end, inside the competitor's cheaper tool, aimed at SOLIDWORKS. It’s real, and it’s contained to the SOLIDWORKS line, roughly €1B by my estimate, about a sixth of software revenue.

The testing layer holds. When SIMULIA says a wing survives its load, regulators accept the answer because of decades of validation behind it. An AI’s best guess about physics isn’t certifiable. In engineering, a hallucination is a structural failure. Even Dassault’s own AI push with NVIDIA builds on top of validated physics, because there’s no substitute underneath.

The memory layer is the strongest, and it’s the one the market has read backwards. This is the master record of every part, test, and certified version across an aircraft program that runs 20 years. AI can sketch you a bracket. It can’t be the legally authoritative answer to which of 40,000 parts is the certified one.

But holding customers in is only half of what the record does. It’s also what makes Dassault’s own AI worth paying for. An assistant automating design work is only as useful as what it knows about the products it’s working on, and the design history it needs sits in Dassault’s systems and nowhere else. Dassault’s AI can read 20 years of a customer’s decisions. Siemens’ can’t, and neither can anything Bezos builds, because the data they would need to train on doesn’t exist outside Dassault’s walls. Prometheus itself acknowledges there is no internet of manufacturing data to ingest. It has to be built from scratch, and the closest thing to it already sits in Dassault’s record.

The moat and the new pricing model are really one bet. Dassault can price AI work against the value it creates only because no competitor can create the same value on that account, and the record is the reason they can’t.

And the moat shows up in the numbers, which is the only place a moat counts. Gross margins have sat between 83% and 84% for seven straight years, through a pandemic, an acquisition, and this slowdown.

Recurring revenue grew 6% in the company’s worst year. Returns on capital have climbed every year since 2020, from 11% to 15%, which is not what full disruption looks like.

The question that decides this is whether Dassault gets paid for what AI creates, and the new pricing layer is where that gets settled. Adobe and Autodesk are the reference points here, both survived tearing up their pricing, and both spent two to three ugly years doing it. Dassault’s road should be smoother than that. The genuinely painful change, licenses becoming subscriptions, is mostly behind it at 74% of revenue, and the AI layer gets added on top of contracts the biggest customers already renegotiate every renewal cycle, so nothing is actually being torn up.

So I think they defend their pricing power, and the early backlog has earned the layer a modest place in my numbers. One point of growth, nothing more, and I pay for what's proven and let the rest be upside. That thinking sets the multiple. This stock traded at 30x+ EV/FCF from 2016 through 2024, and in the 20s for years before that. A proven, moaty business growing 7% deserves something in the low-to-mid 20s, so I'm using 24x.

Can We Trust Management?

Split the question in two, because the record splits in two.

On profits, yes. EPS has landed on target every year. Margins ticked up in 2025 even while revenue missed. They generate €1.6B of operating cash flow, bought back €340M of stock, paid €343M in dividends, sit on €1.5B of net cash, and the share count has drifted down five years running. No dilution, no empire building.

On growth, no. 2024 guidance started at 8 to 10% and got cut. 2025 started at 6 to 8% and got cut. Two years, two cuts, and the 3 to 5% bar for 2026 is the first one set low enough to beat. Daloz has admitted as much, saying he’s done chasing top-line guidance quarter after quarter.

The pay structure explains the whole pattern, and there’s no guessing needed, the criteria are published. The CEO’s stock awards vest on three things. The financial piece is 80% of the award, split two thirds on EPS growth and one third on cash conversion, which just measures how much of reported profit turns into cash. The last 20% is an ESG scorecard. Revenue appears nowhere in that list. So when revenue disappoints, nothing in his paycheck breaks. They flex costs, deliver the EPS number he’s paid on, and the growth guidance takes the hit. The incentive is working exactly as written. The profit guidance is the part to trust, and the growth story is the part to discount until they prove it.

His pay is built almost entirely on those targets too, roughly €13M a year with over 90% of it variable, and he owns about €54M of stock, per outside estimates. His own wealth rides on hitting the EPS targets, and guiding revenue high does nothing for his paycheck.

Then there’s the departure. Bernard Charlès spent four decades building this company, and he left the board ten days after the worst day in its stock history, effective immediately, for personal reasons. The succession itself was the prepared part. Daloz is a 25-year insider who ran finance, then operations, and had already been CEO for two years, with the Medidata acquisition as his deal. The exit didn't look prepared. Orderly chairman transitions get announced months ahead, and same-day resignations don't happen when everything is fine. Daloz now holds both jobs, which is normal for a French company. The part that changed is that the founder who used to look over his shoulder is gone.

My verdict is a disciplined operating team with a two-year habit of overpromising growth, now running a plan they’ve finally sized to hit. That’s good enough to keep going, and not good enough to pay up for.

What Is This Company Worth?

So where does this leave us. A real moat in its two deepest layers. A trough that’s probably this year. Management you can trust on profits. And a stock at 13x EV/FCF that traded at 55x.

That sounds like a buy. Then you run the numbers.

I grow 2025 revenue 4% this year while the cycle bottoms, then 7% a year through 2029. That’s €7.9B of revenue. At the 24% free cash flow margin built a few sections back, one point from cost discipline they’re already delivering and one from the AI layer, they earn €1.9B of free cash flow. I put 24x on it, below anything the stock has traded at in its public life.

The cash matters too. They’ll generate over €6B of free cash flow between now and 2029, and it has to go somewhere. The dividend keeps growing, they raised it weeks after the crash. Buybacks step up like they did in 2022, the last time the stock got cheap, and the share count shrinks to 1.28B. Maybe a deal or two. They still end 2029 holding around €3B of net cash.

That gets me to about €38 per share by year-end 2029, plus close to a euro in dividends along the way. From €18.23, the 7/10/26 close, that’s better than a 2x. About 24% a year.

24% a year on a business this durable is a clear buy for most portfolios.

My hurdle is 30%, and this doesn’t clear it.

The assumed 7% growth builds in macro improvements and the AI layer helping. The 24% margin already builds in expansion that's likely but not guaranteed. For the math to get interesting, the stock needs to be near €15.50, and even then it just qualifies for a deep dive. Not an instant buy.

My Thoughts

This is a very solid business and I’m not buying it.

The market is pricing Dassault like traditional software, the kind AI is supposed to eat. I don’t think that’s what this is. The Boeings and BMWs of the world design the most complex machines on earth inside these systems, and 20 years of their parts, tests, and certified decisions live there and nowhere else.

That history is exactly the data an AI challenger would need to train on, and it doesn’t exist outside Dassault’s walls. Bezos raised $18B to build the disruptor, and so far there are about 150 employees, no product, and an open admission that the training data has to be created from scratch.

They do have real issues, especially at the low end against Autodesk, but real issues are a long way from destroying a company with this kind of customer lock-in.

Price and value are two different things. In 2021 the market set the price, 55x free cash flow, and it has spent the four years since trying to figure out the value, with AI shifting the landscape underneath the whole search. That kind of answer takes time, and it usually overshoots on the way down.

That is where I search for opportunities.

For the math to get interesting, the stock needs to be near €15.50. Until something changes, Dassault sits on the watchlist at €15, and that's where I'd pick this file back up.

You just read a full breakdown of a new idea, free, with nothing held back. This is the standard behind everything I publish. What members get is the portfolio itself, the names I actually own with full deep dives, the buy and sell calls, and updates as each thesis plays out.

If that's the kind of work you want in your inbox, that's what a paid membership is.

Subscribe now

To read my full disclaimer click here.

Here are the highlights.

Welcome to 📉DeepValue Capital📈

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years.

24K+ subscribers and 259% returns from Jan 2024 to June 2026. I buy turnarounds and good companies at great prices.

Subscribe now

Q: What is QXO’s value creation plan?

A: Our value creation plan is straightforward: leverage the attractive long-term fundamentals of the building products sector, capitalize on the scale we’re building through acquisitions, and execute a comprehensive transformation that drives superior customer outcomes and financial performance. Through the completed acquisitions of Beacon, Kodiak, and, most recently, TopBuild, we now have approximately $18 billion in combined company revenue and nearly $2 billion in combined company Adjusted EBITDA.

Q: What does scale accomplish in this industry?

A: The paramount benefit is talent. High-performing professionals generally want to work for growing, ambitious businesses with opportunity and resources. The largest financial benefit from scale is procurement. As we become more important to major suppliers, we gain a better seat at the table, more influence in negotiations. Scale also allows us to invest in technology and infrastructure that smaller competitors often can’t justify economically.

Q: How should investors think about the platform you have assembled today?

A: The platform we have today is both strategically coherent and still early in its development. We now have a much broader presence across the building envelope in North America:

• #1 in insulation

• #2 in roofing

• #1 in waterproofing

• #1 or #2 in the lumber and building materials sector in the key geographies we serve

The strategy is to go narrow and deep, not broad and shallow.

Q: Why was TopBuild the right next step for QXO?

A: TopBuild was the right next step because it added a high-quality business that changes both the scale and the nature of our platform. Beacon and Kodiak gave us substantial midstream distribution capability. TopBuild brought us much closer to the customer and the job site. TopBuild visits about 22,000 job sites per day. This gives direct visibility into what is happening on projects in real time, which products are needed, what stage the job is in, and where there may be an opportunity to cross-sell, improve planning, or serve the customer more completely.

Q: What proof points should investors watch to judge whether execution is working?

A: We believe investors should watch sequential improvement in Beacon volumes, pricing, procurement, gross margin, and EBITDA progression. On the balance sheet side, we think investors should watch free cash flow and deleveraging.

Q: How should investors think about the path to more than doubling your nearly $2 billion of combined company Adjusted EBITDA by 2030?

A: We see a clear path to grow organically from almost $2 billion of combined company Adjusted EBITDA in 2025 to about $4 billion by 2030. At a high level, our current internal bridge assumes legacy Beacon moves from roughly $800 million of EBITDA to about $2 billion, Kodiak moves from about $210 million to about $400 million, and TopBuild moves from about $1.1 billion to about $1.6 billion, before the contribution of any future insulation tuck-in acquisitions. On top of that, we see a path to about $5.5 billion of EBITDA by 2030, representing a mid-teens EBITDA margin, when you include self-funded tuck-ins and moderate leverage.

Q: How much of the story depends on a housing recovery versus self-help?

A: The macro obviously matters. But the investment case doesn’t require us to predict interest rates, housing starts, or weather. Our model is built around controllable, company-specific levers. TopBuild makes the combined company less cyclical than a pure distributor by diversifying QXO across products, services, and end markets. It also creates a more balanced portfolio, with roughly a 50/50 split between new construction and repair and remodel, and a roughly 60/40 split between residential and commercial.

Q: Where do you see the biggest margin opportunities across the portfolio?

A: For the company, the biggest levers are procurement rebate capture, pricing optimization, inventory management, private-label penetration, salesforce effectiveness (including cross-selling), technology enablement, transportation and logistics, sales compensation redesign, and service quality improvement. In Beacon specifically, we also see operating leverage as prior platform investments normalize and begin to carry a larger revenue base. In Kodiak, we see a concrete synergy opportunity, because 16 of Kodiak’s top 20 vendors are shared with Beacon, and those vendors represent about $5.3 billion of spend. We’re not relying on a quick silver bullet. This is a multi-lever model where many smaller and medium-sized improvements will add up over time.

Q: What does a better customer experience look like in practice?

A: In our view, the customer experience in this industry comes down to a few practical things. Do we have the product when the customer needs it? Can we quote quickly? Do we deliver on time and in full? Do we have the installation teams available when the job is ready? Do we help customers get jobs finished on time? Is the invoice accurate? Are our people competent, responsive, and easy to work with? If we consistently do those things better, we should earn more share of wallet and better economics over time.

Q: Why is technology such a central part of QXO’s thesis?

A: It’s how we move from a collection of acquired businesses to a single, highly connected network. It’s how we improve visibility into what’s selling, where it’s selling, how people are performing, and how customers are buying. It’s also how we create better discipline around pricing, procurement, branch operations, and transportation. We see technology as a core source of differentiation, not a support function. We expect accelerated organic growth in 2027 and beyond once the tech stack and basic integration work have matured.

Q: Where are you in the technology rollout today?

A: Our current roadmap has core legacy Beacon moving through the major stack rollout first, with the broader Beacon build substantially complete by the end of Q1 2027, and legacy Kodiak and TopBuild following after that by the end of Q3 2027. We’re moving quickly, but we’re also trying to do it the right way. The goal is to drive adoption and visibility and to fundamentally improve how the business runs.

Q: What’s your plan to de-lever the balance sheet?

A: This business generates strong cash flow, and our priorities from here are straightforward: grow EBITDA, apply substantial free cash flow to reduce net debt, and de-lever while we integrate the assets we’ve acquired. TopBuild’s asset-light installation model, lean working-capital needs, and pricing discipline have historically produced cash conversion that exceeds many distribution peers. We also have portfolio optionality if we decide that a non-core asset is worth more outside QXO than inside it.

Q: Is any near-term equity issuance planned?

A: We do not currently foresee any near-term equity issuance. Our focus right now is on integration, execution, free cash flow, and deleveraging, not on raising equity.

Q: Are you in digestion mode after TopBuild? How are you thinking about future M&A?

A: Our near-term emphasis is on integration, optimization, and deleveraging. Our organizational focus is on pricing, procurement, technology, customer experience, and operating improvement. That does not mean we’ve stepped away from M&A permanently. It means the bar for new capital deployment is appropriately high.

Looking for more details on their acquisition of TopBuild or a deep dive on QXO?

• Pentagon adds Alibaba to the 1260H list (June 8): designated a “Chinese military company,” with a Pentagon contracting ban effective June 30.

• China preps a $295B AI data center plan (June 9): a state-led compute buildout stoked fears it could undercut Alibaba Cloud’s pricing.

• Beijing summons platforms over 618 subsidy claims (June 11): regulators called in Alibaba and peers over misleading “billion-yuan subsidy” language.

• 618 festival results disappoint (June 18): online sales growth slowed to 4% YoY versus 15.2% a year ago.

• Anthropic accuses Alibaba of distilling Claude, senators respond (June 24 & 27): a fake-account extraction claim sent BABA to a 16-month low, followed by a Senate push to sanction the practice.

So what does this all mean for Alibaba?

Read more

Crazy how much has happened, how much I have learned and how far I have come. Thank you everyone for the support.

I really can’t thank you enough.

With that said another month is down so it is time for a full update.

June was a very interesting month for the portfolio. 2 big holdings down 10%+ and the other 7 mostly flat to up as much as ~21%.

My biggest holding continues to announce partnerships after several in May and also released data on how one of their product is performing vs competition. It is clear they are are top tier in the industry, and still no one wants to touch them.

Other names in the portfolio had important news too.

One completed an important refinance, another launched a next gen product to succeed their already #1 position, one secured hundreds of millions in investments to retired expensive financing, and highlighted a more than $1.5B asset no one is giving them credit for, to top it off a couple had senior leadership in interviews.

It was a great month of movement for the portfolio.

In the rest of this article I walk through performance details, new commentary on the portfolio and market, details on portfolio allocation, weights, buys & sells, plus links to all the news and most recent deep dives on each name.

