Pershing Square Challenge 2025 获胜者：Carlisle $CSL

You're about to listen to the Yet Another Value Podcast. Today's episode is with the team who won the Pershing Square Challenge with their pitch for Carlisle. It was the 18th annual Pershing Square Challenge, and I believe this was the first team to win it unanimously. They're super smart. It was a really interesting conversation. They did fantastic work on it. So, I think you're really going to enjoy it. And, you know, these guys are first-year Columbia MBA students. So, if you want to reach out to them, there'll be a link to their presentation in the show notes. I'd encourage you. I think they did fantastic work. It's a great conversation. So, I think you'll really enjoy it. That's coming up. But first, a word from our sponsors. This podcast is sponsored by FinTool. Look, those of you who have followed me on the vlog or the podcast know that the two areas I've probably thought the most about over the past couple months are AI and corporate governance. And look, if you are not using AI, you are getting left behind. And let me just marry those two thoughts in one way. If you read through proxies, there's one thing that you know. Proxies contain a lot of information, but they suck. Companies are almost intentionally obfuscating and burying a lot of the interesting information here. Guess what? You can use AI to really cut through the noise there. So, FinTool just released a thing. You can go do a deep dive into every person in a company's executive roster. So, you know, if I'm looking at a company, I can go to the FinTool people tool. I can look at their CFO and I can see, hey, here's exactly how much he's paid. Here's everything that he's done. Here's everything that's been included about him in the proxy for the past five years. Here's all those key incentive points summarized and laid out. So that what used to take me a day of going through 12 different proxies and looking and mashing and saying, "Was he on this board? When did he join this board?" takes 15 seconds. So look, go check out FinTool. Start using AI. You are going to get left behind fast if you are not using AI as a fundamental investor. FinTool, really interesting product, and it continues to evolve. All right. Hello and welcome to the Yet Another Value Podcast. I’m your host, Andrew Walker, and with me today I’m excited to have the team that won the Pershing Square Challenge at Columbia—the 18th annual 2025 Pershing Square Challenge—with Team Carlisle, ticker CSL. I’m going to turn it over to you guys to introduce yourselves.

Before I do, a quick disclaimer: Nothing on this podcast is investment advice. There’s a full disclaimer at the end of the episode if you want to listen to it. Team Carlisle, you won the Pershing Square Challenge, and all of you are 1st-year students at Columbia Business School. Congratulations on winning. I’d love to start this podcast by having each of you give a 30-second overview of who you are, introduce yourself, and share a little bit of your background. Erik, you’re in the top left of my screen. Do you want to go first?

Sure. My name is Erik. I grew up in Florida and moved to Texas to start my career at a startup. I was there for a little under 2 years and then made the switch into an investing role. I worked for Andy Beal at CSG Investments for about 2 years, doing distressed-debt investing, and that got me to Columbia. I’m at Columbia now, really just taking all the investing courses. That’s how I met these guys. I interned at Owl Creek Asset Management over the spring, and this summer I’ll be at Rothschild doing restructuring.

God, what a terrible, terrible background. Awful mentors, awful history—just the worst. Now you’re at an Ivy League business school. Dimitry, do you want to go next?

Sure. I’m Dimitry. I was born in Russia, moved to and grew up in London, and then came to undergrad in Chicago. I studied in the U.S. once before, and I was quite lucky. I joined a buy-side rotational program at a small Swiss bank, first in London looking at international, non-U.S. equities, and then, for 1 year before my MBA, I was in Geneva working for a sustainable fund. Then I came here to find the right kind of philosophy and opportunity for me to go forward.

Fantastic. Tuan, do you want to wrap it up?

Sure. My name is Tuan. Also, like Dimitry, I was born and raised in Russia and then moved to the Vietnamese family. I moved to the U.S. to pursue a professional career in tennis. Then I went to school in Boston—I went to BU, Boston University—and shortly after I came out of school, I spent a few years in hotel private equity. Then I made a pivot to corporate strategy at a grocery retailer.

Throughout this whole time, I found my passion for investing, Ben Graham, and Buffett in college. So I knew I wanted to pivot into investment management at some point. Columbia was something I set my sights on about 8 years ago. Right now, I’m living that dream goal and really excited to be in this program and to explore the career path in investment management after school as well.

My wife also went to BU. So, go Dawgs.

Terriers.

Terriers. Got it. There we go.

Well, let’s dive into it. You guys won—I believe I was told that, in the 18 years of the Pershing Square Challenge, this was the first unanimous winner in the history of the challenge. Congratulations on that. I’d love to just start with a quick, high-level overview of Carlisle—the ticker, CSL—what they are and what you found so interesting about them. Tuan, kick us off, and then we’ll see.

Sure. At a high level, Carlisle is the largest manufacturer of commercial roofing systems in the U.S. and a provider of building-envelope solutions. At first glance, when people see building products, they’ll tend to write it off as too cyclical and hard to own. But Carlisle is not as cyclical as one might expect for a building-products company for a couple of reasons. First, Carlisle has 80% exposure to commercial, which, as history shows, is much less cyclical than residential. Second, it has high repair-and-replacement exposure, which is also less impacted by macroeconomic cycles, interest rates, and the like.

Repair and replacement—can you explain R&R?

Yeah, repair and replacement. Not many people are aware of this, but commercial roofing is a very attractive niche to be in—not just in terms of building products, but in an absolute sense. You have high recurring revenues, with 70% of revenues coming from R&R; high barriers to entry; growing profit margins; a relatively asset-light business with low capital intensity; attractive returns on invested capital; and very sticky, long-lived customers due to the high switching costs. You also have a laser-focused management team with a strong track record of capital allocation. All of that makes it a very high-quality business.

