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Ron Baron Comments on Marel hf

Food processing system vendor Marel hf (XAMS:MAREL) completed its dual listing in Amsterdam and the U.S. during the quarter. Marel was founded at the University of Iceland in 1978 as a project to help the fishing industry improve throughput and yield. Since then, the company has grown to become a leading global provider of advanced processing systems and services to the poultry, meat, and fish industries. Marel's state-of-the-art equipment and proprietary software helps food processing companies automate traditionally manual tasks of "primary" and "secondary" processing. By automating tasks such as cutting, deboning and forming, Marel's customers can increase throughput, reduce waste, and lower costs.

Marel competes in a large and fragmented industry. The primary and secondary food processing markets represent an $11 billion annual opportunity, inclusive of both equipment and services. We expect the market to grow at low single-digit rates, driven by secular trends including growing demand for proteins, improving food safety standards, and accelerating industry adoption of automation.

Marel is a global technology leader, and targets investing 6% of annual revenue in innovation. This corresponds to more than $70 million of annual spend, a level that exceeds the revenue of many of Marel's competitors. This creates a highly innovative product portfolio. Additionally, the company derives significant and sustainable competitive advantage from its global network of service and support personnel. This has been a significant investment for Marel and it helps drive sales and retention by reducing downtime, improving customer experience, and uniquely positioning the company to compete for larger, diversified accounts.

Marel has historically been acquisitive, using M&A to enhance its product lines, geographic reach, and industry footprint. We expect management to continue acquiring sub-scale competitors that can benefit from Marel's broader sales and service capabilities. We estimate that Marel has around 10% share of its total market, or 17%-18% share of the $6.5 billion-$7.0 billion market subset on which it is focused, implying a long runway for the company's M&A program.

We expect Marel's strong revenue growth to be amplified by continued margin expansion. Margins have already doubled under the current management team, but significant opportunity remains. Marel's poultry business boasts margins that are approaching 20%, while its fish and meat businesses are closer to 10%. We believe that margins in poultry should continue to improve and that the meat business should ultimately be just as profitable as poultry.

From Ron Baron (Trades, Portfolio)'s Baron Growth Fund second-quarter 2019 shareholder commentary.
This article first appeared on GuruFocus.