Lets get to it.

Welcome to 📉DeepValue Capital📈

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years with a 22K+ subscriber following buying turnaround and good companies at great prices.

Subscribe now

Performance

Here is my performance so far.

• 2024 Returns: 85.23%

• 2025 Returns: 118.83%

• 2026 YTD Returns: -11.25% vs S&P 500 9.55%

• Since Inception (01/01/2024): 259.75% vs S&P 500 57.23%

Important Note: I finally had my check get deposited after market close yesterday which is why you see the big jump in cash overnight. I am excited to deploy that cash into names in drawdowns right now. Some incredible opportunities out there.

Back to it.

I am very happy with how my portfolio has performed since 2024 but I understand, as YTD shows, I will not outperform all the time. Skill as an investor is proven through long term outperformance.

These returns are unaudited but almost every step has been documented here on Substack.

Now to all the details.

Subscribe now

Not sure you are ready to go paid and see my live portfolio below? Feel free to read some of my other free content to get familiar with who I am, what I offer, or my investing process.

Below are also a couple free reports on companies I didn’t buy but let you see my process in action.

Read more

Below is a 4 question survey to help me do just that. I will read every single response, and do my best to make this publication as good as possible.

My goal is to save you time and give you the tools to make more money over time.

Start Survey

Adorama, a New York photography and electronics retailer got a 7.3x incremental return on advertising spend (ROAS) and 14.9% incremental transaction lift. The campaign also brought in new buyers, 56% of purchasers had not bought from Adorama in the prior 12 months.

Best Buy reached 6.25x ROAS and dwell time 22% above platform benchmarks.

Once you define a couple of terms and put these numbers in context, it becomes clear how massive this is, and will become for PayPal.

You may have noticed when reporting their figures for Adorama PayPal was clear it was incremental lift they delivered. That is inherently a tougher bar to clear and would typically mean comparing their incremental lift to industry attributed PayPal would come out lower.

But when you look at the actual numbers, PayPal is top tier vs competition even with a more difficult comparable.

Sources: ( Google, Meta, Amazon, TikTok, PayPal)

PayPal was able to get good results for their customers because they have one of the largest data sets in the world with unique merchant and consumer perspectives that lets them put ads in front of the people genuinely likely to buy, AND they own both sides of the transactions so they can actually prove the ad drove the sale.

As they put it:

“PayPal's Transaction Graph aggregates real, cross-merchant purchase signals from more than 25B transactions across 400M+ PayPal and Venmo accounts, spanning how people search, share, and shop. Unlike traditional retail media networks, which are limited to what happens inside a single retailer's ecosystem, PayPal's view is cross-merchant, which helps capture purchase behavior across categories and merchants. The result is an audience signal built on what, where, when, and how consumers spend, not what they scroll or browse.”

Compared to Amazon’s ~310M global active customers and their ~5.6B/yr orders you can see the scale to which PayPal collects data on. They are a juggernaut but it isn’t mainly because of their size.

Their real advantage here is that PayPal is both the consumer's account and the merchant's payment processor, the same logged in person they showed the ad to is the same person they watch check out. So instead of guessing whether the ad worked like everyone else has to, they can draw a straight line from ad to sale.

These are only two examples they reported but they make it very clear what PayPal’s data and connections can deliver. And we can trust results like these because they're measured against actual purchases, not statistical guesses.

What makes this more exciting though is the man building the ads business.

Mark Grether

If you aren’t familiar with Mark let me highlight two businesses on his resume.

Amazon Ads from 2019 to 2021

Mark ended up in Amazon in 2019 after they bought his company, Sizmek, which at the time the largest independent ad platform in the world. When he came in Amazon was doing ~$11.6B/yr of ads and they put him in charge of the behind the scenes systems that allow advertisers to bid for placement of the ad you will see when the screen loads. All of that happens in milliseconds.

He had to take all of Amazon’s data to make sure ads got in front of the right high intent people and if successful advertisers would get better results. But more importantly for Amazon, spend more.

And I can say he did a fantastic job in just those two years, helping grow the business from ~$11.6B (TTM) when he arrived to ~$26B when he left.

Uber Ads from 2021 to 2024

Mark was hired to come into Uber and build their ads business from scratch using their 100M+ user data base to appeal to advertisers. It took him about a year to build a team and lay the foundation but by 2024 this was a $1B run rate business for Uber that has since doubled again after he left running on the low end at at least 50% margins.

After those successes he has come to PayPal to build their ads business and is ~2 years into the job starting essentially from scratch just like Uber.

I am sure it was no accident either about 1 year into his tenure they launched PayPal Ads Manager, the time it took him to build a team and foundation lining up exactly with Uber’s timeline.

Today if we draw a parallel to Uber’s timeline we are coming up on “year 1” in October when they launched ads. By year 2 if he follows the same trajectory, despite the multiples larger data set from both the merchants and customers perspectives, we are looking at $1B in revenue, $500M in cash flow. Another 18 months later, $2B in revenue and $1B in cash flow.

And this is all hidden inside a company the market thinks is dead.

Read more

Advance Auto Parts (AAP) is one of the largest aftermarket auto parts retailers in North America.

The company started in 1932, when Arthur Taubman bought a small three store chain in the middle of the Great Depression. For the next 80 years Advance grew across the Eastern United States selling parts to people who fix their own cars.

In 2013 they paid ~$2B for General Parts International, the owner of Carquest and Worldpac. The deal pushed Advance into the professional installer market and roughly doubled the network overnight.

Today they operate ~4,300 stores and support ~800 independently owned Carquest locations across the US, Canada, Puerto Rico, and the Caribbean.

The 2013 deal is also where the problems started. Management spent the next decade letting the business grow more complex than they could run efficiently. Customers left for better operators and profits collapsed.

Most investors wrote Advance off as the permanent loser of auto parts. A broken retailer up against two of the best operators in America.

But in late 2023 the board brought in Shane O’Kelly, a career supply chain operator, to simplify the business and win those customers back.

~3 years in and the numbers are moving. Same store sales grew 3.5% last quarter, their best in five years. Adjusted operating margins jumped 410 basis points YoY. Free cash flow turns positive this year.

After years of broken promises from this company, nobody trusts the recovery.

Their stock is down over 70% from its highs trading at half their historical EV/S multiple.

In this article I explore if that’s a mistake we can take advantage of.

Welcome to 📉DeepValue Capital📈

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years.

23K+ subscribers and 271% returns from Jan 2024 to May 2026. I buy turnarounds and good companies at great prices.

Subscribe now

The Business Model

Advance generated $8.6B of revenue in 2025 selling replacement parts, fluids, tools, and accessories for vehicles already on the road.

Demand for those parts are driven by two things. How many cars are on the road and how old they are. The older a car gets, the more repairs it needs, and when it breaks the purchase is usually not optional, people in the US need a vehicle to get to work.

That results in more than 90% of Advance’s revenue being non-discretionary maintenance and repair.

The age of the fleet has never looked better for them. The average US passenger car is now a record 14 years old. 289M vehicles are in operation, and ~110M of them sit in the 6 to 14 year sweet spot where repair spending peaks. That group is ~38% of the fleet as of 2024 and expected to keep growing through 2028 reaching 40%.1

Breaking Advance into segments, they sells to two kinds of customers from the same stores.

Professional (~50%)

Shops and mechanics who order parts multiple times a day. For them availability and timely delivery is what wins business. When they get a car up on the lift they need to know they will get the part when they need it to keep business flowing.

As a retailer meets expectations over and over, they move up call lists and earn trust.

DIY (~50%)

People who fix their own cars, either because they enjoy it or because it’s cheaper. They shop less often, buy a broader mix of parts, tools, and accessories, and are far more price sensitive.

Behind the stores sits the supply network. A typical store carries 20,000+ SKUs2 for immediate needs. 16 distribution centers handle nationwide bulk inventories. And 35 market hubs, each carrying 75,000 to 85,000 SKUs, give the 60 to 90 stores around them same-day access to parts they don’t keep on the shelf.

Advance competes with AutoZone and O'Reilly, and it does so as the smaller player. Last year it generated $8.6B in sales against roughly $18.9B at AutoZone and $17.8B at O'Reilly. In a business where scale buys inventory depth and delivery speed, being the small one is a real structural disadvantage and is why Advance consolidated back to the geographies where they are the #1 or #2 player.

The whole industry runs on the same playbook of dense coverage and fast delivery, which is also why Amazon hasn't broken it. A mechanic with a car on the lift can't wait until tomorrow.

The growth fight is in Pro, where reliability wins orders and Advance spent a decade losing them. Underneath both segments though, maintenance driven demand gives the business a floor most retailers don’t have.

What Broke

Advance Auto Parts hit its all-time high in January 2022 at ~$220 per share.

Since then it has been a steady stream of bad news. In May 2023 came the quarter that broke the market’s trust, with earnings ~70% below expectations, full-year guidance slashed, and the dividend cut 83%. The stock fell 35% in a single day, the worst in company history. A new CEO arrived that September. Then came the credit downgrades to junk, the sale of Worldpac, and the closure of ~700 locations.

Today the stock sits at ~$58, down ~73% from its high.

Each of those were symptoms but not the cause of the issues. Two problems did the actual breaking.

Management Let It Get Too Complex

When Advance bought General Parts in 2013, the network doubled overnight. Multiple store banners and Worldpac running on its own systems with hundreds of independent Carquest locations on top. The supply chain that came with it was never consolidated, leaving Advance running a sprawling network of around 50 distribution centers, each with its own processes, creating complexity and delays they couldn’t manage.

Inventory was in the wrong places. Stores ran inconsistently. Pro customers waited too long for parts, with the average time to serve a professional order still running over 50 minutes as recently as early 2025. And when inflation hit, Advance had no efficiency cushion to absorb any of it.

The damage showed up where it always does. Advance ran a 9.8% adjusted operating margin in 2022 which collapsed to 0.6% in 2023 and bottomed near zero in 2024.

They Lost the Customer to Better Operators

While Advance wrestled with itself, AutoZone and O’Reilly executed.

And the gap was never close. Both rivals run operating margins near 19 to 20%, and have for years. Advance’s best year of the recent past, 2022, reached just 9.8%, barely half of what they earn in an ordinary one.

In this industry availability decides the sale. When the part isn’t on the shelf, the Pro calls the next supplier, and that order often never comes back. Advance’s store availability sat in the low 90s percent range while peers ran higher, and it showed. Comparable store sales stalled in 2022, then fell in 2023 and 2024. O’Reilly has now grown comparable sales for 33 consecutive years, straight through Advance’s collapse.

A decade of losing share in an industry where demand grew every year. The fleet aged, repair spending rose, and Advance still shrank.

Put together, the bear case writes itself. Advance is the structurally inferior third player in a scale business, sitting behind two of the best run retailers in America. The operations got too complex, the customers left, and stabilization stories in retail usually stay stabilization stories.

That is the bear case laid out as honestly as I can. But when you have a stock down 70%+ from its highs, you don’t need it to become a “great” company to make a really good return. You just need it to be improving, and the price low enough that the gap between value and price is wide.

That is what a paid membership gets you, on every name I cover, whether the business is improving, what it’s worth, and whether the price is cheap enough to make it worth putting money behind.

Subscribe now

Can We Trust Management?

Shane O’Kelly took over in September 2023. His whole career has been running complicated distribution businesses.

He started as an Army infantry officer out of West Point. From there he ran AH Harris, a construction supply distributor, then PetroChoice, one of the largest lubricant distributors in the country, and then HD Supply, which served around 500,000 customers across 270 branches and 44 distribution centers with 11,500 employees.

These are not businesses you talk your way through. The goods either show up where they’re supposed to in good condition or the customer leaves. You execute or you don’t.

And so far at Advance he has. Stores closed on the schedule he laid out. The U.S. distribution network went from 38 centers to 16, as promised, paring down the roughly 50 of every kind he inherited. Average delivery times to Pro customers dropped more than 10 minutes. Comparable sales turned positive in 2025 after two years of declines hitting their highest level in five. Nearly every piece of operational work this turnaround runs on has landed roughly when management said it would, and the biggest proof is margins turning up after years of falling.

He also bought the company time and cleaned up the books. Advance sold Worldpac for about $1.5B, redeemed its 2026 notes to clear the nearest maturity, leaving no wall it can't easily cover against more than $3B of cash.

And he isn’t turning the company alone. In March 2024, the activists Third Point and Saddle Point reached a cooperation agreement with Advance and seated three new independent directors, all of them operators who have run this exact kind of business.

Tom Seboldt spent most of his career at O’Reilly, the company Advance is chasing. Gregory Smith ran supply chain at Walmart. Brent Windom was CEO of Uni-Select, another auto parts distributor.

A board rebuilt with that much industry and supply-chain experience is a real check on execution, and a sign the people closest to the company believe the problems are fixable.

The incentives are okay. Not great, not terrible.

The annual bonus pays on adjusted operating income, comparable store sales, and individual goals, weighted 45%, 45%, and 10%. The board has shown it will only pay for results. Management earned 0% of target in 2023, 10% in 2024, then 97% in 2025 once comps turned and margins expanded more than 200 basis points.

The long term incentive is split evenly between time-vested shares and performance shares. The performance shares pay out on three year average comparable store sales and adjusted earnings, with relative shareholder return against other retailers moving the final number up or down by 25%.

Reasonable, but the heavy reliance on adjusted profitability and top-line growth sets a bar a company can clear while still leaning on the adjustments that make profits look better than the cash. Here too though the board has held firm, paying 0% of the performance shares over the last three years, which tells you the targets were set high enough to matter. I’d trust it more with real weight on cash generation, and with shareholder return as a core metric rather than just a modifier.

The pay package though isn’t what earns the trust here. The operating record is. A distribution expert was exactly what this mess called for, two years of promises largely kept, a board rebuilt with people who have run these businesses before, and a compensation committee that has already proven it will pay nothing when the numbers don’t show up.

That’s enough for me to say they won’t destroy shareholder value and have the expertise to improve the company.

Can They Grow Revenue?

Comparable store sales grew 3.5% in the first quarter of 2026, their best in five years notably with pro customers growing mid-single digits.

That number matters more than it looks. From the middle of 2022 through the first half of 2025, comps were flat to falling, roughly three years of customers slowly walking away. The turn started in the third quarter of 2025 and has built from there.

To see why it’s turning, you have to understand how a Pro actually buys.

A shop with a car on the lift needs a part now. So they work a call list. They ring the supplier most likely to have it and get it there fast, and if that one strikes out, they call the next. The supplier who has the right part and can get it there on time gets the order. The one who is out of stock or slow gets called second, then third, then stops getting called.

Advance spent years sliding down that list. Parts weren’t on the shelf. Delivery was slow. So the orders went to AutoZone and O’Reilly instead.

That’s the exact problem O’Kelly has been fixing. Store availability climbed from the low 90s to the high 90s percent range, so the part is actually there when the Pro calls. Average delivery times dropped more than 10 minutes. The market hubs, 35 of them now and heading to 60 by 2027, put 75,000 to 85,000 SKUs within same-day reach of the stores around them. And a new assortment system across their biggest markets is putting the right parts in the right places using real demand data instead of guesswork.