For most of its history, this gem of a business was hidden as part of a complex, diversified conglomerate that at one point had as many as 9 different segments, and then 5 segments. President and CEO Chris Koch took the helm in 2016, and over the past 8 years has gradually simplified the business, selling off all the low-returning segments and emerging as this pure-play building-products company.

The big reason for the opportunity is that it’s been quite underfollowed for a company of this size. Carlisle only sold off that last non-core segment, Carlisle Interconnect Technologies, or CIT, in May of last year, so the historical financials are still quite noisy. It’s very easy to miss if someone is just doing a quick screen on Bloomberg.

With that, we think Carlisle is very interesting at these levels. It was obviously a bit juicier when we pitched it in the $350s, but the current price is about $400. We think the intrinsic-value range is closer to roughly $600 per share. So we think the IRR has come down a bit from the low-20s range to the mid- to high-teens, but we’re still excited for the road ahead. I’ll pause there if you guys have any questions.

A mid- to high-teens return is nothing to laugh at. Erik, Dimitry, is there anything you guys want to build off what Tuan said about the background and everything? I’ve seen your deck, and I’ve got a lot of questions on the company, but is there anything Tuan said that you guys want to build off?

Yeah, I think maybe Dimitry can add to this, but we knew we were going to team up before the class started. We were all hoping to get a head start on this whole thing, and we spent all of our Christmas break looking into different names. We looked at hundreds of different companies. Maybe Dimitry can wrap it all together and tell you how we arrived at Carlisle. But this was a lot of work, and we found this company without really expecting that this is what we were going to end up spending 3 or 4 months on.

I’m just a little jealous. You guys are the three amigos. You’re like, “We want to work together,” and then you got to work together for an entire semester on a value-investing idea. I wish I had that with my friends. Dimitry, do you want to talk about how you guys settled on Carlisle, since it sounds like you had the team but didn’t know the name you were going to research?

Yeah, I think that’s great. As Erik was alluding to, and as we mentioned in our introductions, we took a class called Advanced Investment Research altogether, which is one of these flagship, competitive classes at Columbia, taught by Kian Ghazi. We were a bit inspired by what we went through there.

So we had 3 idea-generation pillars. We have a slide buried deep in our deck that goes through exactly how this worked. One of our very simple funnels was looking for basically good companies that could generate some kind of decent return on capital and had had a share-price reaction in the last 1 or 2 years. What Professor Ghazi was teaching us is that one way to have a very productive project, where you're less likely to end up neutral, is to hunt for nonlinear changes.

Nonlinear changes can be anything from actual stock-price movements to something in the industry. In the case of Carlisle, what grabbed our attention as we started reading more about it was what Tuan was talking about: the portfolio simplification and the industry-pricing change.

Then a second funnel—and Tuan was really the champion of this idea—was going through the Value Investor Insight articles over the last decade. Carlisle was mentioned there a small handful of times, but it was always a footnote in a longer debrief on someone's strategy, or it was not really the main focus of different people's portfolios.

Then the last funnel was trying to think about the Pershing Square portfolio and interesting categories for us. We didn't want to pitch something very obvious, but we knew they would like a brand name, something with a good competitive position. Bill Ackman has a family history in real estate, and obviously there's this QSR angle to the portfolio recently, as well as sort of a royalty theme.

We were trying to think of a few ideas where, in a less obvious way, you would be getting a royalty on some of the things that they already like. Something that wasn't part of our thesis, but that we came across, was that when you have a franchise restaurant opening, the roof of that restaurant is also highly specified. It's not like you have free choice to pick whatever material you would like. If you like that theme and you think there are going to be more and more openings, that could have been an initial angle on why to get excited and become interested.

I love the game theory of you guys finding an undervalued thing, but I also love the game theory of knowing who the judges were and designing a pitch that one of the judges would find really useful. Look, if you think about Sohn, as people have said, the pitches at Sohn tend to be extremely cyclical. When AI is hot, AI is the winner, and when event-driven is hot—when I won it a few years ago, event-driven was hot—an event-driven trade is the winner, and it tends to be cyclical.

I love that you just played to the judges. There were a lot of things. Go ahead.

Could I add one other thing, perhaps to deemphasize the game-theory aspect of it? Taking all of that, it's a great idea, too, but I just like that you had that added edge. It was a nice extra, but overall it also fit in the framework of which of the few ideas we had.

They seemed to cluster around certain themes, but this one really had multiple potential IRR drivers. We're a team of 3 guys, 1 of whom has been living on a construction site for the last year at Columbia, so it seemed like we'd have a small edge in doing this value-added research and outreach to get a new angle.

I have a lot of questions, but I want to start off by highlighting this: if I was judging this—and I have judged things like this in the past—this would have been the slide where I would have thought, "Oh, instantly these guys are high finalists," all that sort of stuff.

You guys talked about a summary of the unique work you did. In particular, I saw that you went to 3 different trade shows. I've got a roofing show in San Antonio, New York Build in New York, and then the roofing contractors in Jersey. I would have thrown you to the front of anything I was judging just because you went out and did that.

I just want to ask about all the extra research you did. That's not it. There are a lot of others, like toward the back there's the photo of you guys with the hard hats, which I'm glad you're investors and not executives, because it's a red flag when you see executives with hard hats.

I've been thinking a lot about going to trade shows. We can talk longer if you all want to go into a more philosophical discussion, but I'd love to hear when you go to these industry shows what you were learning that maybe wasn't jumping off the page when you were just reading a 10-K or listening to a conference call.

Maybe I shall kick us off and try to keep it brief. One other aspect that attracted us to Carlisle is that the top 4 players that control the market—2 of them are private, and you don't really have all that much information. Carlisle has been going through this business simplification. Historically, you really need to dig out the right data, and Holcim, the number 2 player, is actually a European conglomerate, and this is just 1 business for them.

