We are delighted to share with you the sixth in-depth research report in our Industry Primers series, this one on fertilizers. The series exists to help fundamental, long-term investors expand and deepen their circle of competence, one industry at a time, and your feedback on what was useful and on which industries to cover next shapes what we produce. The report is complemented by two podcast episodes, the first telling the story of the industry and the second digging deeper into the fundamentals from an investor’s standpoint. Below, you will find two PDF files for download: the research report (members only) and the accompanying slide deck (free to access). We start with a quick anecdote:

On August 18, 2010 (Australian time) BHP Group (ASX, LSE, NYSE: BHP) offered $130 a share in cash for PotashCorp, the Saskatchewan potash miner, about $40bn on a fully diluted basis. PotashCorp’s board rejected the offer, and on November 3, 2010 Canada’s industry minister found that the purchase was not likely to be of net benefit to Canada under the Investment Canada Act. BHP withdrew in mid-November.

PotashCorp kept building potash capacity sized to the prices of 2008, and it spent $9.8bn of capital in the five years 2009 to 2013. The new tonnes arrived as prices fell in 2013 and reached their low in 2016. On January 1, 2018 PotashCorp merged with Agrium into Nutrien (NYSE, TSX: NTR), and each PotashCorp share became 0.4 Nutrien share. At the close of September 25, 2026 those Nutrien shares were worth 67 cents for each dollar BHP had offered, before dividends.

In the same low point of the cycle, CF Industries Holdings (NYSE: CF), a nitrogen producer that owns no mine, bought its rival Terra Industries for $4.6bn in cash and shares, completing the purchase in April 2010. In February 2016 it sold about 11% of its nitrogen business to the farm cooperative CHS for $2.8bn, at an implied value twice what the market put on all of CF, and it spent the cash its plants earned on repurchasing its own shares. Its share count in August 2026 was 42% of the count it had after the Terra purchase. From its first trading day in August 2005 to September 25, 2026, CF returned 52 times its first-day price with dividends reinvested, against 9.3 times for the S&P 500 total return.

The report explains the gap through the way each nutrient is made and priced. Fertilizers are three commodity businesses whose costs are set by geology and by the price of natural gas. Nitrogen is made in chemical plants from gas, phosphate is rock dissolved in sulfuric acid and combined with ammonia, and potash is a salt dug from deep mines. A tonne of urea from Louisiana and a tonne from Qatar fetch the same price at the same port, so a producer earns the difference between that price and its own cost. Its place on its nutrient’s cost curve, the ranking of every producer from the cheapest to the most expensive, therefore decides its margin at every price.

At the World Bank’s August 2026 gas prices a Louisiana plant made a tonne of ammonia for about $161 in all and a Dutch plant for about $757. The price settles near the cost of the most expensive plants that must still run to meet demand, usually European plants on imported gas, so the Louisiana plant keeps most of the gap for as long as the world needs the European plants’ output. CF’s gross margin was 10.5% in 2017, when European gas cost $2.76 per million British thermal units (MMBtu) more than American gas over the year. In 2022, when the difference was $33.97, it was 52.4%.

Potash producers earn their margin from the ore body. In 2025 Nutrien sold potash for a net $252 a tonne at the mine and kept about $161 after its cash cost and Saskatchewan’s taxes, from mines paid for decades ago, while BHP’s new Jansen mine will cost about $2,024 of capital for each tonne of annual capacity. Phosphate’s margin depends on the sulfur and ammonia a producer buys. The Mosaic Company (NYSE: MOS) settled its third-quarter 2026 sulfur at $705 a long ton, 35% above the second quarter’s average, which adds about $72 to the cost of a tonne of diammonium phosphate (DAP). At the close of Friday, September 25, 2026, CF was worth $17.4bn, 2.4 times Mosaic’s $7.3bn.

The record shows how uneven the owners’ results have been. From their listings the four long-listed majors returned between 3.6% a year (Mosaic) and 20.6% (CF) with dividends reinvested, against about 11% for the S&P 500 total return. Without CF the other three averaged about half the market’s return. Over the twenty years from September 29, 2006, five of seventeen listed producers beat the index.

The report finds that capital allocation through the cycle, what managers built, bought, sold and bought back and at what point in the cycle, decided how much capacity stood behind each share more than the quality of any single asset did, while the date at which a record began decided whether it beat the index. Under Stephen Wilson, from CF’s listing to the end of 2013, its shareholders earned 15.1 times their money against 1.8 times for the index. His successor, Tony Will, cut CF’s share count by 45% to the end of 2025 and raised its ammonia capacity per share about 2.6 times. He took over after the stock had risen about fifteen-fold in eight years, and his shareholders earned 7.5% a year against 13.6% for the index.

The report sets the records of the owner-operators, the chief executives and controlling holders who ran these companies as owners, on one basis, and it finds that the variables behind the best of them were visible in advance: the entry price relative to the cycle, the cost position on the nutrient’s own curve, restraint at the peak and the debt carried into the low point. This primer is a manual for reading them. This is one of a weekly series of primers whose purpose is to help readers expand or deepen a circle of competence, one industry at a time.

The companion deck. Fertilizers: a self-contained summary of the report in slide form.

Companion Deck - Fertilizers

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The primer has two parts, both attached to this post: the report and a companion deck that can be read on its own. The report follows the industry from its history and economics to its companies, its accounts, its valuation and its open questions, and every figure in it is dated and sourced in the notes. The highlights, part by part:

Part I, Orientation. Why the industry repays study, how its three nutrients are made and priced, and where they are mined, made and used. The 23 featured companies that trade on exchanges open to most investors were worth $247.8bn at the September 25, 2026 close. Four state-controlled Gulf producers made up $100.9bn of it, 41%, against $83.0bn for the nine Western fertilizer producers.

The four are the Saudi Arabian Mining Company (Tadawul: 1211), known as Ma’aden, SABIC Agri-Nutrients (Tadawul: 2020), Industries Qatar (QSE: IQCD) and Fertiglobe (ADX: FERTIGLB). Ma’aden alone, at $63.2bn, is about a quarter of the total, and its business includes aluminum and gold as well as phosphate. The largest company that makes only fertilizer is Nutrien, at $34.5bn.

Chapter 2 works the cost of a tonne of ammonia in Louisiana and the Netherlands from public numbers and fixes the units, because prices are quoted in tonnes of product and world statistics in tonnes of nutrient. At the World Bank’s August 2026 price of $390 a tonne of urea, a tonne of nitrogen bought as urea cost about $848. Chapter 3 maps the deposits, the plants and the buyers. Canada, Russia and Belarus mined 63% of the world’s potash in 2025, against 62.6% in 2000. Morocco and Western Sahara hold 68% of the world’s phosphate rock reserves, while China mined 44% of the rock. China, India and Brazil used half the world’s fertilizer in 2024, and Brazil has passed the United States.