Do that consistently and you climb back up the call list. The Pro learns Advance has what they need and picks up the phone to them first again. It doesn’t happen in a week. It happens order by order as reliability earns back trust, and it’s showing up in the numbers.

DIY turned positive too, low single digits, which is its own small signal given the consumer feels about as bad as the surveys have ever recorded. The University of Michigan sentiment index has been sitting in the high 40s against a long-run average near 84, close to the lowest readings in the survey’s history. People are still spending on their cars because when the car breaks the repair isn’t optional.

The cleanest proof is where Advance now sits against the operators who took its share. Last quarter O’Reilly grew comps 8.1% and AutoZone grew domestic comps 4.1%. Advance grew 3.5%. Still a step behind both, but a different company than the one posting declines a year ago, and now roughly in line with AutoZone’s domestic pace. It has closed much of the gap to the industry.

So can they grow revenue? The clear answer is yes, and they already are.

Naturally that leads to asking how much they actually can grow.

There are 289M light vehicles on US roads, growing about 1% a year, and the fleet keeps getting older. The 6-to-14-year window where repair spending peaks already holds more than 110M of them, nearly 38% of the fleet, and S&P expects that to push toward 40% by 2028. More cars, and more of them in their highest maintenance years. Add parts inflation, and the US aftermarket should grow around 5.2% per year, in line with the 5.7% and 5.1% it posted in 2024 and 2025.

The thesis doesn’t ask them to win the customer back and out grow industry titans. It asks them to stop giving the customer away, and that is exactly what’s happening.

Can They Raise Margins?

The bear case has always been that Advance is too broken to fix. A poorly run business that got so complicated it stopped working, the kind of mess that takes too long and proves too hard to actually turn around.

The margins say otherwise.

On an adjusted basis, operating margins ran 9.8% in 2022 and by 2024 they had collapsed to essentially zero. That collapse came from a business that had gotten too complicated to run, and that is the part management can control.

They have been controlling it. Adjusted operating margin expanded more than 200 basis points in 2025, and another 130 to 200 is guided for 2026, reaching 3.8% to 4.5%.

The medium term target set by management is 7%, which they believe they can get to with a mid-40s gross margin and an SG&A rate below 40%. From the 2.5% Advance posted in 2025, the bridge has to find about 450 basis points.

Management frames the total opportunity as roughly half merchandising and half supply chain plus store operations.

Gross margin has already climbed to 43.9% and is guided to about 45% in 2026, which is the mid-40s the target assumes. So most of what is left between today and 7% is leverage that supply chain and store operations are built to deliver in 2027 and beyond.

Merchandising

How they buy, price, and stock product. This is the lever doing the work right now, with gross margin guided to expand 110 to 150 basis points in 2026 alone.

Better vendor sourcing, smarter pricing, and a push into owned brands like Argos. Their new oil line that is already a top seller in its category at a better margin than the product it replaced.

Management frames roughly half of the total margin opportunity as merchandising, and that half is now largely banked, sitting in a gross margin that has already reached the mid-40s the target assumes. On the chart it is the green block, the part you can already see in the numbers.

Supply Chain

O'Kelly inherited around 50 distribution centers of every shape and size. Selling Worldpac took the count to 38, and consolidation has brought it to 16, with one more to go to reach 15 by the end of 2026.

That collapse, two legacy networks folded into one, is the hard part, and it is essentially done. The step that hasn't happened yet is making those distribution centers run the same way, since they were never standardized, and that productivity, together with the store-operations work, is the bulk of what remains between today and 7%.

It shows up in the SG&A line, not gross margin, and it lands in 2027 and beyond.

Store Operations

Simpler tasks, better scheduling, less wasted labor. Adjusted SG&A came down about 200 basis points in the first quarter, and stripped of one-time items, expenses were roughly flat year over year while sales grew.

That is operating leverage by definition, the same cost base carrying more volume, and it is the early, visible edge of the SG&A half that has most of its run still ahead.

There is a possible bonus sitting on top of all this. In February the Supreme Court struck down the IEEPA tariffs, and Advance paid real money on those tariffs in 2025, which makes the company eligible for a refund. The mechanics and timing are still unknown and management has recognized nothing and won’t speculate on size or timing, so I’m not counting a dollar of it. But if it lands, it’s whipped cream on top.

The one honest knock is the target date. Management first called for 7% by 2027, then this February pushed it out to a medium-term goal, citing a softer top line and slower progress on the supply chain and store-operations work.

Extended timelines are never what you want to hear in a turnaround, and I won't pretend it's a good sign. But it happens, and outside of that one slip this team has done what it said it would, when it said it would. The slip is real. It just isn't the turnaround stalling, as Q1 2026 clearly showed continued improvement.

So where does this settle? I’m modeling Advance reaching 7% by the middle of 2028, six months later than first promised.

Translating that to cash, free cash flow has historically run a couple of points below operating margin, so once we get to a normalized small working-capital headwind a 7% operating margin lands around a 5% free cash flow margin. That is the number I carry into the valuation.

Risks & Headwinds

No thesis is complete without the case against it.

Execution and the Team

This is a bet on execution, and all of it runs through O'Kelly and the team he brought in. If he leaves before the job is done, or the operational progress that has landed so far starts to slip, the thesis weakens fast.

There is no sign of either right now. He is about three years in, the progress is real, and there is no reason for him to walk. But it is worth being honest that the case leans heavily on this team continuing to do what they have already shown they can do.

Leverage

Advance reports net leverage of 2.4x, inside its 2x to 2.5x target. For context, AutoZone runs around 2.5x on a comparable basis and carries an investment-grade rating, so a ratio in this range is normal for the model. The catch is that the rating agencies capitalize the operating leases and the supplier financing program in full, which pushes their adjusted figure closer to 4x, and both S&P and Moody’s still rate Advance below investment grade.

The piece worth understanding is the supplier financing. Advance pays a large share of its vendors through a bank-backed program that lets it hold cash longer, and roughly $2.5B sits in it today. Moody’s calls the program stable, with vendors and banks still participating, but flags that liquidity leans on it staying that way. A sudden pullback would pressure cash.

What that framing misses is the direction. The program was $3.36B in 2023 and is about $2.5B now, so the reliance is coming down, not going up. The reason they can step it down is the more than $3B of cash on the balance sheet, much of which was raised to give them exactly that flexibility. The cushion against the one risk that matters most is already in place.

And there is no near-term cliff forcing the issue. Free cash flow turns positive this year after a stretch of outflows, the company holds over $3B in cash against a revolving facility it refinanced in 2025, and earnings are growing. The agencies’ leverage math is not wrong, but it does not worry me the way it would at a weaker company, because the rating has a clear path higher if the turnaround holds.

Electric Vehicles

A common concern for any auto parts retailer is electric vehicles. Fewer moving parts, no oil changes, less that wears out and needs replacing over time. I don’t think it is much of a concern for Advance, at least not for a long time. EVs are only about 2% of the roughly 289M vehicles on US roads today, and they are heavily concentrated on the West Coast and in a handful of coastal states, largely not where Advance operates. The ones that are out there are also too new to matter to the aftermarket, since the repair sweet spot is a vehicle six to fourteen years old and the average EV is still under four.

Meanwhile the fleet Advance actually serves is not going away. Forecasts have the number of vehicles with a combustion engine, hybrids included, still rising in absolute terms through the end of the decade and holding around 95% of everything on the road in 2030. So the cars that drive Advance’s demand are getting both more numerous and older at once, which is the tailwind the whole business runs on.

It is also worth noting that the bigger shift in new-car sales has been toward hybrids rather than pure EVs, and a hybrid still has an engine, oil, and a full exhaust and brake system on top of the electric bits, so if anything it gives the aftermarket more to work on, not less.

This is a real question for sometime in the 2030s. It is not one that affects the next several years.

Online Competition

The other concern people raise is Amazon and online retailers taking DIY share. It is a real competitor, the online parts market is large and growing, but it is one Advance has been battling for over a decade and come out the other side of.

The reason is the same thing that protects the Pro business. When a part breaks, people usually need it today to get the car running again, and that is true for a lot of DIY buyers too. Amazon keeps getting faster, but it still cannot match a store down the road with the part on the shelf this afternoon, and the incumbents all run their own e-commerce on top of their store networks, so they compete on that front as well.

Where online does win is the smaller slice of DIY that isn’t urgent, the plan-ahead purchases where someone has time and shops on price. That is a genuine battle. But even there, plenty of DIY customers value walking in and having someone tell them the right part for their car, which a website can’t fully replace.

So there is a bit more pressure on DIY growth than on Pro, but it is pressure Advance has already proven it can live with, not a hole in the business.

None of these is the kind of risk that ends the company. The sharper question is what the stock is worth if the turnaround only partly works, and that is the downside I build in the valuation, where the bear case gets an actual number.

Valuation

I value Advance on enterprise value to free cash flow rather than price to free cash flow, which I've used on the company before, because it puts the net debt directly in the bridge and gives a cleaner picture of value.

Revenue growth and margins came from previous sections. It is the multiple that is the one input that’s a real judgment call.

Over the 2013-2023 decade Advance’s median EV/FCF was about 25x, and even in the years its margin sat in this same 4-to-6% FCF margin range the multiple ran from a low of 14x in 2013 to the mid-30s. My 16x sits near the bottom of that range and far below where AutoZone and O’Reilly trade now.

That is deliberate. Advance burned a lot of credibility, the market will be slow to hand it back even if execution stays clean. If it re-rates anywhere toward its own history as the numbers come through, the upside runs well past the table, and I am paying for none of it.

On net debt, the figure that belongs in the bridge is funded debt minus cash. Roughly $3.4B of notes against more than $3B of cash nets to a few hundred million. I carry $600M to stay conservative assuming some cash gets used between dividends and investment back into growth. I leave the operating leases and supplier financing programs out of my net debt calculation as they are part of typical operations, not extraneous debt used to fund growth.

Put it together. About $450M of free cash flow at 16x is roughly $7.2B of enterprise value. Less $600M of net debt is $6.6B of equity, and across 60M shares that is $110 a share. Against today’s $58, with a dollar a year of dividends along the way, that is about 93%, or a 38% annual return to the middle of 2028. It clears my 30% hurdle with room to spare.

The bear case is where O’Kelly can’t quite deliver. He gets some of the margin but not all of it and top line slips to low-single-digit declines. Revenue drifts to about $8.3B, the free cash flow margin holds near 3.5%, and the multiple stays at 12x, because the market won’t pay up for a turnaround that keeps falling short.

My Thoughts

Advance is an execution story with the hard cleanup already done. O’Kelly shored up the balance sheet, raised the cash, and consolidated the footprint down to the markets where the company is strongest.

The path from here isn’t easy, and he has already had to extend the timeline once. Fixing a supply chain this tangled takes time, even for someone who has run complex distribution his whole career.

The proof of the turn is showing up in the numbers. Margins are climbing, the distribution network is consolidated, SG&A is falling as a percent of sales, and comps have inflected positive. And the bigger half of the margin opportunity, the supply-chain productivity, hasn’t even started to show up yet.

The market priced Advance as if the decline were permanent, and even after a partial rebound to $58 you are paying for a business that only has to get back toward its own normal, not become the best in the industry, to be worth meaningfully more. If O’Kelly does more than that, none of it is in the price.

That is my definition of buying in this case an ok business at a great price.

It is not an easy path, but the bet is on a proven operator in Shane O’Kelly, with the hardest part already behind him, and that is a bet I’m happy to make.

Curious how I think about sizing a new position in the company? Click below and scroll down to my live holding table and on the top right click to the second page. Scroll to the right on the table and you will see a “New Position Sizing” column.

To read my full disclaimer click here.

The company is Comstock Resources, the lowest cost natural gas producer in its basin. The pipeline is Pinnacle Gas Services, the gathering system they built to move their own gas to market.

Yesterday Comstock sold 27% of Pinnacle to Sixth Street, a global investment firm, for $600M. That deal values the entire pipeline at $2.2B. Comstock keeps the other 73%, worth about $1.6B, and still controls and runs it.

The cash raised bought out the preferred equity their former partner Quantum held, roughly $445M, and cleared all of Pinnacle’s debt. With both gone, Pinnacle’s fixed costs fall about $40M a year. No more preferred dividend to Quantum or interest on the debt.

And it is easy to miss but Comstock sold a piece of Pinnacle and came out owning more of it. Before yesterday they were entitled to 70%. Now they hold 73%, and that rises to 80.5% if Sixth Street hits its return targets.

Now here is why the $1.6B matters.

Comstock’s enterprise value today is $6.77B. That is the full cost to own the company, net debt included.

Take out the $1.6B for the pipeline. You are left with about $5.2B for everything else. The wells. The acreage. The gas in the ground.

That $5.2B is exactly what Comstock said their proved reserves were worth at $3.23/Mcf gas at the end of 2025.

The measure is called PV-10. It takes the future cash their proved reserves will generate after costs, discounts it back to today at 10% a year, and reports it before taxes. It prices the gas using a trailing twelve month average, and it counts proved reserves only. Anything Comstock has not yet proved is left out, along with any proved gas that would take more than five years to drill.

So add the two together. A $1.6B pipeline and $5.2B of proved reserves. That is just more than the whole $6.77B EV today. The whole value of the company is accounted for before you even look at their other reserves.

And those reserves are massive. PV-10 counts only proved gas, and the undeveloped part of it stops at a five year drilling window. Everything past that window gets no value in the EV at all.

Comstock controls more than 800,000 net acres of the Haynesville, with total inventory I estimate near 66 trillion cubic feet of gas. Proved reserves are a fraction of those total reserves.

The other decades of drilling inventory? You are paying nothing for them.

None of that gas is hypothetical. It is the same rock Comstock already drills and a good chunk doesn’t even need higher prices, just more years of drilling than PV-10 counts. The rest turns economic as prices rise, and those prices are coming as LNG exports and data centers pull on supply.

That is the setup. The lowest cost producer in the best basin in the country, trading like the only gas it owns is the gas it has already drilled.

I walk through the full case in my deep dive. The demand and supply picture, and how I get to $55 a share from today’s $13.

I was nervous. I had a wife and a young daughter counting on me, and I was walking away from a steady paycheck to bet on myself. But this was something I had dreamed about for years, and finally had the chance to make the jump.

This post is the full story of how I got there. How I learned to invest, the failures along the way, and what it has been like since I have been writing and investing full time.

Below is a photo of my wife Ayisha and our daughter. They are everything to me, and they are a big part of why I took this leap. I love this work and would do it regardless. But what I wanted most was to be there for them. Available for the small moments, present when they need me, building a life we actually get to live together.

I got interested in the stock market at 15 because of a passing comment one of my uncles made about his investments. I asked a few follow up questions, went down the rabbit hole, and never really came back up.

I told him about this recently. He had no idea the impact that one conversation had on me.

By 16 I had convinced my parents to open a Robinhood account and let me manage it.

I had no idea what I was doing. And I paid for it.

I chased trends. Bought hype. Blew up the account more than once because I was convinced I had cracked the code. After a few hours learning about options I once bought a call expiring in two days, risked 10% of my balance, and doubled my money. Feeling confident, I figured why not go bigger.