A really great way for us to get a proper understanding was to go and talk to the people at the trade show from each of these companies, and also the people across the value chain who are interacting with them, and make sure we're understanding the information that we're finding in Google and in other creative ways correctly. Even things like market share—there are a lot of different ways to slice and dice this, but I'll pause there.

Yeah. One thing I'll just touch on, Andrew, is that the class we all connected over, Advanced Investment Research, calls for students to reach out to 15 people in the industry for a particular name. In that exercise, we scoured LinkedIn, and for me personally, I had 400 connections and was only able to get maybe 16 calls. Even then, it's a very manual and tough process, taking many weeks.

With the experience of actually going to these trade shows, at least personally for me, I found that the ability to find this differentiated research was way more efficient. You're able to talk to so many more people and build these relationships that you can actually follow up on and continue nurturing over time if you're studying a company or industry. So it was absolutely huge.

Yeah. Erik, why don't you go ahead and add anything to that?

I was going to say, you asked how this helped us get beyond the 10-K, and I think that, for me, the experience at the conferences was very substantial in bridging the gap there. You read from their investor deck or their website, and they're saying these things that, if you aren't working in the trade, you have literally no idea what they're talking about. It almost sounds like they're just making words up to fill up space on the page and see what sticks.

There was this concept they were really hitting on, which was labor savings. They were trying to market that their products were saving money on labor, and I was like, "How exactly does this work? How does this experience that they're selling really fit into reality and what these contractors are experiencing?"

When we got to the trade show, especially the one down in New Jersey, we were able to talk to contractors. We were able to talk to people across different companies and really understand what these things meant, and get a tangible sense for what these products are, why they're actually different, and why they actually have value.

I think we were able to speak with the management team later on and actually communicate the gap there. I think that's one of their concerns: it's difficult to communicate these themes unless you've been there, unless you've experienced it, unless you've talked to people actually in the field.

This is a highly relationship-based business. One anecdote is that I remember Dimitry and I were at the Atlantic City show together, talking to one of the contractors. These are not things that people are going to be writing in a 10-K about—how they have a family history of working with a specific brand and how nothing would compel them to change, having gone through generations of that. That's not something you can get otherwise unless you really go there and see it explained to you firsthand.

That actually transitions perfectly into the key question I had when I was reading your pitch and the calls. If you guys came to me—and I think Tuan mentioned it during his call as well—and said, "Hey, I've got a building-products company that sells commercial roofs," I would have been like, "Okay, cool. I'm going to guess 8% margins, and return on equity through the cycle is volatile but basically cost of capital."

And that is not what's happening here, right? Obviously, there's a little bit of cyclicality, but they will point and say, "Hey, it did fine during the GFC." Their 2030 ROIC targets, I believe, are over 25%. This is a business that is generating incredible returns on capital, great growth, and a lot less cyclicality than I would have guessed.

Dimitry, you mentioned that we talked to a construction-products guy who had been working with the company for generations. When you listen to the company talking, they'll say, "Hey, this company that we just bought was started in the 1860s."

This one was started in the 1920s. Why is this business good? Why is it good? Why does your guy, who's been working with them for generations, not have some other roofing-products company call him this year and say, “Hey, we'll give you everything, but we'll give it to you 3% cheaper”? And he says, “That's 3% more in my pocket. Let's go, boys.” Why is this a good business?

I can talk about this all day, but Tuan probably has a more concise answer than me, so I'll let him. We've got an hour. Ramble, ramble, ramble.

Yeah, I can start. I think, at the end of the day, when it comes to the stickiness at the contractor level, you have a couple of components. First, you have the certification and training that's required to actually install the product. It's a very technical product with these commercial roofs, and you and I can't just go out and start buying Carlisle product and installing Carlisle product on roofs. You have to go through a certification process, demonstrate that you can actually install these roofs reliably, and build a track record.

Is the person getting the certification the general contractor, or is it each individual laborer who's getting certified?

If you think about a typical building project, you've got the general contractor, but then you've got the roofing subcontractor. In this case, it's the roofing subcontractor that gets that training. He, in turn, can also hire a bunch of other subcontractors who do some of the labor as well.

At a high level, there's that certification and training component. What you'll find in the case of Carlisle, as an example, is that they have different brands under the Carlisle umbrella, like Versico, Mule-Hide, and Carlisle SynTec. Carlisle SynTec is the highest brand, and they kind of, in a sense, segment the contractor base in that respect. As you prove your mettle, you climb up that brand ladder within Carlisle. That's one key component in why a subcontractor decides to go with Carlisle versus someone else.

When a subcontractor decides to go with Carlisle versus someone else, is it just, “Hey, when I was a junior under the other subcontractor, I learned Carlisle, so when I go up, of course I'm going to learn Carlisle”? Or is there a bidding process? How does that happen?

There are a couple of things. I think Tuan was about to get to them, but maybe taking a step back, it's useful to understand a bit more tangibly what this product actually is and what the point is. It's a couple of very simple materials sold in a combined way that makes them much more technical than the underlying components might be.

The point is that Carlisle is selling this fully warranted system, which consists of a bit of insulation, the TPO layer, and the accessories. They're guaranteeing the system for the next 20 years—or these days, it could be up to 30 years. If I'm a customer, I'm really worried about what happens if something goes wrong: who is responsible, who can I hold responsible, and who can I go to for technical support?

Typically, the contractor takes the first couple of years of the warranty on themselves. Then Carlisle, or one of the other top 4 players that produce all of the components themselves in-house, is able to guarantee that whole system for this enormous amount of time, which is the full life of the roof. That really is step 1 in separating these top 4 players from the next ones, which sometimes white-label from the top 4 players. The warranty might look similar, but any interaction point becomes a big point of contention. That's one of the pulls of this brand.