From Chapter 2: the input, the process and the World Bank price of August 2026 for nitrogen, phosphate and potash, with the top of each cost curve, drawn as a stylization rather than a measured curve. The gas alone in a tonne of urea made in a European plant cost about $512 against a urea price of $390. Nutrien’s potash cash cost of $58 a tonne compares with $2,024 of capital a tonne for a new mine.

Part II, Evolution. The history in three eras, chosen by where the nutrient came from. Until 1913 every nutrient came from a natural deposit that a state owned or taxed, from Peru’s guano and Chile’s nitrate to Germany’s potash; Morocco’s phosphate, a state monopoly from 1920, followed the same pattern. The first synthetic ammonia plant, at Oppau in Germany, began production on September 9, 1913. On the count of a study in the Bulletin of Latin American Research, Chilean nitrate’s share of world nitrogen consumption fell from 54.7% in 1913 to 32.2% a decade later. Nitrogen became a manufacturing business whose price follows the cost of making it, while phosphate and potash stayed with the owners of the deposits.

From 1945 to 2003 states and cooperatives built the mass industry. Saskatchewan’s floor price and production quotas of 1969 raised potash revenue per tonne of potassium oxide (K2O) by about 73% on 3% less volume. Canpotex, the export agency incorporated in 1970 and owned today by Nutrien and Mosaic, is the institution that survived. The American gas shock of 2000 to 2003 bankrupted Farmland Industries and Mississippi Chemical, and Koch offered about $104m for four of Farmland’s plants, about $58 per annual tonne of capacity on the price reported at the offer.

The price spike of 2008 was short, and the capacity it prompted kept arriving for years. CF decided its one expansion in 2012 with urea at $399 a tonne on the World Bank’s annual series and started the plants in 2016, when urea averaged $194. On July 30, 2013 Uralkali, whose London depositary receipts traded until December 22, 2015, stopped exporting through the Belarusian Potash Company, the agency it shared with Belaruskali. On the World Bank’s series, which showed the break six months late, potash averaged $344.8 a tonne over the twelve months after the exit against $429.4 over the twelve before, a fifth less.

The Strait of Hormuz has been effectively closed to commercial traffic since March 2, 2026. Urea rose 81.5% from February to April 2026, to $856.9 a tonne. By August it had fallen 54% while the strait stayed shut, and DAP had risen 26.7% since February, to $793.5, and was still rising. Chapter 8 tells four cases as the decisions their owners took: PotashCorp’s building and the BHP bid, the break of the eastern potash cartel, CF from its listing to 2026, and Sirius Minerals, taken over by Anglo American (LSE: AAL) in March 2020 for about £405m after its bond financing failed, on a mine into which $1.1bn had been invested.

From Chapter 6: the World Bank’s monthly prices of urea, DAP, potassium chloride and phosphate rock in nominal dollars a tonne from 1960 to August 2026, with urea’s annual price in 2010 dollars. Of the four spikes, in 1974, 2008, 2022 and 2026, the first is still the record in real terms for urea and DAP, at $759 and $884 a tonne in 2010 dollars.

Part III, Structure & Economics. Where the profit goes from the gas well to the farm, how the cycle turns, what each nutrient earns in dollars a tonne and which advantages have lasted. The producer’s share of the profit rises and falls with the scarcity of its input, while the retailer’s share holds. From 2018 to 2025 the adjusted EBITDA of Nutrien’s retail segment varied with a coefficient of variation of 0.21, against 0.56 for its potash segment. In Illinois the distributors between the export price or the plant gate and the dealer took 29 to 37% of the farmer’s price for urea and ammonia in both 2022 and 2025.

The farmer buys once a season and with the grain price in mind. A tonne of urea cost 4.0 tonnes of maize in April 2026, the highest monthly reading since 2000, and 1.74 tonnes by August. Nitrogen is applied every year while phosphate and potash can be skipped for a season, which is why the demand cuts of 2026 fell on phosphate.

Chapter 11 works nitrogen from the gas price. A tonne of ammonia takes 31 to 36 million Btu of gas, so each dollar of difference between European and American gas is worth about $36 a tonne at CF’s gas use. In August 2026 the World Bank’s European gas price exceeded the US price by $18.34 per MMBtu, the widest month since December 2022, which is about $667 a tonne of ammonia. The world’s demand for European output decides how much of that gap the price passes on. CF earned gross margins of 46 to 51% in 2011 to 2013. On similar gaps in 2023 to 2025 it earned 34.6 to 38.5%, because after the American plants built in 2016 and 2017 the world needed Europe’s ammonia less.

New ammonia plants cost about $2,600 to $2,900 a tonne of annual capacity. CF’s management gave its assumptions for an average year of the cycle on its second-quarter 2026 call as $3.50 gas and a 10% to 12% return. On them a new Louisiana plant needs at least about $450 to $505 a tonne of ammonia before its capital is repaid, the authors’ estimate. CF realized about $521 a tonne in 2025 and $376 in 2016.

Chapter 12 works potash and phosphate. At Nutrien’s 2025 margin of about $161 a tonne, a tonne of Jansen capacity would take about 12.6 years to repay its capital. On August 2026 prices a phosphate producer that buys its rock, sulfur and ammonia lost money on DAP at $793.5, while one that mines its own rock kept about $173 a tonne more. Chapter 13 finds that most producers have no lasting advantage beyond their place on a cost curve, with the ore body as the exception: in the 2016 low PotashCorp and Mosaic stayed profitable while CF, which owns no mine, lost money.

From Chapter 11: the World Bank’s European gas price less its US price by year, in dollars per MMBtu (bars), against CF’s gross margin (line), 2010 to 2026. CF’s margin was 10.5% in 2017 on a gap of $2.76. In 2022 it was 52.4% on a gap of $33.97, and it was higher in 2011 to 2013 than in 2023 to 2025 on similar gaps.

Part IV, The Players. The featured producers on one page at one date, two chapters on the builders, the allocators and the state’s managers, and the unlisted and state forces. The producers sort by their nutrient’s cost curve and their place on it. CF earned operating income plus depreciation of 45% of its FY2025 sales on American gas, while Grupa Azoty (WSE: ATT), Poland’s state-controlled producer on European gas, earned a trailing EBITDA margin of 6.9% and carries net debt nearly six times its market value. Yara International (OSE: YAR) agreed on July 2, 2026 to acquire the Gulf Coast Ammonia plant at Texas City, still in commissioning, for about $1,000 a tonne of capacity.