So I bought a call on Boeing expiring the next day. That day went phenomenally. I was up more than 200% in a few hours. I felt like a genius. A teacher even asked about my investments that afternoon and I was pretty proud of my “strategy.”

The next morning Boeing opened down a few percent. I held on hoping it would bounce, and watched it tick lower and lower until the position expired worthless.

No strategy, no rules, no real analysis. And it showed.

Those losses were the best thing that could have happened to me. They pushed me to actually learn what I was doing.

And I did.

From that point on I was more deliberate. I read everything I could find, took my time, and kept my risk small while I searched for what actually worked for me. I knew there were a lot of ways to make money investing. I just didn’t know yet which one fit me. So I tried them. Day trading, options, futures, index investing, growth stocks, crypto. None of them were disasters but none of them clicked either.

The career side took the same kind of searching. I knew I wanted to work in finance, and I knew I wanted to build something of my own. What I didn’t know was what shape that would take. So I tried financial advising. I tried YouTube. I went to college, then dropped out. Twice. A lot of trial and error, and a lot of failures along the way.

I think that’s what building anything actually looks like, and I was lucky to have the temperament to keep going.

Somewhere in all that studying and trying to find out what I wanted to do I found Benjamin Graham, Buffett, Munger, and deep value investing. Things started to click, and after refining it to make it my own I finally had a strategy that fit me.

And to be clear, I don’t mean companies headed for bankruptcy or beyond saving that I am getting one last puff from. I mean good businesses, that are temporarily out of favor, at great prices.

The core idea is simple. The stock and the business are not the same thing. Public markets regularly hand you the chance to buy a dollar for loose change because Mr. Market is depressed. Everything I do rests on that disconnect between perception and reality.

Landing there took the better part of a decade. And I didn’t go through those years alone.

My first date with my now wife Ayisha was almost ten years ago, which is crazy to think about. She has been there for the entire journey. Through college and the dropouts, through jobs where I was making nothing, through every version of this dream. She doesn’t follow stocks the way I do, but she will always listen when I have something to share, nod along, ask questions, and hype me up. And for years, she heard me talk a big game.

In the summer of 2024 I was working full time in utility billing, and our daughter was due at the end of July. That's when I decided to go for it. On July 1st I launched what would become DeepValue Capital, with no idea if anyone would care.

A few weeks later she was born. My wife and I can figure things out between us, but our daughter is relying on us to give her a good life. Becoming a dad honestly changed how I think about risk, both in life and investing.

So when DeepValue Capital started working, I didn’t rush. Six months in I crossed 1,000 subscribers. Just before the one year mark I hit 100 paid. And the whole time, I treated the idea of quitting my job like an investment thesis. Running numbers with accountants. Sorting out insurance. Building savings. Hitting revenue targets I had set long before. There had to be enough cushion between what my family needed and what the business made before I would pull the trigger.

By December 2025 the numbers worked.

I consider myself a pretty calm, patient person, but in the days leading up to my last day I was jittery. It didn’t feel real until it was close. I had a conversation with my dad, who is a business owner himself. He understood it. He was also one of the most excited people for me.

December 23rd, 2025 was my last day with a day job.

December and January turned out to be my best growth months ever.

Growth has slowed since then, and I won’t pretend there’s no stress in that. This business is now my family’s only source of income. It pays our bills. The pressure to keep delivering good work is real, and honestly, I think that’s healthy. It keeps me accountable.

Here’s what a normal day looks like.

Most days I take my 2 dogs out, eat breakfast, and start around 7 or 7:30. Mornings are short form notes and promoting, since that’s still my best source of new subscribers finding me. While I do that, a couple AI tools run in the background searching through the day’s news. When they finish I review everything, look at how stocks are moving, and send anything interesting to paid subscribers.

Then the rest of the day, usually 5 to 7 hours depending on how long that morning took me, is the part I love. Researching names, writing, looking for new ideas, reading, listening to podcasts.

I still spend more time on the business side than I would like. If I could, I’d spend all day researching. But a decent amount of the business is automated now, and an accountant handles the taxes, so it keeps getting better.

A new addition is sneaking some golf in. A couple mornings a week I get up extra early and head to the course to chip and putt before work, just to get outside. I used to be a pretty good golfer. My handicap got down to about 2 in high school, back when a youth pass cost $50 for the entire year and I played constantly. I play far less now, but I’ve shot in the mid 70s a couple times recently, so the game isn’t completely gone.

I’m still figuring out my schedule, and honestly I’m flying by the seat of my pants in some ways. I don’t have a mentor, and nobody I know personally is interested in this the way I am. I come from an entrepreneurial family, but this is a long way from the construction they do. So I just keep trying to get better.

You might think that sounds lonely. It really isn’t. My wife listens to everything, and all you readers are engaged so that I never feel like I’m doing this alone.

A few weeks ago I was visiting family and went golfing with one of my uncles. On the drive he was talking about how golf is a good escape from work. I mentioned how much I genuinely enjoy my work, and the next thing I knew both my uncles in the car were trying to convince me that work isn’t everything and not to make work my life.

I get it. But I don’t need an escape.

My wife will sometimes try to make my evening easy after long days and work, and I tell her I feel great, it isn’t a drain on me. There are even mornings where I have plans to golf and I wake up and just feel like working instead. I honestly just love what I get to do everyday. Finding companies still feels like a treasure hunt to me, there is always something new and exciting right around the corner.

And the family part of the dream has played out the way I hoped. No commute. I choose my schedule. I eat breakfast with my wife and daughter some days, lunch other days, and dinner every day. I play with my daughter every single night.

The best moments are small. I asked her the other day, “Hey, do you want a chicken nugget?” and she answered “Yes” in her cute tiny voice. Most of what she says is still gibberish, and if you aren’t a parent you may not get that, but watching her start to understand us and answer with her own opinions is the coolest thing in the world.

That’s what I quit for.

Of course, none of it works unless the business holds up its end. So here is where things actually stand.

DeepValue Capital now has almost 24,000 free subscribers and 400+ paid.

From January 2024 through May 2026 my portfolio returned 271.16%. That includes 85.23% in 2024 and 118.83% in 2025.

This year I’m at -8.43%. Underperforming the market by a wide margin.

I could leave that last number out and some of you would never know. But sharing my results, even when they’re ugly, is a big part of what I do here.

The moments that hurt the most this year weren’t red days though. They were mistakes.

The one I think about most, I published research on a company and forgot to include a sizable chunk of shares that would be issued. A subscriber caught it after I posted, and it materially changed my target price. I can live with marginal things I should have considered. Missing something big hurts though, and those are the days that stick with me.

All I can do is be more thorough and keep improving, so that is what I try to do. I’ll listen to other investors, hear something that makes sense, and make a tweak. I keep working on how I compare opportunities against each other, because it can’t just be gut feeling. But so much of investing is estimates, and estimates come from analysis, experience, and yes, some gut. It’s never a purely apples to apples comparison. I just try to get a little better at it every year.

One of the ways I do that is by writing my process down. I published the full thing here on Substack if you want to check it out.

One more thing I want to be upfront about, since I know people wonder about it with every writer they pay. I use AI.

I treat it like a junior partner. It gathers information, searches through news, and helps me clean up writing and formatting. What it never does is think for me.

The research conclusions, the judgment calls, the portfolio construction, the buys and sells, the read on what news actually means, all of that is me.

I hope DeepValue Capital grows many times larger than it is today. But I’m not trying to build an empire, and I’m not trying to run the world’s largest hedge fund. There was a point in my life where I thought I wanted to be a billionaire.

I have realized what I want is much simpler. The freedom to be with my family. Never worrying about bills. Maybe playing more golf and getting to a + handicap. Owning a house where we can have all the family over and eat meals together, preferably outside. And working my whole life, because work is one of the things I enjoy.

That sounds like the life to me.

Thank you for being part of it. Whether you’ve been here since the utility billing days or joined last week, you’re the reason a dad gets to live his dream.

So with that, lets get to the work of uncovering the next treasure!

Cochlear was founded in 1981 and listed on the ASX in 1995. More than 40 years later they have helped over 750,000 people hear.

They make cochlear implants, devices surgically placed in the inner ear that restore hearing for people with severe to profound hearing loss who get little or no benefit from a standard hearing aid. The implant goes in once and stays for life. Every recipient then becomes a long term customer for new sound processors and ongoing support.

In FY25 alone they helped over 53,000 people hear with a new implant and delivered upgraded processors to more than 46,000 existing patients.

Cochlear is one of the best businesses in the world at what it does. They hold around 60% of the global market, sit inside a three player oligopoly in developed markets, and remain the default choice in most adult and senior implant programs in the US.

From a base in Sydney they sell into more than 180 countries with over 5,500 employees. Since 1996 the business has earned a median return on capital employed of 39% and, including dividends, the stock returned over 14,000% at its peak.

Today the stock is down ~70% trading at its lowest EV/FCF multiple since 2016 and its lowest EV/S multiple since being public.

Yet despite all that, I passed on the name, for now.

Welcome to 📉DeepValue Capital📈

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years.

23K+ subscribers and 271% returns from Jan 2024 to May 2026. I buy turnarounds and good companies at great prices.

Subscribe now

Cochlear has long been treated as a reliable grower, almost immune to economic fluctuations. In 2026 that assumption broke. In April, management cut full year profit guidance by around 30%, blaming a sharp drop in demand for adult implants across its developed markets on poor consumer sentiment and the Iran war. On top there is a headwind from China, where a government bulk buying program has reset regional prices sharply lower.

Cochlear is clearly a great business. The question I am working through today is whether this slowdown and other issues are temporary, and whether they are cheap enough to buy today.

Share

The Business Model

Cochlear makes money in three ways.

Cochlear Implants

Their largest segment is the cochlear implant itself, the surgically placed device plus the external sound processor that ships with it for a first time patient. It is a one time sale, and it brought in 62% of revenue in the first half of FY26.

What matters about that sale is what it locks in. The implant is permanent, and the external processor has to be matched to that specific implant. So the moment someone is implanted with a Cochlear device, they are a Cochlear customer for every future upgrade unless they go through surgery again.

By region, the Americas are the largest market at 49% of revenue, then Europe the Middle East and Africa at 34%, and Asia Pacific at 18%. Developed markets are about 80% of the total, where an implant runs roughly $25K to $30K and is reimbursed through almost all forms of insurance. The other 20% comes from emerging markets, which buy older models through government tenders at much lower prices.

Services

The implant stays in the body, but the external processor gets replaced and upgraded every five to seven years, and patients keep buying accessories, parts, and support along the way. Cochlear calls this Services, and it ran at 26% of first half FY26 revenue.

This is the highest margin part of the business and because of the lock in, it is close to immune to competition. Since almost no one is going to switch brands when switching means another surgery. So the installed base of more than 750,000 patients is a stream of high margin, hard to dislodge revenue that grows on its own every year as new implants are added.

Acoustics

The third piece is Acoustics, at 12% of first half revenue. These are bone conduction implants, sold under the Baha and Osia names, for a different kind of hearing loss than the core implant treats. Here the inner ear works fine, but sound cannot physically reach it because the outer or middle ear is blocked, malformed, or missing. So the device sends sound as vibration through the skull bone straight to the working inner ear.

Baha is the established product, and Osia is the newer, premium version that implants the vibrating part under the skin for more power. Economically it works like the core implant, a device sale up front and processor upgrades after.

Margins and R&D

Those three segments add up to a business with high and steady margins. Gross margin has held in a tight band, between ~72% and 76%, every year for the past decade.

Net margins have generally run in the mid to high teens, against a target from management of ~18%.

A big reason Cochlear holds its lead and its margins is R&D. The company reinvests ~12 to 13% of sales into research and development every year. The highest rate of the three players and roughly double Sonova’s group rate.

That spending keeps them at the front of the industry on reliability and product features, and lets them hold around 60% share while commanding premium prices.

How a Patient Becomes a Customer

Cochlear Implants

The implant reaches two kinds of patient.

• Children

Born with severe hearing loss and caught by newborn screening, they are implanted young. In developed markets that pool is already well penetrated, so it is a stable base. The growth in children is in emerging markets, where screening is expanding.

• Adults and Seniors

This is the larger group, and where almost all the room to grow sits. They start on hearing aids, which amplify sound and need surviving hair cells in the inner ear to work. A cochlear implant skips the hair cells and stimulates the nerve directly, once amplification no longer works. The brand is chosen by the surgeon and the audiologist.

Acoustics

Demand here is event driven, from specific conditions and injuries rather than slow age related loss, which makes it a smaller but steadier base.

Across all of them, the ceiling on volume is delivery, the surgeons, the operating theatres, the audiology clinics, and the public funding to pay for it.

Subscribe now

Down 70%, What Broke?

Cochlear hit its high in mid-2024 and drifted lower from then through 2025. It was on February 13^th 2026 that things accelerated. The half year results landed soft, with underlying net profit falling 9% causing the stock to fall ~16% in a day.

Then on April 22^nd management cut full year profit guidance by ~30% and the stock dropped ~40% in a single session. Its worst day since the company listed in 1995.

For years Cochlear was treated as defensive, recession proof, immune to the cycle, and it was priced like one. The moment that belief cracked the premium came out fast. But even after the fall it still trades at more than 20x peak free cash flow.

Cyclical vs Structural Growth

The April guidance cut came from developed market volumes softening in a business long believed insulated from the economy. Management pointed to US consumer sentiment at historic lows, which cut into adult and senior uptake and hearing aid referrals, plus European hospital capacity constraints, waitlists in the UK and Germany, and strikes in Italy and Spain.

Services, the supposedly dependable annuity, had fallen ~10% across FY25 and was still flat through the first half.

So is the ~10% a year adult and senior growth structural, or cyclical and macro sensitive like any other elective procedure? Morningstar took the hard line, cutting fair value in half to ~A$110 and calling the headwinds structural rather than a bad year.

Competition

The new Nucleus Nexa implant is a strong product, ~80% of units by December and gaining share late in the half. But the rollout stumbled. Registration and contracting took longer than planned, especially where Cochlear pushed price increases, so developed market revenue grew only low single digits even with units up 6%.

That handed MED-EL and Advanced Bionics a year to discount against the old models and take share, and Jarden's channel checks suggested the US price premium wasn't sticking1. Acoustics lost ground to competing bone conduction products too.

Margin Pressure

Gross margin had sat ~75% for years. It stepped to ~73% in the first half of 2026 and is guided to ~72% for the year. A few things are pressing on it at once.

The structural piece is China, where volume based procurement reset prices by ~75%. Alongside that, the new Chengdu plant is still running below capacity, so a chunk of its fixed cost isn't being covered. The mix is shifting toward lower priced emerging market units and Nexa is also still carrying early production costs.

All these had a small but measurable gross margin impact that when translated to operating cash flow means margins fell by 40% in 2025.

So that’s what broke. The thing to keep in mind is what didn’t.

None of it means demand has gone anywhere.

None of it means Cochlear has stopped making the best products in the category.

And none of it means the wall of regulation keeping new players out has come down.

It doesn’t make the problems imaginary either. They’re real, and the rest of this article works through what the future of this business actually looks like.