Yeah, I'd love to understand how the actual bid works. That sounds great. I mean, I'm happy to continue unless you go for it.

Yeah. So, we had—as you saw, we spoke to a lot of different people. Maybe one very specific, tangible example is that we spoke to the director of trades at Columbia. Columbia's 2 business-school buildings actually have Carlisle installed on the roof.

The director of trades, who 2 years ago was also in charge of Capital One's building and roof portfolio—which is about 500 roofs across the U.S.—and Columbia's is 300, would usually have 2 approved vendors on his approved-vendor list that he would choose from by default for a project. That said, you would have some kind of competitive bid process at the point when you need to reroof, and you would solicit some information from other players. But really, 80% of the volume would go to the top player, and 20% would go to a second, backup option, which would not even necessarily be one of these top 4. It could be a more local player, just to build some redundancy.

So, it's very sticky from the customer side for a commercial customer like that, but also from the perspective of a new build. The architect or engineer has a spec sheet where they know certain brands they've worked with before that have this potentially decades-long track record of what can be installed on the roof and how it's going to interact with other parts of the building. To disrupt that and come in is actually a really difficult process, and it requires challenging the architect's current workflow and way of thinking. We have a potential anecdote there as well, if you like.

Yeah, I'm in for the anecdote. I'd love to hear it. Does one of you guys want to talk about IKO?

Go for it. Yeah, I can touch on IKO. As brief background, it's a Canadian manufacturer of roofing materials. They were more focused on the residential side of things, but they decided to enter the commercial-roofing-materials market in about 2021. They've had 1 facility, and they've been trying to take share from the market for the past 3 to 4 years. Based on all the conversations that we've had at these different trade shows, it seems like they still haven't gotten serious traction.

That speaks to how difficult it is to actually gain share, not just in these reroofing projects, but especially in these new-build projects that Carlisle, Elevate, and the other top 4 players actually compete in. For a new entrant to enter this market and take some of these excess returns, it can take, in our view, years—if not up to a decade or more—to do so, unless you buy yourself into the spec sheet.

The extra color here is that this is not just some random, small firm. These guys are highly visible at these trade shows. They're advertising, they've taken veterans from the top 3 players and brought them into their business, and they've been trying to undercut price. Basically, they cannot compete for the same fully warranted projects that Carlisle is doing, even despite all those things.

If I'm listening to you guys correctly, it seems like the major moat here is almost brand, right? It's the warranty and knowing that these companies are going to be there 20 years from now to handle the warranty. I'm from New Orleans, so everybody knows hurricanes come through. What's the worst thing? Obviously, if water gets in your home, that's worse, but the roof is damaged and you have to call the insurance guy. A roof is, I think, 5% to 10% of a building's cost, so that's material. If the roof is getting damaged, that's where most of the damage is happening.

It sounds to me like the warranty, and just knowing that these companies are going to be there 20 years from now to handle the warranty, is the big thing. I guess that makes sense as a moat, but the contractors have to get approved. Do contractors tend to only work with one of these big 3?

It depends how big the contractor is. For a smaller contractor, it's not the most simple process. If you're larger and you're making enough money on an aggregate basis, you probably are contracted with all of the top 4 and maybe a couple more. It really depends.

What I was going to get at is that you have this brand and relationship aspect, but you also have the incentive to concentrate volume. You do get volume discounts. This product doesn't travel super well, and historically, there are anecdotes about trips to Hawaii that Elevate would give to its top 500 Master Contractors. If you want to make the most of the sales incentives, you're not really diversifying across more than 2 or 3.

That's a really funny moat. Hey, it makes sense, right? The more I hear about Salesforce and everything, you concentrate, you hit the volume, and you're going to get a free trip to Hawaii. Okay, I think that makes sense.

Let me—we might return to the business, but let's talk valuation real quick. I think the second thing—and I'm just pulling up my notes—is that people are going to look at this, and the first thing I thought was, “Hey, I can't believe that this is a good business.” I think you guys, and the numbers you guys have suggested, explain why it is, and the numbers are proving why it is, right?

The second thing I would say is, “Hey, why is this an alpha opportunity?” If I was looking at valuation, I'd say, hey, if I went back to 2019—now, they've divested some of the lower-margin businesses—but margins are definitely up over the past 5 to 7 years, right? Margins have gone up.

I think if I backed out the lower-margin businesses, they’ve probably gone from the low 20s to the high 20s. So, you’ve got margin expansion, and they’re trading at, call it, 20 times this year’s earnings and 16 times next year’s earnings.

I’d say, hey, you’ve still got a somewhat cyclical business. It’s trading for a full multiple, and its margins are at the higher end of what they’ve earned. And, by the way, this is a business that has done a lot with acquisitions. At this point, this is a $20 billion company. Last year, they did $700 million in acquisitions. It’s starting to get to the point where there aren’t a lot of acquisitions that budge the needle anymore. So if I just threw the 3 of those out there, it’d be like, “Oh, interesting business, good business, but is it alpha?” Any of you can start, and you can break down any of those points you want.

Yeah, I think maybe we can touch on the biggest pushback that this company has had in terms of the bull-bear debate, if you will: Are margins going to sustain, or are they going to mean-revert? With the current price, what it was implying in terms of revenue growth and margins showed that revenue was going to be below what management was guiding, which was 5%. Margins were going to stay about flat over the ensuing couple of years, maybe increase a little bit, and then drop off dramatically. That was partly due to the limited analyst coverage going out 3 years, but that was the key question we were trying to answer.

The interesting thing is, because this is not that well covered, there are a few different ways you can think of what’s actually priced in. We were looking at consensus and could see that, right now, for this year, they had very weak organic growth, and then over the next couple of years had margins coming down. But part of it is also because of analysts dropping out of consensus, so it’s not super helpful.