Chapters 15 and 16 put every leader’s record on one basis, total shareholder return over the tenure against the S&P 500 total return over the same window. The three tenures that spanned the boom of 2003 to 2008 beat the index. Wilson’s CF returned 15.1 times against 1.8 for the index. Bill Doyle’s PotashCorp, measured from December 2000, returned 10.2 times against 1.9, and Jim Prokopanko’s Mosaic beat the index by a narrow margin.

Every chief executive’s window in the set that began in 2014 or later and lasted more than a year trailed the index. CF’s letter for 2014 set out the rule its managers followed, to spend cash on capacity and on buybacks so that the cash flow each share can generate rises as far as possible, and CF bought back $8,768m of its stock from 2014 to 2025. Nassef Sawiris sold nearly all the plants of OCI N.V. (Euronext Amsterdam: OCI) in 2024 and 2025 and paid out about $7bn, and a holder since the 2013 listing still has 0.83 times the money in euros.

Chapter 17 covers the state as producer, buyer and regulator. Eleven of the 23 featured companies have a state or a state company as controlling or largest holder, and they carry 58% of the featured value. India budgets ₹1.71 lakh crore net for fertilizer subsidies in 2026-27, about $17.8bn. Producers inside the Strait of Hormuz shipped 26.9% of traded urea in 2024 on UN Comtrade’s data, a share other sources put at up to a third.

The chapter also sets out the antitrust matter, two investigations and one consolidated set of private suits, all allegations the companies deny. Bloomberg reported the Justice Department’s investigation on March 4, 2026, and the Federal Trade Commission announced its own on May 28. On June 9, 2026 the Judicial Panel on Multidistrict Litigation centralized five farmer suits as MDL No. 3187 before Judge Eric F. Melgren in the District of Kansas, and 29 related suits have followed them there. The defendants include CF, Nutrien, Mosaic, Koch and Yara entities and Canpotex. No charge has been filed, and no court has ruled on the merits.

From Chapter 15: total shareholder return a year in US dollars over each chief executive’s tenure (bars) against the S&P 500 total return over the same window (points), with the World Bank urea or potassium chloride price in the month each record starts. Stephen Wilson’s CF returned 38.2% a year from 2005 to 2013, and all ten records in the chart that start in 2013 or later trailed the index.

Part V, Speaking the Language. The reference section: the units, terms and measures with their competing definitions, the accounting for mines, waste stacks, hedges and minority partners, and a tour of the filings and free data in the order a specialist reads them. Two analysts can quote the cost of the same potash mine from the same release and differ by 64%, because Jansen costs $2,024 per annual tonne of potassium chloride and $3,318 per tonne of K2O. Nutrien’s potash cash cost is $58, $65 or $91 a tonne, depending on what the definition leaves out.

Chapter 19 names three numbers the income statement hides: the reserve behind the depletion charge, the cost of closing mines and the stacks of phosphogypsum, the waste left from making phosphoric acid, and the claims of minority partners between EBITDA and the shareholder. Mosaic’s asset retirement obligations, its discounted cost of closing mines and stacks, rose from 8.8% of its equity in 2015 to 21.5% in 2025, mostly through revisions of estimate. Adding them, $2.6bn at the end of 2025, to Mosaic’s enterprise value lifts its multiple of EBITDA in an average year of the cycle, its mid-cycle multiple, from 5.7 to 6.9 times. International accounting rules let Nutrien reverse $780m of phosphate impairments in the 2022 spike, a gain a company reporting under US rules could not have booked.

Chapter 20 reads the filings. CF’s second-quarter 2026 gas cost of $3.37 per MMBtu, set against the World Bank’s European average of $15.58, put it about $440 a tonne of ammonia ahead at its own gas use. The bond prospectus of OCP, Morocco’s state producer, shows its net debt up 45% in 2024 to its own ceiling of 2.5 times EBITDA.

Part VI, Analysis & Valuation. A producer is analyzed from its cost position upward and from its owner downward. In 2025 a Gulf Coast ammonia plant on CF’s gas use burned about $128 of gas a tonne, against about $413 for Yara’s European plants. Mid-cycle earnings depend on the years averaged: Yara’s short window overstated its normal EBITDA by 19%, and CF’s management uses a baseline 18% above CF’s eleven-year average.

At the September 25, 2026 close the nine Western fertilizer producers traded at a median of 6.3 times mid-cycle EBITDA, from K+S (XETRA: SDF) at 3.9 times to LSB Industries (NYSE: LXU) at 11.0. CF stood at 8.6 times its eleven-year average and 7.3 times management’s baseline of about $2.9bn. The difference between the two is about $3.2bn of equity value. A multiple of a single year’s earnings misleads at the top and the bottom of the cycle. At the end of March 2022 the majors traded at about 6 to 7 times the 2022 earnings they went on to report, and at the end of 2016 PotashCorp traded at 48 times its 2016 earnings.

Against the cost of new capacity, Nutrien’s potash is valued at about $755 per tonne of capacity, 37% of Jansen’s $2,024. CF’s enterprise value of $2,235 per tonne of ammonia capacity is 78 to 85% of the cost of Blue Point, its new Louisiana plant. The Gulf producers trade above their own cost of building new plants.

Chapter 23 measures what a buyer of fertilizer stocks chosen without selection has earned. The median of the seventeen ranked producers, Qinghai Salt Lake Industry (SZSE: 000792), returned 4.94 times over twenty years, a little over half the index. From 2019 to 2025 a falling multiple cost every major 5.5 to 12.6 points of return a year. The entry price relative to the cycle was the strongest predictor of the return, followed by the cost position, restraint at the peak and leverage, while retail integration, size and a nutrient’s scarcity predicted nothing. The report treats this evidence as suggestive, because it rests on seventeen companies over one cycle.

From Chapter 22: enterprise value per annual tonne of capacity at the September 25, 2026 close against the cost of building or buying a tonne, by nutrient. Nutrien’s potash is valued at $755 a tonne against $2,024 for BHP’s Jansen Stage 1. CF’s ammonia is valued at $2,235 a tonne against $2,643 to $2,857 for Blue Point on CF’s two dated estimates.

Part VII, The AI Inflection. The part counts only what the filings measure. Nutrien mined 53% of its potash ore with automation in the first half of 2026, against 22% in 2023. The value of that automation lies in the capital it saves, since Nutrien prices the next tonnes from its existing mines at $200 to $300 of capital, against about $2,024 at Jansen, and no filing has yet turned it into dollars a tonne.

The farm software platforms set digital targets and missed them. Nutrien’s digital share reached 18% of its North American retail sales in 2022 against a target of more than 50%. Yara counts 25 million digitized hectares against a goal of 150 million. On the farm, precision application has cut the nitrogen used per bushel of US corn by about 1% a year while the rate per acre rose.