Can We Trust Management?

Dig Howitt has run Cochlear since January 2018, and been with them since 2000. He's an engineer by training, with a stint at Boston Consulting Group, a Stanford MBA, and general management roles in cement and building materials before he joined. Most of his years before becoming CEO were spent in manufacturing and logistics.

Operational History

Under his leadership, revenue has grown ~7.7% a year, gross margins have held in the mid-70s, R&D has stayed ~12% of sales funding the reliability lead that surgeons default to, and market share has held around 60% the whole time. No big dilution either, share count up 13.8% over eight years and most of that from the one defensive COVID era raise.

Return on capital has averaged 25.5% under him, well above cost of capital, though down from ~32% over the prior two decades. Some of that is just a bigger company maturing, and the recent numbers are muddied by COVID and the drawdown. A deceleration worth watching, but not a clear red flag.

The price increase they implemented that caused so much noise this year is nothing new. Constant currency revenue per implant, which strips out exchange rate moves, has risen a little under 3% a year for over a decade, from modest increases taken at each launch where reimbursement allows. Nexa was the same move, just stated more openly. The concern this year was that something had changed, that management was running a different playbook. From what I’m seeing, it’s no different at all.

Cochlear has also fixed a real break before. The 2011 CI500 implant recall was a manufacturing failure, on Howitt’s watch running manufacturing. They pulled it, reverted to the prior generation, relaunched a redesign, and the franchise now carries a top reliability record in the industry.

Incentives

Managements short term bonus (STI) is gated on profits. No STI pays out unless underlying net profit clears a set threshold first. Above that level, the bonus is 60% based on revenue and 40% on strategic measures, the longer term work like growing the implant market, holding market leadership, and building out the organization.

When FY25 missed, the gate did its job. Profit came in under the threshold, revenue landed below target, and the board cut the STI pool rather than pay through a weak year making exceptions for poor results.

The 60% revenue weighting can reward volume over profit, and you can see a little of that in the low priced emerging market units dragging margin. But the profit gate sits above it and the long term plan pulls the other way.

Long term awards (LTI) run 50% on relative total shareholder return against the ASX 100 and 50% on compound growth in underlying earnings per share, over four years. Clearly in line with shareholders, promoting per share profit growth and stock price appreciation.

Then there's his own money. Howitt directly owns ~0.1% of Cochlear. Small as a share of the company, but it was worth ~A$17M at the 2024 peak and his net worth based on all the estimates I could find is essentially all stock. The ~70% drop hit him the same way it hit shareholders.

So can we trust them? Yes.

But not blindly. This year was a real hit to their credibility, even if it was more a perfect storm than an execution failure. The Nexa transition ran longer than planned, competitors discounted into the gap, and the Iran war dragged consumer sentiment to lows, all at once.

Still a miss though. They didn’t guide it well and took a ~30% cut to fix it. The stock was priced for perfection, so it paid with a ~70% fall.

So yes. Just not blindly, and we keep an eye on execution from here.

Is the Growth Cyclical or Structural?

The Demand Runway

More than 6M adults in developed markets could benefit from a cochlear implant. Around 3% have one.

That gap is the growth runway Cochlear has in front of it. The device is covered by most insurance globally, the clinical need is large, and the adults and seniors segment grew ~10% in FY25. What has kept penetration at 3% is mostly awareness and referral. Most adults who qualify, and many of the clinicians who see them, don’t know an implant is an option.

The demand side is widening on three fronts.

The eligible pool is growing. Hearing loss rises with age, and the older population keeps growing, so the eligible base widens on its own.

It is also being taken more seriously as a medical problem. The 2024 Lancet Commission ranks hearing loss as the single largest modifiable risk factor for dementia, tied to ~8% of cases.2 That reframes hearing loss from a quality of life issue into a medical one, the shift Howitt has been pushing, and it is the awareness work that lifts penetration over time.

Candidacy is widening. The bar for who qualifies has been moving toward milder loss for years.

Medicare covered implants only for adults scoring 40% or worse on sentence recognition until September 2022, when it raised the threshold to 60% and pulled a whole band of harder of hearing adults into coverage.3 The FDA has approved implants for single sided deafness since 2019, a group that didn’t qualify at all before. Every loosening of the rules moves more of the hearing aid base into the implant pool.

The hearing aid channel feeds it. This is the one I’ve seen people get backwards.

The worry is that better hearing aids keep people in amplification and shrink the implant market. To qualify for an implant, an adult has to show limited benefit from properly fitted hearing aids, tested with the aids on. The hearing aid trial is the qualifying step, and the audiologist running it is the one who refers the patient on when amplification stops being enough.

Could a better hearing aid delay that? At the margin, a little. But more and better hearing aids mean more people in hearing care, and earlier in their loss, so more candidates reach the referral point, and reach it sooner. Set against a population that keeps living longer, that is a bigger funnel, not smaller.

Put the runway against the volume and it’s hard to miss. Cochlear helped over 53,000 people hear with a new implant in FY25, against a developed market adult pool of 6M+. That is under 1% of the eligible base a year. Moving adults from 3% toward even 10% penetration is many years of growth at today’s pace, before emerging markets or a wider candidacy add to it.

So back to the question. Is the ~10% adult and senior growth structural, or a good run that’s now done?

It is clearly structural growth. The pool is barely tapped and growing, the rules keep widening, and the referral channel feeding it is intact. FY26 didn’t change any of that.

What softened was short term demand. A worried household defers an elective decision, then comes back to it. That is a blip on a structural trend. Pessimists are reading the dip as the trend.

Delivery Capacity and Productivity

The runway is decades deep but how fast Cochlear works through it is a question of delivery capacity.

In the US and Western Europe, where most of the revenue sits, Cochlear’s own results flag growing waiting lists for evaluation and surgery across those markets.

In Europe it is surgical and in the US it sits in referral flow and clinician time. Emerging markets have more capacity to spare, so this ceiling is a developed world one.

How much the system can move through comes down to two things. How many clinicians there are, and how much each one gets done.

The workforce grows slowly, and always has. Take audiologists, who evaluate candidacy and program the device. That headcount has only ever grown in the low single digits a year, and the BLS projection has it adding around 1,500 jobs through 2034.4 It is a slow, steady base under the business, but it has never been the main growth point.

Productivity is the growth lever. With the workforce growing slowly, the gains come from each clinician doing more. Cochlear’s volumes have outgrown the audiologist headcount many times over for years, which is only possible if output per clinician keeps climbing.

Most of the room to push it sits in routine follow up, the checking and tuning of devices for existing patients, which eats a large share of an audiologist’s day. Cochlear’s Connected Care tools move that work out of the clinic. In a validation study its Remote Check caught 94% of the issues an in person visit would, so monitoring can run remotely and safely, and it reaches patients too far from a clinic to visit often.5

Every follow up that comes off the calendar frees a slot for a new candidate. AI assisted documentation takes another bite out of the admin load, with industry estimates of up to an hour a day returned per clinician.6 And the Nexa platform is built for this, with remote programming and monitoring designed in, so one audiologist can carry more patients without adding hours.

So the deliverable rate, the pace capacity allows, sits below the demand runway. The workforce sets a low single digit floor. Productivity is what carries it the rest of the way, toward the high single to low double digits the adult and senior segment has been running. Call it ~7 to 8% as a base, with the upside in how fast the remote and AI tools spread.

Did Services Break?

Services is the most stable revenue Cochlear has, and the highest margin.

Once someone has a Cochlear implant, every future processor upgrade is a Cochlear sale. The only way to switch brands is another surgery, so almost nobody does. That makes the installed base of more than 750,000 patients recurring revenue no rival can price or market its way into. And it keeps getting bigger. Cochlear adds more than 50,000 new patients a year, each one in the upgrade pool for life.

It isn't a smooth line though. Services fell ~13% in the first half of FY25 and ~10% for the full year. The dip was timing.

The Nucleus 8 launch drove a surge of upgrades, with Services up 29% in constant currency in the first half of FY24 alone, so FY25 was always going to step down off that. The pool due for replacement was thin after COVID held implant volumes down five years earlier, and US households facing a higher out of pocket cost chose to wait. Deferred, not gone.

It is already turning. Services steadied to roughly flat in the first half of FY26, then grew 13% in constant currency in Q3, lifted by the growing base, the retirement of the Nucleus 7 in the US, and the new Kanso 3 processor pulling patients into the upgrade cycle.7

The other potential worry is Nexa itself. Every implant before it was frozen hardware, so the only way a patient got anything new was a new processor. Nexa takes firmware updates and stores the patient’s settings in the implant, and some of what once required a purchase now arrives free.

But firmware only touches part of the clock. Insurance replacement schedules and external hardware wearing out drive most upgrades, and neither changes. And it cuts the other way with time. Old implants eventually lock patients out of new processors and out of the annuity entirely, while a Nexa patient stays upgradeable for decades. Only ~46,000 of the 750,000 patient base upgraded in FY25, so keeping patients in the annuity is the bigger lever, and Nexa points straight at it. Little effect through ~FY30, when the first Nexa patients reach a replacement window, maybe slightly slower upgrades in the years after, and more patients upgrading for longer over the decades.

So no, the annuity didn’t break. Over the long run, Services grows with the installed base. Year to year it runs lumpy around the upgrade cycle and sentiment.

Is Cochlear Losing Its Lead?

Cochlear puts ~12 to 13% of sales into R&D every year, roughly double the ~6% Sonova spends across its group.8 That buys two things. The reliability record surgeons default to, and the feature lead that keeps Cochlear out front, from the firmware upgradeable Nexa implant to the surgical navigation and remote care tools around it. A challenger has to out compete a company spending twice as much that is already years ahead on innovation, clear the same wall of regulation, and unseat a surgeon habit built on decades of one of the lowest failure rates. Nobody has, and the share above 60%, held for years, is the proof.9

Pricing power. Strip out currency and revenue per implant has risen a little under 3% a year for over a decade, in small steps at each launch where reimbursement allows. Those increases stick. The product is genuinely ahead, and the surgeon doing the buying isn’t shopping on price. The cap here is what reimbursement will allow, but even under that Cochlear has always sat at the very top.

The brand. Direct to consumer marketing now drives ~30% of US surgeries, with patients walking in already asking for Cochlear by name. That is rare for a medical device and it builds. Every year, more of the funnel reaches Cochlear before a surgeon is involved.

FY26 tested all of it. The Nexa rollout stalled on paperwork, not the product. Registration and account contracting ran longer than planned, especially where Cochlear pushed price, and that held developed market revenue to low single digits even with units up 6%. MED-EL and Advanced Bionics got a year to discount against the old models, and they used it.

The window is already closing. By December ~80% of units were Nexa and it was gaining share late in the half, with the last account renewals finishing in the third quarter. So the product that was stuck in contracting is now broadly available, and developed market revenue reaccelerates behind it.

Acoustics tells the same story. It lost ground to competing bone conduction products through the soft half, then grew 11% in constant currency in Q3. Osia grew ~30% in FY25 and keeps expanding into new geographies, and the Baha 7 processor and the non-surgical SoundBand launched in June.

So is Cochlear losing its lead? It lost a year to a stalled rollout. The lead itself, the R&D gap, the reliability record, the regulation wall, the brand, are still intact. And the share Nexa was gaining by the end of the half is the early proof.

The lead funds itself, the ~3% a year holds, and the brand does some of the selling. Durable quality like that is what justifies a premium multiple.

Where Do Margins Settle?

Gross margin sat ~75% for years and is guided to ~72% for FY26. Four pressures sit between those numbers, and they don’t all behave the same.

Nexa’s early production costs are transitory. New platforms start expensive and come down as production ramps.

So is Chengdu. The new facility is running below capacity, so its fixed costs aren’t fully covered, worth about half a point of gross margin according to management. That reverses as volumes grow into it over the next year or so.

China is structural, but bounded. Volume based procurement (VBP) reset prices there by ~75%, and that revenue doesn’t come back at the old price. China is ~3% of group revenue though, and the reset took effect around the middle of 2025, so the YoY hit runs through FY26 and is largely out of the comparison by FY27. A headwind that fades on a timer rather than one that keeps getting worse.

The mix shift stays. A growing share of volume comes from lower priced emerging market units, and that continues as those markets grow.

Services pulls the other way. The highest margin revenue in the business grows with the installed base, so every year it makes up a little more of the total.

So where do margins settle? As China drops out of the comparison, Chengdu fills, Nexa comes down the cost curve, and returning volume absorbs the fixed base, gross margin works back toward ~73 to 74%, up from the ~72% the trough pushed it to. The old 75% is a longer term reach that the richer emerging market mix makes harder. Net margin follows it toward the mid teens, ~15 to 16% as the realistic medium term base against management’s 18% target.

Risks & Headwinds

Demand Stays Soft

The growth answer rests on the read that FY26 was cyclical, a worried household deferring an elective decision and coming back to it. If sentiment stays weak deep into FY27, or the deferred patients don’t return on the timeline that assumes, the ~7 to 8% may not show up. The stock stays cheap because the earnings stay depressed. This is the central bet the whole piece makes, and it’s the one most worth watching the quarterly volumes for.

A Reliability Stumble

The moat’s spine is the failure rate record surgeons trust. The 2011 CI500 recall showed what a manufacturing fault does to that, pulled product, paused launches, share handed to competitors. The risk reaches further now that Nexa is firmware upgradeable. A bad update or a flawed cohort would hit reliability, pricing, and the brand at once, the three things holding the premium together. Nothing in the record says it’s likely. The point is that it’s the one break that would damage several pillars in a single event.

Procurement Pressure Spreads

China’s volume based procurement reset prices there by ~75%. No other market is trying to do the same today but the volume growth sits in emerging markets, and they buy through tenders. Another large buyer moving to bulk procurement would mean that growth arrives at thinner economics though probably not near as big of a discount as China.

Valuation

Since 2016, Cochlear’s median EV/FCF multiple has been 57.5x. Outside the stretch where COVID pushed free cash flow negative, the stock never traded as low as it does today. Not at a single point in the decade has it been below 40x.

I’m not underwriting a return to that premium. Confidence was lost this year. Shareholders got wiped out in the drawdown, and a stock that was priced for perfection has trust to rebuild before the market pays the old multiple again. Give them 6 to 8 years of execution and they could justify more. Inside this window, I’ll assume 35x in my base case and 27x in the bear.

My full assumptions are in the table below, and they sit below what management says the business will do. Less revenue growth than the ~10% they expect. Free cash flow margins under their 18% net margin target. Net debt for a company that held net cash this year, and the bear case allows some creep in share count.

Just for the sake of details, if we push the horizon out a year to mid-2031, the base case still returns ~24% a year.

Where the return comes from matters. At $105 the stock trades at ~20x normalized free cash flow, so more of the base case comes from the multiple recovering than from the business growing.

That cuts the other way too. If the premium never comes back and the multiple sits at today’s 20x, even the bear case fundamentals are only worth ~$119 a share. With dividends that’s ~7% a year, roughly keeping up with the market. The return in these numbers leans on trust being rebuilt, and that’s the real floor if it isn’t.

My Thoughts

Cochlear is a very strong company. R&D led, with a business model built to drive growth for years in an industry with secular tailwinds. It would take serious missteps from management to derail it.