We also looked, as Tuan was alluding to, and did our own reverse DCF and tried to triangulate: If we put the consensus numbers in, what do we get if we stretch this out into the next couple of years explicitly? I think the overarching point is that you’re buying a company that has relatively predictable growth characteristics and what we felt was a resilient margin at a multiple that, at the time, was, I think, 16 times forward earnings, compared to an S&P average that was meaningfully higher.

On top of that, this was kind of the U.S.-listed pure-play champion for this category, trading at a lower multiple than other conglomerate building-product companies listed in Europe, which is quite unusual.

Yeah, trading below Europe. I mean, maybe over the past month, but the most frequent theme for investors over the past years has been, “Hey, this European pure-play trades at a 50% discount to the Americans.”

Let me frame the investment another way. The stock, as you and I are talking, is trading for $400 per share. They give a target 2030 EPS number, right? The target 2030 EPS number is $40 per share. And on the Q1 call, they said, “Hey, we’re going to generate $6 billion in cash flow between now and then.” That’s about $133 per share. So if I said $40 per share, what multiple would you put on a 2030 earnings number?

Yeah, that’s the big question. But I think we assumed an exit multiple of 18, and we’re still able to get an attractive IRR. A case can be made here if you were to look at this business and take stock of its advantages in distribution, its underlying economics, its historical returns, and its competitive position and market-share leadership in the industry.

Can you argue for a low- to mid-20s multiple on a business like this? We had a slide in the deck that touches on some aspirational comps. Sherwin-Williams comes to mind in terms of control over distribution. A company like Kingspan is also a very good operator, which we can touch on—its interest in entering the U.S. market and commercial roofing as well. A great CEO is now going to be leading Holcim’s Elevate as well.

Right. No, look, I had just done 15 times $40 per share, which gets you to a $600 stock price, plus $133 in cash build between now and then. That’s a $733 stock price against $400. That’s approaching a 15% 5-year IRR. That puts you in the top 2% of investors.

Yep, Erik, this is exactly the point. These guys are covering it well. Sorry, go ahead, Dimitry.

Yeah, I was just going to say, even though you can put an aspirational P/E on whatever you like, we realized you don’t even need to do that because, as you mentioned, keeping the P/E constant, the cash build that they should be able to do, if we’re right, will enable management to buy back a significant amount of shares in the coming years. That will then get you that same IRR quite easily even without it. But sorry, Erik, go ahead and add if I’m missing anything here, too.

Oh, no. You’re good. That was one of the main points that we were really eager to bring up whenever anyone would push us: “Okay, so great, you’ve got a good opportunity here. When is it going to materialize? What are the catalysts?”

It doesn’t really matter for us how long this takes to materialize, because management is committed to continuing to buy back shares, and you’re just buying more and more of a good business that other people want access to but can’t break into. So we think all the excess cash is going to be deployed intelligently, whether it’s through M&A or buybacks.

It’s funny because I have always said, “Oh, if the price goes lower, it’s great. The management teams—they’re going to buy back shares.” And then maybe it’s because I’m investing in worse management teams: When the stock’s at $100, my God, do they know how to buy back stock. And then the stock’s at $60, and they’re like, “You know what? Then we don’t know. We don’t know.”

So that actually transitions nicely into management. I’d love to talk about how you guys view management. I saw your deck. You hit on the first thing I hit on as well, but I’d love to quickly talk about how you view management, how you view their track record, and how you view their alignment and incentives here.

I’m happy to talk about alignment, but someone else should start; otherwise, I’m talking to myself.

Yeah, I’ll touch a bit on the context behind this. This management team, and specifically CEO Chris Koch, came into the business at Carlisle in 2008 and then assumed the helm as CEO in 2016. If you look back at 2016, this business had 5 disparate segments. They had a Fluid Technologies segment, which was selling into aerospace, medical, and automotive. They had a food business at that time. They also had CIT, Carlisle Interconnect Technologies, which was a cable business. So on the earnings calls, you would have them talking about commercial roofing in one segment and then starting to talk about how they sell into Boeing.

It was a very Frankenstein-type conglomerate that was very difficult for outside investors to understand. But since the beginning of 2016, and going forward, Chris Koch was very sensitive to the fact that you had this hidden gem of a business that was just year in and year out churning, putting up 20%+ ROICs year after year.

So he slowly started adding bolt-on acquisitions to that building-products segment, buying insulation businesses and building upon its position in the building-products industry. Fast-forward to 2020 and 2021, and the funny anecdote that we actually learned directly from him when we were talking is that he received The Outsiders by William N. Thorndike. Thorndike’s daughter gave him The Outsiders. He read that and was like, “Oh, wow, that’s exactly it.” He just had that lightbulb epiphany.

Since then, he’s put all his chips into focusing on getting rid of the low-returning, low-single-digit business segments and doubling down on that building-products segment.

That is so funny, and I will tell you my history with CEOs—I will not name names. My history with CEOs who are like, “I read The Outsiders and I treat it as gospel,” is either the stock is a grand-slam home run or it’s like, “This stock is going straight to 0,” and the whole way they’re going to be saying, “Capital allocation, we’re so aligned with shareholders.”

But I do think the results speak for themselves, and he owns $100 million in stock plus options. I have a strange question for you—or does anybody in management? Go ahead.

Yeah, so we heard this story about The Outsiders, and as you say, it does look like the track record aligns and is indicative of something interesting going on. But one thing to say is that the incentive design could use some improvement and be more explicit, in our view.

That said, as you’re alluding to, for a roofing-company CEO, both Chris and Kevin own a significant portion of their total net worth in Carlisle and have held it for a very long time, which is also partially what helps us feel more confident that they’re aligned with what we, as potential owners of this business, would want to be doing. Combined with this return-oriented focus, their ability to buy back shares, and their willingness to do it, it really all goes hand in hand.