For the producers the larger question is the price of American gas, for which data centers now compete. A $2 rise in the Henry Hub price would take about a quarter of 2025’s gap between European and American gas and almost all of 2019’s, although the September 2026 outlook of the Energy Information Administration has Henry Hub falling to $3.28 in 2027 as production outgrows exports of liquefied natural gas and power demand.

Part VIII, Risks & Debates. Fertilizer producers fail when a high cost position or a single asset meets a price collapse with debt. The American cooperatives failed on gas in 2002 and 2003, Sirius Minerals on a bond in 2019, and in 2026 the Gulf plants whose only route was a closed strait. No producer listed in North America or Europe in 2005 has failed since. The shareholder’s usual loss is a dividend cut in the low years after borrowing in the good ones, and Mosaic cut its quarterly dividend by 91% in seven months in 2017. Mosaic’s undiscounted cost of closing its phosphogypsum stacks, about $3.0bn at the end of 2024, equals about 41% of its market value.

Chapter 27 works the open debates of 2026, facts first and proponents named, with the dates to September 2027 that will settle them. On the US Geological Survey’s estimates, world potash capacity grows 17% by 2029, so output must grow about 4% a year to hold 2025’s operating rate. Urea fell 54% from its April peak with the strait still shut, so the debate over the Gulf producers turns on whether buyers will pay more for supply from outside the Gulf. In the antitrust debate, which concerns investigations and allegations the companies deny, the plaintiffs allege that record prices drew no increase in supply, and CF answers that it ran at 97% of its gross ammonia capacity in 2025. A charge or a closing statement from the Justice Department or the FTC, and Judge Melgren’s rulings, will settle it.

The appendices. The investable universe, 69 listed companies with the restricted Moscow listings and the unlisted producers set out beside them; a checklist of 30 questions for the analyst in ten groups, from the producer’s cost curve to the proxy statement, with the place to look and what the record shows for every question; a reading course that opens with the producers’ own letters and calls, followed by books, the government and multilateral data series, the trade bodies’ statistics and interviews; and the numbered notes that source the report.

The companion deck. The report in the format of the Monday Morning Briefing, designed to be read without the report: the propositions of the Executive Summary with the number that carries each, the report’s exhibits re-rendered for the slide format under titles that state what each shows, the tables that carry the argument, and slides for material that has no exhibit in the report, followed by the universe and the checklist.

What the primer is for. A reader who works through it should be able to explain how fertilizers make money, from the gap between European and American gas and the margin of a mine whose capital was repaid decades ago to the retailer’s margin on each tonne; use the industry’s vocabulary, from product and nutrient tonnes, short, long and metric tons and the gas used per tonne of ammonia to the controllable cash cost and the obligation to close a stack; read the filings without being misled by a cost quoted per tonne of product where the argument needs the nutrient, a mid-cycle figure without its years, or an EBITDA that includes a minority partner’s share; appraise a producer the way specialists do, from its place on its nutrient’s cost curve upward and against mid-cycle earnings and the cost of a new tonne; and recognize the managers and business models that have compounded value over decades, and the ones that built capacity at the top of the cycle.

How to use this primer

The report does not need to be read in order. Suggested paths:

• a generalist with limited time, Parts I and VI plus the checklist in Appendix B;

• a reader interested in the history, Part II;

• an accountant, Part V with Chapter 12;

• an analyst working on a specific company, Chapter 14, then Parts III, V, and VI in order;

• a commodity specialist, Chapters 10 to 12 and the debates of Chapter 27;

• a risk officer, Part VIII with Chapters 8 and 17;

• a technologist, Part VII;

• a reader who came for the owner-operators, Chapters 15 and 16, with Chapter 23 for what their records are worth against the index.

Every chapter ends with a “What to remember” box, and the boxes read in sequence summarize the report. The checklist follows the order of the analysis in Chapter 21, from the producer’s place on its nutrient’s cost curve to the owner and the proxy statement, and its first questions test the cost position because in 2025 a Gulf Coast ammonia plant on CF’s gas use burned about $128 of gas a tonne, against about $413 for Yara’s European plants.

Feedback and requests

Please reply to this email or leave a comment with what was useful, what was missing, any errors you find, and the industries you would like covered next. Member requests will inform the order of coverage.

This content is published by MOI Global for educational purposes only. It is not investment advice, an offer, or a solicitation, and no security mentioned herein is recommended for purchase or sale. The publisher and contributors may hold positions in securities discussed. Figures are believed accurate as of the dates stated but are not warranted; readers should verify all data against primary sources before relying on it. Nothing herein constitutes legal, tax, or accounting advice.

We are delighted to share with you the fifth in-depth research report in our Industry Primers series, this one on homebuilding. The series exists to help fundamental, long-term investors expand and deepen their circle of competence, one industry at a time, and your feedback on what was useful and on which industries to cover next shapes what we produce. The report is complemented by two podcast episodes, the first telling the story of the industry and the second digging deeper into the fundamentals from an investor's standpoint. Below, you will find two PDF files for download: the research report (members only) and the accompanying slide deck (free to access). We start with a quick anecdote:

Dwight Schar founded NVHomes in 1980 and in 1987 bought his old employer, Ryan Homes, with more than $450m of debt. The combined company, NVR (NYSE: NVR), filed for bankruptcy on April 6, 1992, and it failed on that debt while its buyers kept closing on their houses. It came out of Chapter 11 on September 30, 1993 and stopped owning land. Since then it has bought finished lots from developers under option: it pays a deposit of at most a tenth of the lot's price for the right to purchase the lot when it is ready to build, and in a downturn it can walk away and lose only the deposit. In Schar's words to HousingWire in April 2026, NVR "optioned the lots from the developers."

From the emergence to Schar's retirement from the board in May 2022, NVR compounded at 23.9% a year with dividends reinvested, against 10.2% for the S&P 500 total return. At those rates $10,000 became about $4.57m in NVR and about $162,000 in the index. By June 30, 2026 NVR had retired 17,877,177 of the 20,555,330 shares it had ever issued. Over the twenty years to September 18, 2026 it returned 13.0% a year, while Hovnanian Enterprises (NYSE: HOV) lost 8.9% a year. NVR held options and net cash through the bust, and Hovnanian's book equity was negative at every fiscal year end from 2010 to 2020.

The report explains the gap through the way a builder earns its return. A homebuilder acquires land, or an option on it, turns it into finished lots over one to five years, builds each house in about four months and is paid at closing, when the buyer's mortgage funds. Its return on equity is its pretax margin times its inventory turns (revenue divided by inventory) times its inventory per dollar of equity, and the terms after the margin decide most of it.