And the recent issues weren’t execution led, but more a perfect storm of external factors. China’s volume based procurement landed on top of a product rollout that ran longer than normal, consumer sentiment hit the lowest levels in history, and they were lapping very tough comparables, all at once. A storm that paints the company as far worse than it actually is. Behind it sits a strong balance sheet and a long history of operations. Over time, I think they do very well.

Even so, it doesn’t clear my 30% a year hurdle today. The base case lands at 28%. There’s a real chance growth comes in above my numbers and management claws back more margin over the medium term than I’m giving them. Those are assumptions I’m not willing to make for a base case.

So for now, I’m on the sidelines. If it drops below the ~$90 to $95 range I just might take a swing, and that decision will come down to a comparison against my current holdings. My hurdle for displacing a position is high. This one has the potential to clear it but we will see when/if that time comes.

Cochlear goes on the watch list for now. I’ve got some cash coming in over the next month, as long as another check doesn’t get lost in the mail, and if the price moves, this could be a fantastic piece of healthcare exposure.

You just read a full breakdown of a new idea, free, with nothing held back. This is the standard behind everything I publish. What members get is the portfolio itself, the names I actually own with full deep dives, the buy and sell calls, and updates as each thesis plays out.

If that’s the kind of work you want in your inbox, that’s what a paid membership is.

Subscribe now

To read my full disclaimer click here.

Defense spending is set to pass $1 trillion for the first time in FY26, ammonia is heading into a build cycle, and yet the stock is down almost 50% from its high.

On top of that, the company is splitting itself into two separate public companies to remove the conglomerate discount.

Welcome to 📉DeepValue Capital📈

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years.

23K+ subscribers and 271.16% returns from Jan 2024 to May 2026. I buy turnarounds and good companies at great prices.

Ticker:

Market Cap: ~$3.5B

TTM Revenue: $7.7B

TTM FCF: $489M

EV/FCF: 13.75x

5yr Median ROIC: 11.31%

Subscribe now

The Company

KBR is two businesses sharing one ticker, but that is going to change.

On September 24, 2025, the board approved a plan to spin off Mission Technology Solutions (MTS) as a standalone public company in the second half of 2026, leaving Sustainable Technology Solutions (STS) as the company that remains.

MTS

MTS sells the time and expertise of cleared engineers, scientists, and logistics specialists to militaries and government agencies, mostly the U.S. Department of Defense and NASA.

It accounts for about 72% of consolidated revenue. The work spans high-end systems engineering on classified national security programs, operational support for NASA’s human spaceflight, and overseas base operations for U.S. and allied forces. It also includes critical infrastructure engineering for governments, covering things like water, transportation, energy, and power.

Contracts run five to ten years with options to extend, and renewals are the norm. Replacing the incumbent means clearing a new workforce from scratch, which takes years, so the work tends to stay put.

Operating margins are the lower of the two segments at 8.3% in 2025, but the relationships run deep. Brown & Root has been embedded at NASA continuously since the 1960s, and KBR is one of only three primary contractors on LOGCAP V, the Army’s $82 billion overseas military logistics program. Those are not positions a rival wins by underbidding.

STS

STS, the other 28% of consolidated revenue, is a very different business, with operating margins of 21.6% in 2025, more than double MTS. It combines process technology licensing, engineering services billed by the hour, and equity earnings from joint ventures like its 45% interest in a major LNG project.

The licensing is where STS really shines, especially in ammonia, with 50% of global licensed capacity, and refining residue, where they hold 90% market share. The list of licensors that can write performance guarantees on multi-billion-dollar plants is short, and getting on it takes decades of operating history. Insurance underwriters won’t write policies on these plants without a licensor standing behind them, and lenders won’t finance them.1

Once a process is licensed, KBR earns recurring revenue from catalyst replacements every five to ten years across hundreds of plants, often for decades.

Why They’re Interesting

Several long-term trends are moving in KBR's favor at once.

Defense Spending

The FY27 defense budget request calls for $1.5 trillion, the largest in U.S. history, building on the first-ever $1 trillion defense budget in FY26. The new money flows disproportionately into research and development, integrated air and missile defense, space, hypersonics, and autonomous systems. That is exactly what MTS sells, and it will pull margins up over time.

Allied spending adds to it, with NATO targeting 5% of GDP by 2035.2

Ammonia

Global ammonia capacity is set to grow about 21% to 290 million tonnes by 20303, and 84% of that new capacity is conventional or carbon-captured ammonia, where KBR is strongest. The other 16% is near-zero-emission.

Near-zero-emission is the part that gets the headlines, but it is the smaller story. The announced low-emission pipeline looks enormous, more than 300 million tonnes, 125% of today's entire global capacity.4 Most of those projects will never reach a final investment decision, so the capacity that actually gets built still skews conventional, but that pipeline highlights how massive demand is.

KBR’s PURIFIER process uses 12 to 15% less natural gas than competing oxygen-based designs, and its Ammonia 10,000 technology triples single-train capacity to 10,000 metric tons per day, which no competitor offers.

Since 1943, KBR has licensed, engineered, or constructed more than 250 ammonia plants worldwide.

Civil Nuclear

Western civil nuclear is in its first growth cycle since the 1980s, with the U.S., UK, Europe, and Canada all targeting major capacity increases through 2050.5

KBR's strength here is concentrated in the UK, where it has grown its nuclear team about 370% since 2020 to over 1,000 professionals and holds positions on Sizewell C, the Rolls-Royce SMR program, and Sellafield decommissioning.

The OpEx Pivot

In January 2026, KBR’s industrial maintenance joint venture, Brown & Root Industrial Services, closed a $115 million acquisition of SWAT, short for Specialty Welding and Turnarounds. The deal more than doubled the joint venture’s EBITDA, and KBR holds a significant stake in it.

The work is recurring industrial maintenance at refineries, chemical plants, and other heavy-process facilities. It is contracted and tied to plant operations rather than new construction, which makes the revenue more predictable than the rest of STS. Management has been explicit about wanting more of this kind of work, organically and through further deals.

Energy Security

The closure of the Strait of Hormuz during the Iran war showed how dependent the world still is on Middle East energy. Wood Mackenzie called a prolonged closure “the single greatest threat to global energy markets in decades.”

Wood Mackenzie’s view is that even after the strait reopens, the episode pushes import-dependent countries to strengthen their own energy security and lean less on the region. That means building and hardening energy infrastructure, which is engineering work. KBR does it for governments through MTS and for private operators through STS.

There is also the damaged infrastructure itself, which needs repair and reinforcement. A direct KBR peer shows the demand is already real. McDermott International has continued Gulf energy work right through the conflict, with clients like Saudi Aramco and ADNOC pressing to speed up projects already underway, and it guided its 2026 earnings about 21% higher.

The Spin-Off

Most of the catalysts above play out over years. The spin-off is the near term specific corporate action with a date attached, and it targets a discount that already exists.

Conglomerates that combine very different businesses trade at a discount to the sum of their parts, and that is especially true for one as complex as KBR. The company gets priced by whichever investor group is willing to tolerate both halves, which is rarely the group willing to pay a full price for either.

Academic research on U.S. spin-offs finds the parent and the spun-off company, taken together, tend to outperform the market for the first two to three years after separation. In one study, the newly spun-off businesses outperformed by about 8% in their first year alone.6 The discount is real, and the mechanism for closing it is now in motion.

The Drawdown

As of today KBR trades around $36 per share, down almost 50% from its late-2024 peak near $73.

The market sold it off for real reasons, which I will get to. But a good business with several long-term tailwinds lining up at once, in a drawdown this size, caught my attention.

Forward Returns

I kept STS and MTS growth at 7% and 4% as a conservative base well below managements guidance due to the uncertainty of awards inherent in their businesses.

On margin. The base business does improve as other joint ventures contribute and the contract mix moves up-market, but I do not think they fully replace Plaquemines LNG. That is why my 2029 consolidated EBITDA margin lands near 11.8%, below the 12.8% management targets for 2027. The honest read is steady expansion in the base business, hidden by LNG fading out.7

For net debt, I assume it grows roughly in line with revenue., from about $2.2 billion today to about $2.7 billion. That just assumes they hold leverage about steady as they get bigger.

I also hold share count flat over the period, so the move in market cap is the move per share. KBR has been buying back stock, so if anything that understates the per-share result.

The multiples are where the two businesses part ways. STS should trade at a premium. Its closest public comparable is Worley, which does some of the same engineering work, but STS also owns a portfolio of licensed process technologies that throw off recurring, high-margin revenue Worley does not have. 16x EV/EBITDA is reasonable for that.8

MTS is a government services business, in the company of Leidos, CACI, and Booz Allen at roughly 12 to 15x. Given its slower growth and a couple of recent contract stumbles, I anchor to the low end at 12x.9

Forward returns clear my hurdle comfortably, but they are not guaranteed by any means.

As we get closer to the spin, we should get a lot more detail on how each business looks standalone, including the capital structure each one carries. For now, this is my framework for what they are worth a few years out.

Why I’m on the Sidelines

I do not own KBR. Everything below is what has kept me from taking a swing so far.

The HomeSafe Cancellation

HomeSafe was a 72%-owned KBR joint venture that won a $20 billion contract from U.S. Transportation Command (TRANSCOM) in November 2021 to consolidate the U.S. military’s household goods relocation under a single primary contractor.

TRANSCOM terminated it for cause on June 18, 2025. The financial impact was modest, but the credibility impact was real.

On the May 6th Q1 earnings call, CEO Stuart Bradie called the TRANSCOM relationship “excellent” and said he was “very confident in the future of this program.” Forty-three days later, TRANSCOM terminated for cause.

A CEO calling a customer relationship excellent weeks before that customer terminates for cause is a different category than a forecast that does not pan out. Bradie’s 2014 to 2024 track record earns him the benefit of the doubt10, but not blind trust.

The Margin Cliff

KBR holds 45% of the KZJV joint venture executing the Plaquemines LNG project for Venture Global. Its share of that JV’s profit comes through as equity earnings, which is what pushed STS adjusted EBITDA margins to 23.5% in Q3 2025. That contribution rolls off through 2026 and into early 2027.

Lake Charles was supposed to follow it. KBR and Technip Energies held the engineering and construction contract there, set up to run through a joint venture the same way Plaquemines does. But in December 2025 Energy Transfer suspended the project to put its capital into pipelines instead, leaving it open to a third-party developer. The other LNG work KBR has in flight is mostly consolidated fee-for-service, revenue but at much lower margins.

Management’s 2026 STS guidance is still 20%+, because Plaquemines is still contributing this year. The real question is what STS looks like once it is gone. On the most recent earnings call, management gave a clear answer: without the LNG contribution, margins run around 15%.

The step down is a margin problem, not a volume one. STS backlog grew more than 20% excluding Plaquemines, but the work filling it pays far less than the equity earnings rolling off. So the business has to be valued on steady-state margins. They likely drift up from 15% as the OpEx and technology mix grows, but a return to 20%+ is very unlikely without another major equity-participation project.

Iran War Timing

Management has been clear that work in the region is continuing despite the conflict. The risk is on new projects. If it drags on, I would expect some regional work starts to slip, though when and for how long is hard to know.

Forced Selling Post-Spin

Spin-offs reliably create forced selling. Funds and institutions that cannot hold the new spun-off company sell it regardless of price, which usually makes the best entry the one after the split, not before. Could this time be different? Sure. But I am not a forced buyer here, so I am happy to wait for what may be a better entry.

Final Thoughts

KBR has been on my watchlist for a while now, with dozens of hours of research behind it. It checks a lot of boxes, sitting right in the middle of several long-term tailwinds.

What has kept me out is the credibility lost by a management team that has been fantastic for over a decade, two complex businesses that are hard to forecast, and a spin-off that will likely open a better entry down the road.

Add it all up, and I see a good but not great opportunity right now. That is not good enough to beat what I already own. It is a high bar to interrupt compounding that I can’t confidently say KBR has.

If I get more confidence in their ability to grow the top line and margins, this could become a very compelling add. For now, I will be waiting and watching results.

Odds are I never buy it, but we will see how things play out.

Curious what I do own? Click here.

It has been a tough month for the portfolio especially compared to the market ripping higher on the back of semiconductors. I took the opportunity especially early in the month to add to a few of my favorite names.

Had a check being deposited into by account not gotten lost in the mail and needed to be reissued I would have been adding more. Unfortunate, but it is what it is.

Stick around to see a performance breakdown and for paid subscribers a detailed live table of my holdings, a history of my buys and sells, plus a review of every positions with updates from the month of May.

Welcome to 📉DeepValue Capital📈

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years with a 22K+ subscriber following buying turnaround and good companies at great prices.

Subscribe now

Performance

Here is my performance so far.

• 2024 Returns: 85.23%

• 2025 Returns: 118.83%

• 2026 YTD Returns: -8.43% vs S&P 500 10.73%

• Since Inception (01/01/2024): 271.15% vs S&P 500 58.93%

I am very happy with how my portfolio has performed since 2024 but I understand, as YTD shows, I will not outperform all the time. Skill as an investor is proven through long term outperformance.

These returns are unaudited but almost every step has been documented here on Substack.

Now to all the details.

Read more

I’m Kyler Johnson, a husband, dad, and self taught investor of 7 years.

23K+ subscribers and 291% returns from Jan 2024 to April 2026. I buy turnarounds and good companies at great prices.

On May 28th HRL released their Q2 2026 earnings.

The stock popped ~12.5% on the strong results.

Hormel beat bottom line expectations by a wide margin despite all the unforeseen headwinds and management is confident they will hit full year targets.

Lets get into what happened, where they are going, and how much upside they still have left.

Subscribe now

Financials & Data

• Revenue came in up 3.3% on a like for like basis with organic net sales up 3% marking the 6th consecutive quarter on strong protein demand.

By segment:

Retail organic net sales was up 1% on double digit Jennie-O growth, offset by an exit from some snack nut lines. Applegate natural and organic meats, Hormel Black Label bacon, the Herdez portfolio, and Hormel Gatherings also contributed to the growth.

Segment profit grew 13% in the quarter.

Despite their really strong performance management felt they have room to do better. Saying size/pricing, promotions, and better in store and e-commerce execution are all areas they see opportunity to improve for brands including Planters and Skippy.

Foodservices was up 7% which was the 11th consecutive quarter of organic growth and the strongest performers were Hormel Natural Choice meats, Austin Blues smoked meats, Jennie-O turkey and Fontanini Italian meats.

Segment profit grew 11% YoY.

They performed well in the face of lower restaurant traffic because they have innovated to address problems their customers are facing. Simply put they are good at making things people want and have the flexibility to move to where opportunities are.

International was up 5% led by SPAM and growth in their China business.

Segment profit grew 20% YoY.

• Gross Margins improved to 17.44% in the quarter up from 16.71% last year with gross profits growing 7% YoY.

• OCF Margins came in at 6%, 4% better than last year.

• FCF flipped positive to $96.7M in the quarter vs -$19M last year bringing the last 6 months of FCF to $377M vs $218M last year. That’s 73% growth.

• Adjusted EPS came in at $0.40, 11% above estimates of $0.36, and up 14% YoY.