Let me ask you a weird question. This is just something I’ve been thinking about, so it’s not indicative of the company, but it’s something that’s been on my brain, so I want to get it out into the world.

It's strange here because a lot of times I'll see boards—a typical board where there was a private-equity owner or a big long-only fund. The management team will own a middling-to-normal amount of stock, and then the board will have 1 or a few members who own quite a bit of stock.

What's interesting here is that you've got a CEO who owns $100 million-plus of options. The management team up and down owns a decent bit of stock, although part of that is because the stock has done so well that it's become a decent bit of stock. The board, to my memory from looking at the proxy, owns almost nothing.

I think it's interesting when you've got a management team that owns a lot of stock and a board that owns almost nothing. I think that's really good alignment, but it is a strange thing. I was thinking, “Are there risks where the board is asleep at the wheel?” I think the management team has still got it under control, but I thought it was interesting and wanted to throw it out into the world because I've been thinking about corporate governance from all sorts of different angles.

I think we're not as fresh on this as we were when I first did the review, but we did look into the overall incentive design across the CEO, CFO, and board. The overall components that they're targeting and the metrics broadly make sense, although they did get rid of ROIC a few years ago.

That said, I think there's also a function of a few of the previous leading C-suite executives stepping up to the board. Because they had spent their whole lives at the company, they would either retire 2 years afterward or something along those lines. I'm pretty sure those kinds of people—the 2 former CFOs before Kevin, for example—had been on the board and would have owned a greater portion of the shares.

I think it might just be a function of the transition: where you actually find these people, and how many relevant roofing executives you can get who have good experience in the relevant places to put on the board.

Let me ask about Vision 2030. I've mentioned the Vision 2030 target. I believe they had a Vision 2025 target, and before that they had a Vision 2022 target, if I remember correctly. They've hit their targets so far, so I just want to ask about Vision 2030. They're, I think, 2 for 2, but what are the odds that they hit Vision 2030? What do you think they need to do? What are the key drivers to hitting that target?

I think I'll start. There are a couple of components. Obviously, on the organic-revenue front, they've targeted 5% organic revenue growth. From our view—and in talking to them as well—I think that's on the conservative side in terms of organic revenue growth, excepting a recession. If we were to have one, that might dampen both new construction and re-roofing to some extent.

Keeping that organic revenue engine through 2030 is the first layer. The second layer is on the M&A front. They've shown a track record of doing accretive M&A in the past, especially over the past 6 or 7 years in the building-products segment.

If they can continue to find good bolt-on acquisitions in insulation and architectural metals to round out their roofing-system and building-envelope solutions, that can add another 2–3% potentially to the top line. Then you have buybacks, in the event that the stock price continues not to increase in any significant fashion, helping drive EPS growth as well toward that $40-per-share range.

I haven't read The Outsiders, the book, but they've demonstrated skill in bolt-on acquisitions. The management team got rid of all the superfluous divisions, but if you've demonstrated skill in bolt-ons and you've got a passion for buying, would there be a natural, larger-than-bolt-on deal?

I don't know the commercial-roofing space well enough, but it does seem like there would be synergistic things that you could pump through the sales force or through your contractors. Do you think there would be a natural, bigger-than-bolt-on deal that they could look into?

One that they have done is the Henry acquisition, which maybe Tuan could talk quite a bit about. They've basically entered a whole new market, expanded their TAM substantially, and formed the basis of a new segment for their business.

These guys are very good at acquiring. They do it in a disciplined fashion and logically, in order to address different parts of the spec sheet. They're able to pay on a gross basis anywhere in the low to mid-teens, and when you consider the integration, they get the multiple down to 7–8 times on an EBITDA basis.

They're disciplined, and they're good at acquiring businesses. It's usually a pretty accretive thing for them. The track record of overdelivering on synergies, from what I can tell, is just insane.

Andrew, to flip your question on its head, Carlisle themselves have been the target of potential acquisitions several times in the past. Kingspan, which is now entering—or trying to enter—the market, had considered bidding for Carlisle in the past. They focus more on wall insulation and are Europe-based at the moment, and they had been active in 1 or 2 other bid opportunities before.

As you might have seen in our deck and maybe read more broadly, this could be a good question for Brad Jacobs as well, who's acquiring Beacon, one of Carlisle's major specialty distributors, and whether there could be a chance for greater vertical integration there. But it sounds like there are good reasons historically.

It's funny—my last question was going to be Jacobs' QXO. They just bought Beacon. Beacon is Carlisle's 3rd-largest customer, I want to say. Beacon is a big customer here. You can search through the filings; they've been mentioned a few times.

I think on the Q1 call, somebody asked, “Hey, QXO and Beacon—what's going on with that?” How does Brad Jacobs moving to QXO create risk or opportunity? I only ask because, for those who don't know, Brad Jacobs is a legendary entrepreneur, probably the only person to build 3 roll-ups and take them to over $1 billion. He just bought Beacon, a big customer here. How do you guys think about that?

Yes, this was my segment in the speaking notes. Initially, we did think this was a potential risk—one of these very unique risks specific to this sector and this company.

We managed to find podcasts where Brad Jacobs was speaking about his plan and vision. I've done 300-plus of these podcasts, and the only person who might have done more is Brad Jacobs over the past year talking about QXO. I think every other podcast at this point is Brad Jacobs.

We were listening to him and trying to understand whether this could change this key relationship. As you said, Beacon is a top-3 customer of Carlisle, and vice versa. Carlisle is a really important supplier to Beacon, especially on the commercial-roofing side, because they also do residential, if I'm not mistaken.

After thinking through it, talking to management, and talking to people in the industry, it really comes back to the point that Brad Jacobs wants to accelerate M&A and the consolidation of distributors. That's something that's already been happening; it's just a question of the speed at which it can happen going forward.