In FY2025 NVR and D.R. Horton (NYSE: DHI) earned almost the same gross margin, 21.2% and 22.3%. NVR's return on average equity was 33.2% and D.R. Horton's 14.5%. NVR's inventory, houses on lots bought weeks earlier, turned 5.46 times in the year, against 1.36 times at D.R. Horton, and at D.R. Horton's turns NVR would have earned about 8% on its equity. The option also limits the loss. In the five years from 2006 NVR wrote off about $654m of deposits, 57% of its equity at the end of 2006, and it still earned a profit every year.

The monthly payment decides how much house a buyer can afford. In mid-September 2026 the average 30-year mortgage rate was 6.95%. At that rate a $400,000 loan costs $2,648 a month, and one point of rate changes the payment by $262. That is why the large builders run their own mortgage lenders: D.R. Horton's lender financed 81% of the homes it closed in FY2025.

The record shows how rare NVR's result is. Kenneth French's construction portfolio, which mixes homebuilders with contractors, compounded at 8.7% a year over the century to July 2026, against 10.4% for the US market. Of the 27 builders and land developers listed in the United States in 2005, six failed in or through Chapter 11, and about a third lost most or all of their equity. Single-family starts fell 81% from January 2006 to March 2009. Over the twenty years to September 2026 NVR was the only one of nineteen listed builders to beat the S&P 500 total return.

The best records belong to a few owner-operators who owned little land with debt before the busts, had cash when land was cheap and reduced their share counts. D.R. Horton returned 21.7% a year under David Auld as chief executive, from 2014 to 2023, against 11.3% for the index. PulteGroup (NYSE: PHM) has returned 20.2% a year under Ryan Marshall since 2016, against 15.2%.

The report finds that the variables behind those records were in the filings in advance: the share of lots owned and the debt behind them, the cash held for a downturn and the price paid for buybacks. This primer is a manual for reading them. This is one of a weekly series of primers whose purpose is to help readers expand or deepen a circle of competence, one industry at a time.

The companion deck. Homebuilding: a self-contained summary of the report in slide form.

Companion Deck - Homebuilding

2.76MB ∙ PDF file

Download

As of October 2026

Download

What's inside

The primer has two parts, both attached to this post: the report and a companion deck that can be read on its own. The report follows the industry from its history and economics to its companies, its accounts, its valuation and its open questions, and every figure in it is dated and sourced in the notes. The highlights, part by part:

Part I, Orientation. What a homebuilder is, how it earns its return and where the industry sits in the world. Americans started 939,700 single-family houses in 2025, and 72% of them were built for sale by a builder that controlled the lot. Seven Sunbelt states issued 51.0% of the country's single-family permits that year, Texas alone 15.4%.

The 34 listed companies the primer features were worth about $217bn at the close of Friday, September 18, 2026. About 39% of that value sits outside the United States. D.R. Horton, at $38.6bn, is the most valuable listed homebuilder among them. Chapter 2 follows NVR and D.R. Horton side by side from the land to the closing, and shows why buying lots under option limits a builder's loss in a downturn to its deposits. The listed American group is shrinking. Four listed builders have passed to other owners since June 2025. The last was Taylor Morrison, which Berkshire Hathaway (NYSE: BRK.A, BRK.B) bought on July 24, 2026 for about $6.8bn of equity.

From Chapter 2: the cash cycle of a builder that owns its land (D.R. Horton) beside one that buys finished lots under option (NVR), drawn as a stylization rather than a measured timeline. On the 200-lot community the report works through, buying the lots under option cuts the peak cash from $18.2m to $5.9m, for a margin about a point lower.

Part II, Evolution. Ninety years of American homebuilding told as a series of credit cycles, with the British, Japanese and Chinese builders beside them. The Federal Housing Administration, created on June 27, 1934, insured long, fully amortizing loans, so that a buyer could pay for a house in monthly installments over decades. A Levittown house of 1950 cost $7,990, or $56 a month for a veteran. The busts that followed each started when credit tightened. At the rate of April 1971 each $1,000 of a thirty-year loan cost $6.88 a month. At the peak of October 1981 it cost $15.59, so a household with the same budget could borrow 44% as much.

After 1992 the listed builders used the bond and stock markets to acquire one another and to add land, and the bust that followed took 81% off monthly starts. In November 2007 Lennar (NYSE: LEN, LEN.B) sold about 11,000 homesites carried at about $1.3bn for $525m. That price, about 40 cents on the dollar, shows what a seller in need of cash could get for land at the low point.

The survivors then bought their lots under option instead of owning them. Lennar owned four-fifths of its lots in 2010 and fewer than 2.5% of about 488,000 homesites in September 2026, after spinning off its land into Millrose Properties (NYSE: MRP) in 2025. The record-low mortgage rate of 2.65% in January 2021 gave the builders the best margins in their history, 28.8% on D.R. Horton's home sales in fiscal 2022. The rise in rates that followed lifted the monthly payment on a $400,000 loan from about $1,612 to $2,648.

Chapter 8 tells four cases as the decisions their institutions took. The first is NVR's bankruptcy and the way of buying lots that came out of it. The second is TOUSA, whose joint venture paid $826.2m for Transeastern Properties, a Florida builder, in August 2005; TOUSA filed for Chapter 11 on January 29, 2008. The third is Persimmon (LSE: PSN) under the British government's equity loans to buyers of new homes, offered from 2013: its underlying operating margin rose from 21.9% in 2015 to 30.8% in 2018 and fell to 14.0% in 2023 as the subsidy ended. The fourth is China Evergrande, whose buyers paid before their apartments were built and became its largest creditors.

From Chapter 5: each listed builder's fall from its 2005 high to its 2008 to 2009 low, with what became of it by September 2026. NVR fell least, 67%, while the median of the fourteen builders with a traceable price series lost about 92%; the six that failed through Chapter 11 have no free price series and are not drawn.

Part III, Structure & Economics. Where the profit goes, how the cycle works, what a house, a community and a balance sheet earn, and which advantages have lasted. In a boom most of the profit on a new home goes to the landowner, and in a bust it goes to the builders with cash to buy land cheaply. The National Association of Home Builders' 2024 survey put construction at 64.4% of a new home's price and the finished lot at 13.7%.

A builder works out what it can pay for a lot by subtracting its construction cost, its other costs and its profit from the price buyers can pay. On a $400,000 house the survey's shares leave $55,200 for the lot, and if buyers can pay 10% more at the same construction cost, $86,480 is left. A 10% rise in house prices therefore lets the builder pay 57% more for the lot, and competing builders pass that gain to the landowner. The mortgage arm is a second source of profit: financial services earned 21.8% of Lennar's pretax income in FY2025.