Margins benefited from price raises, better mix, increased productivity, and past restructuring actions. All of which will continue through 2026.

Another tailwind specifically for Q2 was improvements in the supply chain of their turkey operations from higher volumes and better weather helping both retail and food service profits.

Going back to the important price hikes, management did note that elasticities, which just means how consumer demand changed after prices hikes, was in line with expectations.

Offsetting some of these improvements were high pork, beef and logistics expenses. Though management did say logistics was not as large as expected and pork and beef were in line with expectations.

• Balance Sheet is still rock solid with ~$827M of cash vs ~$2.85B of total debt putting them at net debt to EBITDA of 1.7x.

Looking Forward

Full year guidance was maintained despite the energy and logistics headwinds with management confident they will hit full year targets and even say they are “trending toward the upper half” of their earnings guidance.

As it stands guidance already incorporates headwinds from pork, beef, energy/logistics costs, and a $50M reduction in sales from their turkey business divestiture.

By segment for the year retail is expected to grow flat to low single digits, foodservice mid single digits, and international high single digits.

The two adjustment to guidance they did make was first to GAAP EPS for a $61M loss on the sale of their whole bird turkey business. And second they walked back their expectations of falling input prices from pork in the second half of the year to more expecting flat but elevated levels YoY.

Going into Q3 they expect earnings to be flat YoY because of high commodity prices, logistics expense, and inventory rebalancing. They were clear though these costs are only affecting quarterly cadence not full year expectations with Q3 retail being particularly messy. That segment is affected by inventory balancing, the divestiture of their whole bird unit, the divestiture of Justin’s, and exiting some snack nut lines.

Management was clear that logistics costs from higher energy are above their expectations but the business has been performing so well and they are making some tweaks to their operations that they are easily dealt with. It does pressure their Q3 but overall they are very confident they can deliver results.

Looking medium term a key focus is integrating technology allowing them to move faster to take advantage of trends and opportunities. To make this happen during the quarter they hired their first ever Chief Technology Officer, Donald Monk.

Long term targets of 2-3% net organic sales growth and 5-7% operating income growth are still targets though 2026 profit is guided to beat that.

Here is a quick map of what to expect based on managements guidance over the coming years.

P.S. Curious to find out all the names I own? Click here.

Thoughts and Updates

Read more

The stock popped ~14% on the strong results.

They are reducing costs, improving efficiency, and bringing the brand back to life.

Lets get into the details of what happened during the quarter, where they are headed, and end with how much upside they still have to go. (Its a lot.)

Subscribe now

Financials & Data

• Revenue came in up 1.2% YoY with same store sales up 3.5% YoY beating estimates of only 1.9% and measuring the highest in 5 years.

Growth came from both Pro at mid single digits and DIY customers at low single digits reversing softness we have seen in recent quarters.

In both channels they also saw improving transaction volumes and units per transaction.

• Gross Margins improved by 2.13% YoY hitting 45.1%.

Margin improvements came from better merchandising, how they buy, price, promote, and assort. And shifting customers to higher margin items like their ARGOS oil which is already a top selling name in its category. It has done so well they plan to expand the brand to hydraulic oils, antifreeze, performance chemicals, and washer fluids.

• SG&A Expense Margin declined by 1.97% YoY to 41.3%.

• Adjusted Operating Margins improved by 4.1% YoY hitting 3.8%.

• Adjusted EPS came in at $0.77 beating expectations by ~75% and up from -$0.22 last year.

• FCF was -$75M in the quarter vs -$198M last year. (Q1 is their typical FCF trough.)

• Balance Sheet is still strong with $2.95B in cash against $3.4B in debt leaving them at 2.4x net debt to Adjusted EBITDAR, within their 2x-2.5x target.

Looking Forward

Management reaffirmed 2026 full year guidance during the quarter expecting solid improvement YoY inclusive of potential headwinds from consumer softness and tariffs.

Interestingly the tariff picture has actually improved since they gave guidance.

In February the Supreme Court overturned the IEEPA tariffs. Like all companies affected AAP has applied for refunds on what they already paid but nothing has been recognized in the financials. Any recovery is upside to the guide.

As the year progresses their comparable quarters from last year get more difficult which is why despite stronger than guided performance in Q1 no shift up in full year expectations was made.

In 2026 AAP expects Pro to outperform DIY despite winding down some national pro accounts as they focus more on main street.

Their market hub strategy is supporting that Pro outperformance. Regions with a hub are running 1% higher comparable sales growth than regions without. They have 35 today and plan to add 10-15 more this year on the way to 60 by 2027.

On the customer side, in Q1 they launched their updated loyalty program which fixed the common problems with the old system like flexibility in when they could use the rewards and better exclusive offers.

They are already seeing that change result in “strong early engagement” from new and existing customers.

Margins should be strongest in Q2-Q3 2026.

Medium term 7% adjusted operating margins is still the target with improvement starting from supply chain starting next year with continued help from store operation efficiency and merchandising improvements.

Merchandising

Merchandising is expected to be the “primary catalyst for margin improvement” through the rest of the year being the main contributor to the guided 1.1%-1.5% gross margin improvement. That improvement comes from better vendor relationships, removing unrelated costs, and closer front line collaboration.

Using customer data they continue to improve product placement and keep available a larger number of SKUs.

Supply Chain

Their supply chain keeps getting better with additional improvements found that will be implemented in 2026 leading to gross margin improvements during the year and into 2027.

T hey recognized that the receiving methods at each DC were not uniform costing workers time to adapt to each one. Fixing that will improve efficiency and reduce lost time.

They are also targeting close to perfect shipment accuracy getting the parts needed on time. As they improve this will reduce the hours needed to verify the parts they need got there.

On the vendor side they plan to simplify their order volumes and methods to lower costs for both AAP and vendors creating a simpler relationship.

Investment here will partially offset improvements from merchandising.

Store Operations

In their store operations productivity continues to improve as tasks get simplified and scheduling gets better. To help this improvement continue they are upgrading their training and making performance metrics clearer.

AAP continues to invest to refresh their stores and recently redesigned a wash and wax section that is better aligned with what customers are actually buying.

YoY reduction of SG&A expenses will result in 0.2%-0.5% of margin improvement.

Every one of the changes they make is driven by customer data, and they are seeing measurable improvement in their best metric of customer satisfaction, net promoter score.

Here is a quick map of what to expect based on managements guidance over the coming years.

P.S. Curious to find out all the names I own? Click here.

Thoughts and Updates

Read more

The stock opened negative but ended the day up 8% on cloud and AI growth optimism. Then it sold off in the days after.

It was more of the same trend we have been seeing. High spend crushing the bottom line, and cloud and AI accelerating the topline.

In this article I go over what happened in the quarter, if they can keep this investment up, but most importantly if they‘re going to get a good return on all this spending.

Subscribe now

Financials & Data

• Revenue in the quarter was 243.4B RMB ($35.6B), and for the FY 1,023.7B RMB ($150.5B), both up 3%.

That looks like slow growth but there are two distortions we need to account for.

First, last year included revenue from Sun Art and Intime, which they have since exited. Second, they changed the classification of some expenses for the commerce business as contra-revenue.

Contra-revenue just means instead of in an expense line, it cancels out revenue.

If we adjust for both of those,1 topline growth on a pure like for like basis was 13.25% YoY.

A completely different picture than the headline suggests.

• Gross Margin was 34.51% in the quarter and 39.81% for the FY. Down from 38.41% and 39.95% in the previous periods. Both down on increased investment in cloud and instant commerce.

• Adjusted EBITDA was 4.1B RMB, down 84% YoY.

• Operating Cash Flow was 9.4B RMB, vs 27.52B RMB last year.

• Free Cash Flow was -17.3B RMB, vs 3.7B RMB last year.

Falling profits on rising investment is what worries some investors. But investment itself isn’t bad. What matters is the result, so there are two questions to ask.

First, can their balance sheet sustain these investments?

Second, will these investments grow revenue and profits?

The answer to the first question is clearly yes.

Alibaba has a net cash position of 260.82B RMB or $37.8B. So even if they continued burning $2.5B per quarter it would take almost 4 years before net cash dries up. Or up to 7.5 years before their cash hit $0.

Obviously I don't expect them to get anywhere near those levels, but I share that to make it clear. I have no concern on their ability to invest.

The second question is worth digging into. I'll answer it throughout the rest of this article with specific examples and management commentary.

• China E-commerce revenue was up 6% YoY, or 10.2% after adjustment for the contra-revenue.2 Adjusted EBITDA for the segment was down 40% YoY.

Growth was mainly driven by quick commerce which was up 57% YoY and their most important business line, customer management revenue (CMR), up 8%.

Adjusted EBITDA declined mainly due to investments enhancing customer and merchant experiences.

For consumers, they integrated Taobao and Tmall into Qwen and launched the Qwen Shopping assistant. They continue merging offerings into Qwen, creating a one-stop shop.

The best part? It’s working.

Alibaba's 88 VIP members, which are their biggest spenders on an annual subscription program often compared to Amazon Prime, hit 62M in the quarter with growth accelerating to ~24% YoY.

For merchants, they started testing Wukong, an AI enterprise agent to improve efficiency and integrate agentic capabilities.

It’s clear merchants continue to come to Alibaba for the consumer reach they get, and the improvements Alibaba has made to their experience.

The proof is their CMR revenue growth of 8% YoY, shown in the chart below.

Looking at Quick Commerce, which is where most of the increased spending is going, they continued to see improved unit economics, higher average order values, and stable market share.

Excluding the losses from their Quick Commerce business, Adjusted EBITDA would have been flat YoY.

• Alibaba International Commerce (AIDC) grew 6% YoY and Adjusted EBITA improved massively from -3.57B RMB in March 2025 to just -138M RMB in the quarter.

That big improvement came from “significant improvement in AliExpress’ operating efficiency”.

Despite pressures in other segments, this is clear proof they can greatly improve efficiency from here, not just through lower spending but through execution.

• AI & Cloud revenue growth accelerated for the 8th consecutive quarter to 38% YoY, or 40% YoY from external customers. It was also the 11th consecutive quarter of triple-digit AI growth. Adjusted EBITDA also grew 57% YoY, outpacing topline.

Increased adoption of AI agents is driving growth in cloud. Plus they're seeing “exponential growth” in a smaller line, MaaS (Model-as-a-Service). That subsegment grew 8x YoY, mostly due to demand for coding.

In the call, management said their AI is at a “pivotal inflection point” moving from chatbots to “autonomous AI agents, which is directly driving explosive growth… AI and cloud commercialization inflection point has arrived.”

In the quarter, AI-related revenue reached 30% of the cloud segment's external revenue.

At T-Head, “over 60% of compute capacity is already serving external customers.” They have shipped 470,000 chips as of Feb 2026.

They are the only AI cloud provider in China able to deliver AI chips at scale. “We’ve secured autonomy over our compute supply chain while providing customers with highly competitive AI inference and training services.”

Increased capex to build or buy chips and to build data centers is directly driving growth. It's clear their strategy is working, with continued acceleration in revenue and profits.

• All Others shrank 21% YoY, but adjusting for Sun Art and Intime, revenue was only down 0.5%. Adjusted EBITDA loss in the quarter jumped 520%, from -3.4B RMB in March 2025 to -21.16B RMB in March 2026.

This segment was hit by a decrease from Cainiao, partially offset by growth in Freshippo and Amap.

The growing loss in this segment is their biggest drag on profitability. In the quarter, management said it was “primarily due to the increased investment in technology businesses (including investment in user acquisition of Qwen app)”.

Critical for this segment is the Qwen app, which on May 7th was integrated with Taobao and Tmall capabilities. Users can get on the app to place orders. So all that spend on user acquisition will now drive repeat purchases from their core China e-commerce business.

The Qwen app is now “China’s first all-in-one personal assistant”.

Looking Forward

Management was clear they are focused on taking advantage of the tailwinds in technology and innovation to grow the business long term. When asked about how they will balance investment in growth and generating positive cash flows, this is what management said.

“We’ve been very resolute in making those investments over the past year. And looking forward to the next 2 years we intend to be equally resolute in continuing… because we see this is a critical window of opportunity.”

To put this in perspective, management believes they need 10x the number of data centers they had in 2022 to meet 2033 demand. That is a massive investment, and to hit it they expect to overshoot their original 380B RMB 2025-2028 Capex figure.

Along the way though they expect Taobao and Tmall to continue generating cash, quick commerce losses to narrow significantly with positive UE by the end of FY 2027, and AIDC to flip from loss-making to profitable in that same time frame. Their balance sheet gives them the strength to continue on this high investment path, but improvements will be choppy.

They see investments, especially in AI and cloud, as clear drivers of value. In fact, the Alibaba CEO said “there isn’t a single card on our service that is idle. So we see the ROI on this investment in the next 3 to 5 year period as being extremely clear.”

Later, when asked about China customers’ willingness to pay for these AI offerings, management framed it simply. Once their offering becomes valuable enough, people will come. They see demand for AI “as a long term certainty.”

To back that up they highlighted that the Bailian platform, which is essentially the host, customization, and delivery layer for their MaaS, has grown more than 10x from December last year through May of this year. ARR is already over 8B RMB and management is “highly certain” they can hit 10B ARR in the current quarter and expects 30B RMB by year end.

On the cloud + AI segment as a whole, management was direct. “We expect that in about 1 year, AI-related product revenue will cross the 50% threshold, (share of segment revenue), becoming the primary engine driving the Cloud business’s revenue growth.” They added that “External revenue growth is expected to continue accelerating beyond its current 40% rate over the coming quarters.” Even more impressive, though, is that they “expect this trajectory to sustain growth over the medium to long term.”

When asked about token price hikes and their effects on MaaS and cloud margins, management reiterated the same as last quarter. “Our ability to supply this demand is not able to keep up with all the growth and demand. We actually have a lot of customers still waiting to access the service.” Then, answering the question directly, they said they are seeing continued optimization that will lower costs to deliver outputs. At the same time, they expect to increase prices. Together this will result in “a very positive impact on our overall gross profit margin.”

When asked about EBITDA margins and if they can reach similar levels to US peers, management was clear their objective today is still to grow. “Margin is still secondary.”

That said, the cost to build out these servers has doubled from a year ago, which gives Alibaba some pricing power. Plus MaaS, which is inherently very high-margin, will lift segment margins as it grows. Efficiency gains will reduce costs. And sourcing chips internally through T-Head will naturally reduce costs further.

So, while maximizing profitability isn’t the focus right now, margins should rise “significantly” in the next 2-3 years according to management. We will start to see this in the next 1-2 quarters.

Here is a quick map of what to expect based on managements guidance over the coming years.

Thoughts

Read more

On March 20th I wrote about Cooper Standard in a deep dive laying out why I believe price is significantly dislocated from value.

And that gap had gotten even wider after a decline that has reached ~38%.

Q1 results released last week reaffirmed the case.

Subscribe now

To read my full disclaimer click here.

Financials & Data

Q1 2026 reaffirmed the trajectory CPS has been on for multiple years. Continued cost reductions and steady performance in the face of slow volumes.

• Revenue came in at $686.4M, up 2.9% YoY beating estimates by ~3%.