Secondly, he wants to create cost savings and efficiencies by essentially concentrating volume on probably the best relationships he has. From the sounds of it, Carlisle, especially in certain regions, might well be an exclusive supplier to Beacon, and vice versa. From that perspective, there should be mutually beneficial, synergistic benefits to be had from working even more closely over time.

That's probably our take at the moment, but it's something we would need to monitor and that could evolve.

No, look, if you think the big 3 own 66% of the market, and there are reasons for them to own most of the market, then the best entrepreneur and roll-up guy in the industry getting involved with 1 of your suppliers—yes, there's probably a risk of pricing pressure. But it's probably good because he's probably going to cut out the mom-and-pops. Anything he buys is going to cut out those mom-and-pops.

The 1 other big piece that I would add is that the ultimate decision-makers here are the contractors and building specifiers. You have that demand pull.

Yes, the distributor can extract better economics if it has more concentration and more volume, but at the end of the day, it's going to sell products that are coming off the shelves and are being demanded by the end customer. In this case, Carlisle has a very sticky customer base that will, year in and year out, ask for Carlisle products.

As Dimitry mentioned, Beacon is a very big customer and partner because of the way the value chain works. The distributor and the manufacturer work very closely to sell this technical product to the end customer, and the distributor employs a markup-pricing model. They're not very incentivized to necessarily have pricing be lower.

So, if you take all that into consideration, we think that, on a net basis, Carlisle should benefit from increased consolidation in the distribution channel, especially with QXO accelerating that.

One of the nice things about you guys having already done this pitch and won a contest is that I can lean on the wisdom of the people who came before me. I’d love to ask: What was the most insightful question that you got when you did the first pitch, or just when you’ve been circulating this pitch into the ether recently?

Yeah, I think we got a lot of questions. I guess there’s always the first question of, “What actually is this product, and is this really recurring or not?” We already answered that one. But once you get past that layer, it’s really about the margins and how credible this margin trajectory is for the specific businesses they have today. I’ll let maybe the guys talk a bit more about that, potentially, but we just felt we had many factors coming together that all point in the same direction: that it should be at least resilient, if not even have room for improvement. And that lined up with the message the employees of Carlisle seem to be saying as well.

One interesting question was, “Why invest in the manufacturers and not the distributors?” In this case, specifically in this industry, you don’t really have that many options, either on the manufacturer side or on the distributor side. You just have Beacon as the only public player. You have SRS, which was acquired by Home Depot, so it’s private, or you can invest in Home Depot and be exposed to all the other stuff, too. ABC Supply is the largest, and that’s also private.

So, in our view, if that was the question, I think the fundamental drivers of this industry are so attractive going forward that you can make a case to be invested. Why not be exposed to both and buy a bit of QXO and a bit of Carlisle? That was one of the other interesting questions that we had.

There are 2 categories of people we would tend to talk to. There are the people who would come from the perspective of, “Why did you guys choose to focus on building materials? How are you going to win this competition? Isn’t there going to be a very high hurdle?” And then there are the people who are aware that there are these high-value-added building materials with good relationships. Essentially, those would be the 2 tensions we’d have to grapple with, depending on whom we’re talking to.

Erik, if I told you we laid out the 2030 vision—a $700 stock price and a 15% IRR—and if I took “we go into a global depression and we never build another building in this country again” off the table, what would be the thing that would keep you up the most at night if you were running a concentrated portfolio with Carlisle as one of your big positions?

The funny part about this question is that I was actually the guy who was trying really hard to kill this idea because I hated it at first. I was really skeptical of the margins. It’s something where you have no track record, really, unless you clean a lot of data. We had to dive deep into the footnotes to figure out what the underlying business actually was.

Until you’re able to do that and understand the strength of the margins going forward—and really the ability to sustain this high-margin business—I think that kept me up a lot. That was something I was trying to use to kill the idea. Going forward, I think that’s really the most worrying thing about it all, and it would require a few structural changes that we don’t necessarily see as too likely.

Give me a structural change that would impact the margin story here.

Let’s just say that, all of a sudden, people stop caring about pricing and change the way in which they quote.

If there’s one thing the past 3 years have taught me, it’s that people really care about pricing, right?

Yeah, no, exactly. Every single person along the value chain is incentivized to keep pricing flat or higher. That was something I didn’t know from the outside. Going forward, if I were getting kept up at night by anything, it’d probably be, “Okay, all of a sudden, everybody’s going to stop trying to drive prices up. They’re going to price off a different model than cost-plus, and we’re going to get something like a whole new regime in terms of pricing.” That would be something that really worries me, but I don’t see that as very likely.

You guys mentioned the Canadian player who’s moving in. Let me give you a different one. I understand there’s a lot more here, but one of the things that really struck me is the importance of the warranty. Berkshire Hathaway buys a competitor and says, “We’re going to guarantee the warranty for the next 20 years.” All of a sudden, you’ve got literally the only AAA credit out there guaranteeing the warranty.

Would that scenario worry you guys at all? Or would you just say, “Hey, Berkshire—I actually think the history of the companies run underneath them is that they get a little bit sloppier and everything”? But I’m more thinking of it just from the warranty guarantee. Now, all of a sudden, you’re going up against the gold standard of, “We will be there. We will make sure this gets replaced.”

Yeah, Andrew, I’m very excited for this question, because if you think about the top 4 players, the number 3 player is owned by Berkshire Hathaway.

Oh, I didn’t realize that. Who’s the number 3 player that they own? Oh, I should have known that.

It’s Johns Manville. Berkshire bought them in 2000, and even they, despite Berkshire’s impressive track record, actually struggled to keep up with Carlisle’s track record despite being within that umbrella. We have this on slide 3, and we show the actual margin difference.