The average 30-year mortgage rate rose 69 basis points in the year to September 17, 2026, so a household with the same monthly budget can borrow about 7% less. In July 2026 the Census Bureau counted 9.6 months' supply of new homes, a level last seen in the bust, while estimates of the national housing shortfall run from 3.7 million to 5.5 million homes. The report reconciles the two readings. The shortfall is a national count of missing homes at today's prices, and months' supply measures unsold new homes at today's monthly payments, concentrated in the markets where the builders built fastest. The builders have answered with incentives, above all by paying to lower the buyer's mortgage rate. A one-point cut in the rate gives the buyer about 2.75 times the monthly relief of the same money taken off the price.

Chapter 13 finds no durable competitive advantage in the industry. The ten largest public builders' closings rose from 22.6% of Census new-home sales in 2005 to 43.7% in 2025, yet the two largest, D.R. Horton and Lennar, earned 14.5% and 8.3% on their equity in FY2025. The one advantage that has lasted, holding less land and less debt than competitors, depends on the managers who keep to it.

From Chapter 11: return on average equity in FY2025 for seven American builders and Persimmon, each broken into pretax margin, inventory turns, inventory per dollar of equity and the share of pretax income kept after tax. NVR earned 33.2% on a 17.1% pretax margin because its inventory turned 5.46 times, against 1.36 times at D.R. Horton.

Part IV, The Players. The featured companies on one page at one date, two chapters on the owner-operators and the capital allocators, and the owners and rules outside the stock market. At the September 18, 2026 close eight of the fourteen American production builders traded below book value. PulteGroup has retired 45% of its shares since 2016 while holding net cash.

The owner-operator chapters put every record on one basis, total shareholder return with dividends reinvested over each tenure, against the S&P 500 total return over the same dates. Donald R. Horton told the trade magazine Professional Builder in December 1999: "Walk through the builder graveyard and all the tombstones read 'long and wrong on land.'" His company returned 16.6% a year from its 1992 listing to his death in May 2024, against 10.45% for the index. Robert Toll said publicly in December 2005 that the market had softened and then walked away from thousands of optioned lots, and the shares of Toll Brothers (NYSE: TOL) fell 76.9% from the 2005 high to the low of the bust, against about 92% for the median measured builder. In 2016 William J. Pulte, PulteGroup's founder, whose group held about 9.0% of the shares, forced a change of chief executive.

In Britain Tony Pidgley of Berkeley Group (LSE: BKG) stated his rule as a ratio to the journalist Peter Bill in February 2012: "If the land is 10% of the sum total, you've got a chance. If it becomes 50% or 60%, as it does at the top of a boom, you've got no chance." In February 2009 Berkeley dropped the rest of a promised cash return and sold £49.6m of new shares at £8.40 to purchase land after prices had fallen. It then promised £13 a share over ten years and paid it. The companies' own documents record the failures. TOUSA's chief executive, Tony Mon, wrote in June 2007 that the company would be "[u]nable to survive should housing conditions degrade further." Persimmon's incentive plan of 2012 had no cap and paid its chief executive £45.7m for 2017.

The report judges buybacks by the price paid. Weighted by the dollars spent, Toll Brothers bought back its shares at an average of about 1.27 times book at its year ends, and NVR at 5.1 times. At D.R. Horton's FY2025 multiple of 2.06 times book, each dollar it spent retired about 49 cents of book value.

Chapter 17 covers the private builders and those owned by larger companies. The private and outside-owned builders closed about 94,800 homes in 2025, about 14% of Census new-home sales. The American homebuilding business of Sekisui House (TSE: 1928), the largest Japanese buyer of American builders, lost ¥12.5bn on ¥413.5bn of sales in the six months to July 2026.

From Chapter 16: total shareholder return a year over each leader's tenure, with dividends reinvested, against the S&P 500 total return over the same window (the British rows in pounds, against the FTSE All-Share price index). Dwight Schar's NVR returned 23.9% a year from 1993 to 2022, against 10.2% for the index.

Part V, Speaking the Language. Part V is the reference section: the vocabulary and its competing definitions, the accounting that turns land bought years earlier into this year's margin, and a tour of the filings and the public data in the order the questions arise. The filing states which margin and which lot count is in use. D.R. Horton's FY2025 gross margin was 23.7% consolidated, 22.3% on home sales before charges and about 21.7% after them. The capture rate, the share of a builder's buyers who take their mortgage from its own lender, was 85% of PulteGroup's financed closings and 64% of all its closings in the second quarter of 2026.

Under US rules a write-down of land to its fair value, an impairment, is never reversed, while the British builders reverse theirs under international rules. Interest on the money borrowed to carry land is added to the land's cost and reaches the income statement only when the house closes. It took 4.1% of PulteGroup's home-sale revenue in 2010 and about 0.7% in 2025.

Options keep a builder's commitments outside its reported debt: NVR's $920.1m of deposits controls at least $9.2bn of lots, none of them on its balance sheet. British builders often pay for land on deferred terms and report what they owe as land creditors. Counting its £623.4m of land creditors turns Persimmon's £117.0m of net cash into net debt.

The filings also show the coming year in advance. NVR's backlog of homes sold but not yet closed fell 15% in 2025, so 2026 opened with fewer homes already sold. By July 2026 D.R. Horton had cut its fiscal 2026 closings guidance to about 3.4% below its October 2025 range.

Part VI, Analysis & Valuation. The analysis from the land upward, price to book against return on equity, the prices paid for whole builders and the base rates. Chapter 21 starts with the markets and the land: how many years of closings a builder owns, when it bought that land and how much of its equity a write-down would take, and only then the margin. Per dollar of average inventory, NVR earned about 93 cents of pretax profit in FY2025 and D.R. Horton about 19 cents.

The market prices a builder on its book value and on the return that book earns through a cycle, because its balance sheet is mostly land, lots and houses carried at cost. At the September 18, 2026 close, a line fitted across fifteen US builders and land developers, NVR excluded, crosses one times book at a return on equity of about 11%. The five large builders traded at a median of 1.62 times book, against 1.59 at their fiscal year ends over thirty-one years. NVR's 4.83 times book reflects a small book more than a high price, since it trades at 15.6 times trailing earnings.

A low price relative to earnings has misled buyers when the earnings came from land bought with debt near the top. At the fiscal 2005 year end D.R. Horton traded at 7.7 times earnings, and its shares then lost 28.8% a year for three years. At the fiscal 2022 year end four of the five large builders traded at 3.7 to 5.5 times earnings, and they returned 17% to 47% a year over the next three years. They held most of their lots under option and had spent the good years' earnings on their own shares rather than on land.