  • Fluid Handling came in at $318M, up 4.6% from $304M.

  • Sealing Systems came in at $348M, up 1.5% from $343M.

FX tailwinds helped, partly offset by volume and mix. This marked the sixth consecutive TTM revenue improvement and the highest Q1 revenue since 2019. All in the face of declining production in every geography except South America.

Broken down by region, North America was flat, Europe grew 12.8%, Asia Pacific shrank 1.5%, and South America was flat.

• Gross Margin came in at 12% vs 11.4% last year.

• Adjusted EBITDA Margin came in at 7.4% vs 8.8% last year.

• Adjusted EPS came in at -$0.29 vs $0.19 last year missing estimates of -$0.17.

Margins were down due to $10M of royalty income that did not repeat. Adjust for that and EBITDA would have grown YoY, with EPS $0.13 better.

• Free Cash Flow came in at -$93M vs -$22M last year.

The decline came from a -$88M working capital swing, the one off royalty income that did not repeat, and higher capex at 3.5% of sales vs 2.6% in 2025. Management expects working capital to normalize over coming quarters.

• Balance Sheet is solid with ~$286M of liquidity available vs $1.1B of 2031 debt.

After the refinancing, interest expense was reduced by $6M annually.

• Lean Savings came in at $17M during the quarter.

Cooper Standard has a relentless focus on cost reduction. They have reduced their cost base by well over $700M since 2019.

• Net New Business Wins came in at $128M up 133% YoY

  • $31.8M was tied to EVs and hybrids.

That is well ahead of their $400M annual goal, which management has said they are "well on their way to exceeding." They continue to gain market share globally.

Looking Forward

Cooper Standard's future looks increasingly bright because of management's execution. They agree.

“We believe we will continue this trend of expanding margins in 2026 and beyond, even if production volumes remain flat, and we would expect to leverage any increase in production volume to drive further profitability and returns.”

When asked why they have so much confidence in margins, management went into detail.

Going into 2026, over 90% of the $90M annual lean savings target had already been identified. That is the highest level of pre-identified savings in many years. They are confident the savings will continue into 2027.

On top of that, 2027 and 2028 revenue is more than 85% booked. They know years in advance what products they will make and at what contracted margins. As new wins flow through, they replace older lower margin contracts. Management has a “high degree of confidence” they can keep expanding margins and is “increasingly confident” they will hit longer term targets for growth, margins, and ROIC.

The one thing they cannot predict is volume and mix. Despite a difficult period, they keep relying on the two levers they can control. The result is improvement on the bottom line and now the top line.

For 2026, management sees the volume headwinds of the past two quarters potentially “turning into tailwinds in the back half of the year.” A resolution to the Iran war would add further upside to demand. Either way, they believe they are at least on track or ahead of 2026 guidance.

Gas prices have been pointed to as a demand risk. Management was clear that volumes are coming in as expected.

On oil and aluminum inflation, indexed contracts cover more than 70% of CPS’s exposure. They renegotiate the rest every three to six months, with built in recovery of costs lost in prior periods. Commodity inflation can be a short term headwind, but CPS recovers the costs over time.

Longer term, management targets a doubling of the fluid handling business within five to seven years. Recent wins put them on track. They expect to meet that higher volume with “minimal incremental capital investment.”

Thoughts

Despite recent share price decline Cooper Standard is executing on every goal they have laid out. Margins continue to rise in the face of low production, new business wins are accelerating, and topline is turning positive.

Now we are just waiting on those volumes to turn. The tailwinds for that flip are still in place. Record population, record new drivers entering the market, dealer inventories needing restock, higher tax refunds, car loan interest deductions, and the oldest fleet on record.

Read more

Credit for this idea goes to .

Comstock Resources is probably not a company you have heard of. They don’t do anything flashy, they are a natural gas producer.

And they do it at costs 40%+ lower than peer average on some of the most resource rich land in the country that just so happens to be right in the heart of data center and LNG demand.

So yes, they might not be flashy, but the opportunity they present sure is.

Subscribe now

The Company

Headquartered in Frisco TX, Comstock controls 806,980 net acres across East Texas and Louisiana.

Production runs ~1.2 Bcf/day (billion cubic feet per day) of dry gas, meaning no oil or natural gas liquids byproduct. They are a pure play on natural gas.

Part of what makes them low cost is that they built their own gathering and processing system through a subsidiary called Pinnacle Gas Services.1 That pipeline is now scaling toward 2 Bcf/day of capacity giving them room to grow.

And they have room to grow. Based on current production and my conservative estimates they have ~30 years of inventory (66 Tcf) before they run out. And that's only the inventory economic at $5/Mcf. Roughly two thirds more sits locked behind higher gas prices or better technology.

If that unlocks, the runway is much longer.

So if everything looks great, what is going on today?

What Broke

Pure play gas means Comstock's stock moves with gas prices. Both have been soft. Henry Hub trades at $2.84/MMBtu today, ~19% below the 2025 average of $3.52. CRK is down ~53%.

I bought CRK in early 2024 when gas was worse. Three things had hit at once:

• Warmest U.S. winter on record.

• Record high production.

• No new LNG export capacity coming online (a Freeport train was even out on a January Arctic freeze).

These pressures led to storage ballooning to 39% above the five year average, forcing prices down.

Today is a milder version of 2024.

• Record production.

• Unusually mild winter and warm spring.

Storage now sits about 7% above the five year average. Less extreme than 2024, but the pressure is the same.

The good news is none of this is permanent damage. Demand is coming. LNG capacity is ramping. Gas fired data centers are coming online.

Management has to navigate the gap. Costs, capex, growth, and debt.

To read my full disclaimer click here.

Can We Trust Management?

Jay Allison and his team have run Comstock for over thirty years. The proof of that experience shows up in one very important number.

Production cost.

Read more

On February 10th I wrote about PayPal in a deep dive laying out why I believe price had gotten significantly dislocated from value.

That was a week after their Q4 2025 earnings which prompted a 20% decline in a single day.

In this article I break down how things are moving since then, what management is saying about their future, and what it means for shareholders after their Q1 earnings report.

Subscribe now

To read my full disclaimer click here.

Financials & Data

Q1 marked the first quarter that new CEO Enrique Lores was at the helm.

As a reminder he came from HP where he spent 36 years eventually becoming the CEO in 2019. While there, he was known for cutting costs and returning capital to shareholders aggressively.

Impressively while there he had 15 consecutive quarters of guidance meets or beats.

He is no slouch but that doesn’t mean turning around PayPal will be a walk in the park.

So here is how things looked in his first quarter.

- Total Payment Volume (TPV) came in at ~$464B up 11% YoY marking their 4th consecutive quarter of accelerating growth and the fastest since Q1 2024. Both US and international TPV grew 11% YoY. On a constant currency basis TPV was up 8% YoY led by the US up 11% with international lagging up 2%.

TTM TPV reached a record $1.84T adding $150B of payments processed since Q1 2025. Key to this growth was improvement in Venmo (6th consecutive double digit growth), branded checkout, and PSP which all accelerated growth QoQ.

Pay with Venmo TPV grew +34% and BNPL TPV grew +23%, both gaining share in their markets. Debit + tap-to-pay (PayPal & Venmo) grew +60% YoY. This is the #1 growth metric inside the "branded experiences" bucket.

- Transaction Take Rate came in at 1.62% down 0.06% or 3.6% YoY. This is not a bug of PayPal’s model but a feature of payment providers as they scale that their take rate declines.

- Transaction Revenue came in at $7.5B up 7% YoY hitting a record $30.28B in the TTM growing the fastest since Q2 2024.

- Value Added Services (OVAS) came in at $852M up 10% YoY hitting a record $3.45B in the TTM.

- Net Revenue inclusive of transaction revenue and OVAS came in at $8.35B and was up 7% YoY or 5% on a currency neutral basis. In the TTM it hit a record $33.73B up $1.84B since Q1 2025.

- Transaction Margin Dollars (TM$), which can be thought of as their gross profit, came in at $3.81B or up 3% YoY hitting a record $15.56B in the TTM.

Growth here was slowed down by increased investment and a shift in mix to lower margin Venmo and PSP.

- Operating Expenses came in at $6.8B up 10% YoY accelerating sequentially as they invest into the customer experience. Non-GAAP operating margins in the quarter were 18.4% down from 20.7% in Q1 2025.

- Adjusted FCF came in at $1.72B up 25% YoY and hit ~$6.8B in the TTM.

During Q1 $1.5B of share were repurchased reducing share count ~3% bringing total share count reduction since Q1 2025 to 8.9%.

Balance sheet remains rock solid with $13.5B of cash and investments against $11.6B of debt.

The bear case for PayPal is that they are a dying company. Record revenues, TPV, rising FCF, large buybacks, and improving branded checkout growth tell me a different story.

I am not at all saying that they are firing on all cylinders or are free and clear but that the narrative of a dying company does not hold up to scrutiny when they are hitting records left and right.

That is the disconnect I look for, sentiment diverging from reality.

And there are more signs than just these.

- Active Accounts came in at 439M up 1% YoY but flat sequentially. It was however the transactions per account (TPA) that improved 1.7% and more importantly TPA excluding PSP which isolates branded checkout and debit growth accelerated to 6% YoY.

People that have accounts are using PayPal more often. A very clear metric that people keep using PayPal and their experience is improving enough the come back more and more often.

Looking Forward

Before the Q1 call Enrique announced a restructuring of the company around 3 segments showing up in 2027.

On the call the gave more details on why this change was made saying PayPal previous setup, “resulted in organization complexity with multiple dependencies and handoffs that slowed decision making and weakened execution.”

This specifically addresses the issues that led to them firing the previous CEO, slow execution. To guide where they spend their time Enrique had this to say.

“We are going to be very rigorous, I would even say ruthless in prioritization…. we need to decide in which (initiatives) we double down…. and which ones we are going to be de-investing”.

In addition to reorganizing the company Enrique laid out the following as changes they will be making:

• Balancing investments between the consumer experience and merchants. More recently Lores noted it had been focused more heavily on merchants. Specifically the goal is improving presentment, selection, and experience so people can use PYPL seamlessly.

• Accelerate tech adoption of the company in cloud and AI.

• Simplify operations, decision making, and more clearly define accountability for leaders.

• Reduce costs and invest those savings into growth and combat competition. So far he has identified “at least” $1.5B in savings over the next 2-3 years.

  • Remove Duplicate Layers from Organization

  • Adopt AI and Automate

This was a clear message that Enrique sees the evolving industry and the need to adapt to it. PayPal is a very large company so this won’t happen over night but is a good sign that he is not just talking about executing more quickly but organizing a company in a way that facilitates that.

Now the plan needs executed on.

Moving to the specific guidance for Q2 and the full year 2026 this was what likely spooked the market.

The weakness in Q2 comes from “the most demanding YoY comparison this year". Q2 2025 had 1.5% benefit from a key partners renewal, had “very strong credit performance”, and benefited from a decline in tax expense.

In addition to those one offs that will not repeat investments are higher this year increasing into Q2 exacerbating the YoY comparison. Management notes investments alone will be a 3% transaction margin headwind on their own during the year 1H weighted.

Management gave a little more details stating in branded checkout quarter to date (Q2) they are seeing trends near the low end of their guide as softness from higher oil prices works through economies.

Investors didn’t like the sound of this and if it was unexpected and below guidance I would sympathize. Guidance however was maintained for the year despite some consumer softness.

When asked if oil prices could cause results to be worse than expected management said the following.

“As we get deeper into the second quarter, comps get easier and candidly, in the second half as well… And we’ve been prudent, I think, in how we’ve set our branded checkout guide and our expectation for lower growth”. - CFO & COO Jamie Miller

Essentially I see this as despite all the pressures they are facing they were able to maintain guidance which is impressive. It tells me that the bar was set low.

As a last note many investors had been asking if there are segments PayPal is considering divesting.

Enrique was clear that at this point he believes the businesses they operate in all have attractive futures. It is investing in them that will drive the most shareholder value.

Thoughts

In future quarters I want to see PayPal making progress on their stated goals.

We should see a more clear plan of how investments will drive topline growth, especially in OVAS, and specifically stabilize branded checkout. How progress is being made to reduce costs and grow bottom line at or near topline pace.

And importantly that they are able to continue to grow user base, and the frequency with which users pay with PayPal.

Looking at just this quarter, despite some fear and an ~8% selloff after earnings, we are ahead of my base case.

Read more

You’ve probably put in the work.

You’ve read the filings, followed the news, listened to the calls and still watched your returns lag.

You don’t want more information. You want better results.

You want research you can trust, written clearly, sent regularly and grounded in fundamentals.

That’s what I do here at DeepValue Capital.

I run a concentrated portfolio, 12 positions or fewer, invest my own money alongside the research, and typically hold for 2–4 years to let the thesis play out.

This research is for serious investors with $20,000+ invested who want high quality, independent research.

I write in plain English, explain jargon when it matters, and typically publish once per week.

In this article I breakdown a stock in the portfolio’s Q1 2026 earnings, filter out the important takeaways, and how my thinking about the company has changed.

To read my full disclaimer click here.

Q1 2026 Update

Q1 delivered solid figures for TCMD with a beat on top and bottom lines and raising full year guidance to 9-12% growth up from 8-11%. Execution and the acquisition of LymphaTech are what allowed them to raise that guidance.

• Revenue was up 23% YoY and gross margins improved a full 2.5% YoY to 76.5% as efficiency and productivity gains flow through.

  • Lymphodema Revenue Up 23%

  • Airway Clearance Revenue Up 22%

• Balance sheet remains rock solid with $75M in cash and $0 in debt.

On the earnings call it was clear they see good things ahead while also tempering near term expectations as they work with physicians and insurance on prior authorization changes.

Read more

You’ve probably put in the work.

You’ve read the filings, followed the news, listened to the calls and still watched your returns lag.

You don’t want more information. You want better results.

You don’t want to waste time on noise.

You want research you can trust, written clearly, sent regularly and grounded in fundamentals.

That’s what I do here at DeepValue Capital.

I run a concentrated portfolio, 12 positions or fewer, invest my own money alongside the research, and typically hold for 2–4 years to let the thesis play out.

This research is for serious investors with at least $20,000 invested who want high-quality, independent research.

I write in plain English, explain jargon when it matters, and typically publish at least once per week.

Subscribe now

In this March 2026 review you will see:

• Portfolio Performance

• Live Portfolio Holdings

• History of Live Alerts

• TLDR Core Thesis and Updates for Each Holding (And the price I like them.)

If you are new, my Start Here article gives the details on what I offer, other important resources, and how to navigate my publication. For everyone else, let’s get into the numbers.

To read my full disclaimer click here.

Performance

From the start of 2024 through April 2026, my portfolio is up 291.64%. That includes an 85.23% gain in 2024, 118.83% in 2025 and a proud -3.38% in 2026 so far.

I want to be clear, I don’t expect this pace of returns to continue. My goal is to average 30% annually, which means lower and potentially even negative years ahead. In other words past results are not promises of future returns.

Keep reading for details on every position including what I would still buy at current levels, my April buys, and a concise review of each holding’s thesis and risks.

Read more