Investor Presentaiton
Portfolio Outlook and Positioning
MFS®
we overcame our lingering concerns about the company's balance sheet, technological modernization and positioning, and trajectory of revenue
growth and durability. In particular, its underlying revenue growth has been increasing and management is taking heed of the balance sheet.
Elsewhere, we sold our position in household products company Kimberly-Clark as we view its EV/uFCF valuation as not overly compelling
relative to the quality of the business and within consumer staples we prefer Kenvue, which we added to, given a more attractive valuation. We
sold our position in PPG Industries as we determined we could replicate its exposures more robustly elsewhere. Specifically, it has exposure to
housing, where we prefer Home Depot and Summit Materials, aerospace, where we prefer Howmet Aerospace, and auto OEM, where we prefer
Analog Devices and TE Connectivity. We also sold our position in data center REIT Equinix. Our initial buy case was predicated on enterprise
migration to the cloud and Equinix's exposure to the higher quality interconnection and collocated business mix that yielded more pricing
power. However, our analyst's work highlighted that the company is likely overearning due to the temporary supply/demand dynamics (and
being respectful of the bargaining power of top customers such as Amazon, Alphabet and Microsoft) and the recent deterioration in returns
particularly caught our attention. This combined with a full valuation led us to redeploy into more compelling ideas.
Finally, we started new positions in utility Southern and semiconductor equipment company Lam Research. For Southern, we were underweight
utilities and we had been sharpening the pencil given the contraction of relative P/Es versus the market, and we had been waiting for a more
attractive valuation in terms of dividend yield versus the 10-year Treasury yield to lean in more meaningfully. The dividend yield reached parity
with the 10-year, and Southern has constructive jurisdictions (Georgia, Alabama), a good balance sheet, and an attractive total shareholder
return. For Lam Research, we already owned Applied Materials and ASML and we appreciate the semicaps as critical providers of equipment,
know-how and IP that fabrication players need for manufacturing. In our opinion, these are solid businesses through cycle as key players have
consolidated market share in their specific categories, have moats that are made significant by the increasing complexity and mission-critical
nature of their machines and enjoy a solid revenue growth runway driven by rising capital intensity in semi manufacturing, deglobalization and
national security driving demand for local fabs, semis going into an ever-expanding range of products, and Al adding fuel to the fire. Thus far,
we've mostly funded out position in Lam from other semis, mostly Applied Materials, to keep the overall semi exposure unchanged. Lam's
quality is highlighted by its solid margins, high returns, good FCF conversion and strong balance sheet. The key parts of the thesis are that it has
significant exposure to memory, which is currently depressed but has a potentially bullish outlook due to its criticality for Al, with high
bandwidth memory providing a tailwind for demand, and Lam has not benefited nearly as much as Applied Materials has from China, which
concerns us, as it may prove unsustainable for Applied Materials.
FOR DEALER AND INSTITUTIONAL USE ONLY. - Massachusetts Investors Trust
PRPEQ-MIT-31-Mar-24
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