Since 2017 buyers of whole builders have paid 1.1 to 1.4 times book for a healthy builder and less than book for a weak one. Berkshire paid 1.09 times book for Taylor Morrison, which earned 12.9% on its equity, close to the 1.10 times the fitted line gives for that return. Chapter 23 sets the base rate: a buyer of a listed builder in September 2006 had about one chance in nineteen of beating the index by 2026, and that chance lay in the builder that owned the least land. The report treats the evidence that owner-operators outperform as suggestive rather than proven, because it rests on a handful of companies and one great bust.

From Chapter 22: price to book at the September 18, 2026 close against return on average equity in the latest fiscal year for sixteen US builders and land companies, with the line fitted across the fifteen other than NVR. The line crosses one times book at a return of about 11%, and NVR sits at 4.83 times book against 2.29 times on the line.

Part VII, The AI Inflection. The part counts only claims that carry a number, a date and a base. The phrase "artificial intelligence" appears in 14 of the 19 annual reports for fiscal 2025 filed by the US builders, as a risk factor, and only Lennar publishes numbers. Its cycle time, the days it takes to build a house, fell to 116 days in the quarter to August 31, 2026 from 126 a year earlier, a gain it also credits to starting houses at an even pace. Its selling, general and administrative expense rose to 9.2% of home-sale revenue from 8.2%, about $78m more in the quarter than at the old ratio, so the spending has raised its overhead before any saving shows.

Attempts to build houses in factories have not changed how most houses are built since the federal factory program of 1969: Katerra raised close to $3bn of equity and filed for Chapter 11 in June 2021. The largest effect so far runs through labor. Electricians' hourly pay rose 7.4% in the year to July 2026, against 5.2% across construction, as data centers competed for them. If D.R. Horton cut its overhead by one point of revenue, its pretax income would rise by about $314m, about 7% of what it earned before tax in fiscal 2025.

Part VIII, Risks & Debates. In every homebuilding failure the report records, the builder owned land bought with debt when credit tightened. The joint venture, the condominium tower and the presale moved the debt to where the parent's balance sheet did not show it. Texas and Florida issued 27.5% of the country's single-family permits in 2025, so a slowdown in those two states now reaches most of the large builders at once.

In September 2026 the numbers a builder controls, its incentives and its deposit write-offs, are rising, while cancellations and debt remain near their lows. Lennar's incentives ran at about 12% of the price, against the 4% to 6% Stuart Miller calls normal. NVR wrote off $75.9m of deposits in 2025 and about $21.7m more in the second quarter of 2026. The Federal Reserve raised its target range on September 16, 2026, its first increase since 2023.

Chapter 27 sets out eleven debates, each with the facts first, the proponents named and the number that would settle it. On incentives, each point of Lennar's margin is worth about $84m of gross profit next quarter. On September 16, 2026 Miller described an environment "which has deteriorated since our last earnings call." On the cost of the option, Hunterbrook Media estimates that Lennar pays Millrose an average of 8.5% a year, about what Lennar's equity earned in FY2025. The holders of Beazer Homes USA (NYSE: BZH) vote on the cash offer from Dream Finders Homes (NYSE: DFH) on Thursday, October 15, 2026, and most of the numbers that would settle the debates arrive between October 20 and November 16.

The appendices. The investable universe, 94 listed companies in 17 countries with their listings and the unlisted builders, land sellers and owners set out beside them; a checklist of 36 questions for the analyst, in eleven sections, in the order of the analysis of Chapter 21, with the place to look and what the record shows for every question; a reading course that opens with the builders' own letters and calls, followed by books, the government, regulatory and court records, interviews and the data series; and the numbered notes that source the report.

The companion deck. The report in the format of the Monday Morning Briefing, designed to be read without the report: the propositions of the Executive Summary with the number that carries each, the report's exhibits re-rendered for the slide format under titles that state what each shows, the tables that carry the argument, and slides for material that has no exhibit in the report, followed by the universe and the checklist.

What the primer is for. A reader who works through it should be able to explain how homebuilding makes money, from the margin on the house and the speed at which the land turns to the builder's own mortgage lender; use the industry's vocabulary, from the lot option and its deposit, the backlog and the cancellation rate to the capture rate, capitalized interest and the British land creditor; read the filings without being misled by a gross margin quoted on the wrong basis, a count of "controlled" lots taken for lots owned, a net order count without its cancellation rate or a net cash figure that leaves out land bought on deferred terms; appraise a builder the way specialists do, from the land upward in the sequence of Chapter 21 and against price to book, the return on equity and the prices paid for whole builders; and recognize the managers and business models that have compounded value over decades, and the ones that bought land with debt at the top of the cycle.

How to use this primer

The report does not need to be read in order. Suggested paths:

• a generalist with limited time, Parts I and VI plus the checklist in Appendix B;

• a reader interested in the history, Part II;

• an accountant, Part V with Chapter 11;

• an analyst working on a specific company, Chapter 14, then Parts III, V, and VI in order;

• a risk officer, Part VIII with Chapters 5 and 8;

• a technologist, Part VII;

• a reader who came for the owner-operators, Chapters 15 and 16, with Chapter 23 for what their records are worth against the index.

Every chapter ends with a "What to remember" box, and the twenty-seven boxes read in sequence summarize the report. The checklist follows the order of the analysis in Chapter 21, and its first eight questions test the risk in the land, because from 2006 to 2011 the large American builders wrote off between 57% and 140% of their 2006 book equity, and the charges came from land held into the downturn.

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This content is published by MOI Global for educational purposes only. It is not investment advice, an offer, or a solicitation, and no security mentioned herein is recommended for purchase or sale. The publisher and contributors may hold positions in securities discussed. Figures are believed accurate as of the dates stated but are not warranted; readers should verify all data against primary sources before relying on it. Nothing herein constitutes legal, tax, or accounting advice.

At the close of September 18, 2026, GE Aerospace (NYSE: GE) was worth $326.1bn, about as much as The Boeing Company (NYSE: BA) at $156.7bn and Airbus SE (Euronext Paris: AIR) at $175.6bn together, on FY2025 GAAP revenue of $45.9bn against Boeing's $89.5bn. Rolls-Royce Holdings (LSE: RR.), at $159.5bn, was worth slightly more than Boeing on the same date. The two Western makers of large jets are valued below the makers of the engines that hang on them because in this industry the money is made after the airplane is delivered, and the products last longer than most of the companies that make them.