What’s that slide number?

That’s a good one. I’m trying to find it. It’s in the appendix, a couple of slides in.

Okay, I must have missed it. Last question, and then we can wrap it up while I try to find that Johns Manville one.

When I was researching this and reading the Q1 call, one of my first thoughts was, “Oh, labor shortages.” A lot of migrants come in and do construction. I think that’s more residential than commercial, but I’m sure it’s very much commercial as well. Labor shortages: You guys have obviously been concerned about it, because I think there were 2 questions on it in the Q1 call. The company is concerned. You guys had a different view on labor shortages and how they might actually benefit the company. I know you talked about it a little bit upfront when you were talking about going to the industry conferences, but I know people are going to be thinking about labor shortages. I’d love to hear how you think that could benefit them instead of hurt them. That’s a very contrarian view.

One thing to note really early on is that this is highly skilled labor. You can’t just get any contractor to come in and do this type of work. I think Tuan mentioned it: This is something you have to be certified for to even be able to install Carlisle product.

We interviewed a lot of people at the trade shows we went to, and most of them were smaller contractors. These are the guys who are closest to the labor constraints. On average—and I’ll try not to speak too broadly here for Dimitry—what I was gleaning from the questions I was asking was that backlogs are not really different. They’re not worse than they were last year. If anything, they’re slightly higher. New project bids are not challenged or constrained by the ability to find labor, and, all else equal, their expectations are flat to slightly positive for the year ahead. I’m not sure if you guys have other things to add, but that helped us become a little contrarian.

Andrew, when you ask what would keep me up at night, I think the labor risk may be one of the few things that could keep me up at night. Labor has been tight for many years in this industry and in other trades. Now tack on the immigration policies of this current administration. We don’t know—when we ask and talk to industry folks—what percentage of roofing-contractor labor consists of illegal immigrants.

The part that gives us a bit of comfort, and maybe Erik touched on this a bit, is that the contractors who are able to install Carlisle product are, for the most part, established. Many of them are very established, larger players that have been installing the product for decades, to some extent. They’ve built a very strong, recurring book of business.

If we were to see an environment where the aggregate labor force in this industry is constrained or reduced, I think, at the margin, the players that would get hurt the most are the smaller players, which have less-experienced installers, perhaps. Starting with my interviews, that was the segment we were really trying to disprove the thesis on. If you can extrapolate that up, it really only gets better.

Just one last question—a parting-shot question here. The company is running, let’s call it, $2 billion of debt. They’re doing more than $5 billion of revenue every year, if I’m remembering correctly off the top of my head. That’s a pretty lightly levered balance sheet.

They read The Outsiders. I haven’t read The Outsiders in a long time, but John Malone jumps to the top of my head. A lot of people in The Outsiders tended to run with a little bit more leverage than this.

Do you think the company should lever up a little bit? Does this company belong in private equity hands outside of public markets? Do you think they should be a little bit more aggressive? I’m not saying to take it to 10 times EBITDA, but do you think they should run a little bit more leverage to amplify what I think is a pretty darn good business?

I think the covenants, Dimitry—correct me if I’m wrong here—but I think it’s something around 3 times the leverage they’re allowed to have when they do M&A. They’ve been willing to go up to 3.3 times. I’ll let you continue, Erik.

They can flex up as necessary. I think they’re not trying to flex up to buy back stock; they’ll use internal cash flows for that. But in the event that they find another Henry, definitely.

Do you think they definitely hear you on that position? Do you think it’s too conservative is kind of what I’m asking, right? Again, they don’t have to run 3 times, but I think they’re running less than 1 time right now.

Should they just be—you know, it’s not in vogue right now because you can look at the Charter stock price—but say, “Hey, we run this 2 times levered. Every dollar of cash flow, we buy back stock. If our EBITDA grows, then we can buy back—if it grows by $1, we can buy back $2 because we run this 2x levered.” Then we flex up to 3 times for acquisitions and take it back down.

I guess I’m saying, do you think they could improve returns without measured risk by just being a little bit further along that leverage spectrum?

I think the short answer is yes. But as owners of the stock and the company as well, I think my preference is to have the balance-sheet flexibility for when downturns hit.

Given the somewhat cyclical nature of this business, given that it’s in building products, you want to have that flexibility to be able to play offense and do big deals when everybody else is playing defense. So, yes, they can have a much more levered profile, but they don’t need to.

Look, I don’t think there’s a right or wrong answer, right? Again, I’m not saying take it all the way to the hilt. You can say, “Hey, if things get really bad, we’ll be able to go elephant shopping.” But at the same time, you look at the history of the stock. If they had just been able to lean a little bit more into the buyback, there’d be a lot fewer shares outstanding right now.

Everything we’ve said points to a good business, a lot less cyclical than you think, with growing tailwinds. That does call for, “Hey, maybe we need to run with better than a AAA balance sheet.”

Guys, this has been awesome. We covered a heck of a lot. I actually had a heck of a lot more in my show notes, but I’m going to have to wrap at some point. Is there anything burning that any of the 3 of you think we listeners should be touching on, or that we should have talked about? What do you say?

No, from my end, we covered a lot of ground. I just want to say thank you—thank you for the opportunity, and thank you for bringing us on. I’ve listened to your podcast for many years. I’m a big fan, so this was a huge opportunity. I’m really excited to be on.

I appreciate you guys coming on. Congrats again—first unanimous winners. I appreciate it. I’m looking forward to staying in touch. Anytime you guys want to talk stocks or anything, let’s do it.

You guys have a compounder, a good business that goes up; I tend to buy shitty businesses that apparently only go down. I’m really looking forward to it. Let’s stay in touch, and I appreciate you coming on. We’ll talk soon. Thanks.

Absolutely. Would love to. Thank you. Thank you, Andrew. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.