Headwaters Capital Management: CBIZ Inc. ($CBZ) Investment Case
Introduction
In their Q1 2025 investor letter, Headwaters Capital Management introduces a new investment in CBIZ Inc. ($CBZ), highlighting it as an opportunistic addition during market volatility. Headwaters, which experienced a -9.0% (-9.2% net) decline in Q1 2025 compared to the Russell Mid Cap Index’s -3.4% decline, presents CBIZ as a strategic reallocation from one of their successful long-term holdings. The letter emphasizes the firm’s approach to navigating market uncertainty by identifying quality businesses with strong financial characteristics and competitive advantages. Headwaters’ decision to invest in CBIZ came during a broader market selloff, reflecting their commitment to capitalizing on temporary market dislocations.
Investment Highlight: CBIZ Inc. ($CBZ)
Business Overview
- Provider of accounting, tax, and advisory services to small and midsize businesses
- Shares similar business characteristics to Brown and Brown (BRO), a previously successful holding
- Essential service provider in a stable industry
Market Position
- Delivers critical accounting and tax services required in any economic environment
- High customer retention rates providing revenue stability
- Ability to win new business and implement moderate price increases
Performance Analysis
- Business Stability:
- Essential services that remain necessary regardless of economic conditions
- Predictable revenue stream from high customer retention
- Strong free cash flow generation
- Growth Potential:
- Organic growth through new business wins and price increases
- Significant M&A opportunities to drive additional growth
- Recent Marcum acquisition expected to deliver synergies above street expectations
Market Dynamics and Opportunities
- Temporary valuation dislocation created by soft earnings report and broader market weakness
- Stock trading at levels not seen since July 2019
- Strategic opportunity to capitalize on unwarranted multiple compression
Valuation and Capital Allocation
- Added at attractive valuation following multiple compression
- Expected to recover to historical 14x EBITDA multiple
- Price target of $114 on 2027 estimates representing +72% upside from purchase price
- Projected +22% IRR potential
Strategic Portfolio Decision
- Funded by partial sale of Brown and Brown (BRO), which had:
- Grown to be the largest portfolio position
- Generated +170% gain (26% IRR) since portfolio launch
- Reached all-time high valuation multiple
- Limited additional upside in current market conditions
Risk Considerations
- Recent Marcum acquisition performance below initial expectations
- Small/mid-cap exposure during uncertain market conditions
- Potential integration challenges with acquisitions
Other Key Points
- Similar business characteristics to BRO’s P&C brokerage business model
- Management discussions provided increased conviction on Marcum expense synergies
- Position added during opportunistic market weakness
- Part of portfolio upgrade strategy during market volatility
Headwaters Capital views CBIZ as an attractive investment opportunity with significant upside potential, citing its essential service business model, strong cash flow generation, and M&A growth opportunities as key factors. They believe CBIZ represents a compelling value at current prices with similar characteristics to one of their previously successful investments.