The 737 first flew on April 9, 1967, and Boeing delivered 447 more in 2025. CFM International, the joint company of General Electric and Snecma (today GE Aerospace and Safran (Euronext Paris: SAF)), was incorporated in 1974, and its CFM56 engine was still delivered 52 times in 2025. TransDigm Group (NYSE: TDG) states in its 10-K that its parts have "an estimated product life cycle in excess of 50 years." Among the large companies, market value per dollar of latest fiscal-year revenue ran from 1.8 at Boeing to 6.8 at TransDigm and 11.1 at Howmet Aerospace (NYSE: HWM).

The report explains the gap through three businesses that are paid at different points in an aircraft's life. An airframe program spends tens of billions of dollars and most of a decade before its first delivery and builds its early units at a loss; under program accounting Boeing carries the excess cost of those units in inventory, and the 787's deferred production costs peaked at $28,510m at the end of 2015 and stood at $14,428m at June 30, 2026. In 2025 Airbus's commercial aircraft business earned a 10.4% margin on its own adjusted measure on 793 deliveries, while Boeing Commercial Airplanes lost $7,079m on $41,494m of revenue, a GAAP loss of 17.1%, on 600.

An engine maker sells the engine at a thin margin and is repaid over the shop visits, the scheduled overhauls of the following decades: services were 75.1% of the $33,314m of revenue at GE Aerospace's Commercial Engines & Services in 2025, a unit that earned a 26.6% margin. The owner of a proprietary part, one that it alone is certified to supply, prices it against the cost of a grounded airplane: in the year to September 30, 2025 TransDigm earned EBITDA As Defined, its own non-GAAP measure, of 53.9% of net sales (47.2% on GAAP operating income), with about 55% of sales from the aftermarket.

The record follows the same order. Kenneth French's value-weighted portfolio of US-listed aircraft, engine and parts makers compounded at 12.8% a year from July 1926 to July 2026 against 10.4% for the market, with deeper falls and losing decades. Over the twenty years from September 29, 2006 to September 18, 2026, with dividends reinvested, TransDigm returned 27.1% a year, HEICO (NYSE: HEI, HEI.A) common stock 21.1% and Safran 17.6%, against 11.2% for the S&P 500 total return, while Airbus returned 12.3% and Boeing 6.5%, and five of the seven listed airframers sit in the bottom third of that board.

The largest fortunes were made by capital allocators in the supply chain who bought small certified monopolies and priced them: Nicholas Howley's TransDigm returned 26.9 times from its first close on March 15, 2006 to April 30, 2018, 31.2% a year against 8.3% for the S&P 500 total return, and at HEICO $100 invested on October 31, 1990 became $128,481.31 by October 31, 2025 on the company's own table. Boeing is the counterexample. It returned $64.3bn to shareholders from 2013 to 2019, 133% of its $48.4bn of free cash flow, and its stock returned 26.3% a year from the end of 2012 to the end of 2019 and then lost 7.0% a year to the September 2026 snapshot, a 39% loss while the S&P 500 total return rose 2.6-fold.

The report finds that every variable behind that gap was observable in advance in free public documents, and this primer is a working manual for reading them. This is one of a weekly series of primers whose purpose is to help readers expand or deepen a circle of competence, one industry at a time.

The companion deck. Aerospace: a self-contained summary of the report in slide form.

Companion Deck - Aerospace

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What's inside

The primer has two parts, both attached to this post: a 249-page report and a companion deck that can be read on its own. The report has eight parts, twenty-seven chapters, and four appendices, with 30 exhibits, 20 tables, and three photographs; every figure is dated and sourced in the notes. The highlights, part by part:

Part I, Orientation. Why the industry repays the time, the chain reduced to three businesses with one FY2025 worked example each, and the map that certification rather than geography drew. At the September 18, 2026 close the forty companies featured in the primer were worth about $2.34tn, and they sort by how much of the flying fleet's consumption each owns: the six engine companies were worth about $941bn and the seven listed airframers about $499bn. Chapter 3 draws the ten working segments of the chain, from the airframe to the forging and the maintenance shop, and explains why their revenues cannot be added: they supply one another. The borders are drawn by certification, since the holder of a type certificate, the regulator's approval of a design, controls that design for the life of the fleet, and the lessors own just over half of the commercial fleet by industry estimates.

From Chapter 1: the total return a year of Kenneth French's value-weighted aircraft portfolio and of the market over the twenty calendar years ending in each year from 1946 to 2025. The portfolio beat the market in 63 of 80 rolling twenty-year windows, though not in every era.

Part II, Evolution. A century and a quarter told as the making of a duopoly, an engine trio and a supply chain that earns more than the names it supplies. The structure was set before the jet: the Air Commerce Act of May 20, 1926 made the government the licensor of every airworthy design, and the Air Mail Act of June 12, 1934 separated the airframer from its engine maker and its customer, which is why the engine and systems makers supply every airframer.

The jet age turned a crowded industry into a duopoly because each generation of airplane cost more than the last and the losers could not fund the next. Pan Am's order of April 13, 1966 for twenty-five 747s launched a program that took Boeing's payroll down to 38,690 in April 1971, and Rolls-Royce went into receivership on February 4, 1971 on a fixed-price engine costing £110,000 more than its price. The engine makers drew the lesson and shared each program's risk with partners, and the three Western makers of large turbofans of 1970 are the three of 2026. Airbus Industrie, established on December 18, 1970, booked one order in 1976 before Eastern Air Lines' order of April 1978 broke the incumbents' hold, and McDonnell Douglas merged into Boeing on August 1, 1997.

In the century's first quarter Boeing lost its parity with Airbus through a loss of engineering control, from the 787, launched on April 26, 2004 and first delivered on September 25, 2011, to the 737 MAX, grounded from March 13, 2019 to November 18, 2020, and the door plug of January 5, 2024, after which the FAA froze 737 output at the rate then flowing, about 38 a month. The top of the chain is now buying back its constrained suppliers: Spirit AeroSystems on December 8, 2025 and, agreed on September 8, 2026, the castings maker Consolidated Precision Products for $11.75bn. Chapter 8 tells four cases as the decisions their institutions took: TransDigm as the industry's way to compound, and Rolls-Royce's fixed price, Boeing's loss of engineering control and the CSeries of Bombardier (TSX: BBD.B), a good airplane its maker could not fund, as three ways to fail.

From Chapter 7: deliveries of large jets each year from 1974 to 2025, with Airbus's and Boeing's shares of them. Airbus rose from 1% to parity by 2003, the two makers split 17,140 deliveries almost exactly from 2003 to 2018, and Boeing's share has been between 22% and 43% in every year since 2019.

Part III, Structure & Economics. Where the profit pools, how the cycle works, and what each position in the chain, which the report calls a station, earns. The profit goes to whoever owns certified content that the fleet consumes, and three contractual facts decide the split: who buys the part (the airframer once, or the operator one unit at a time), whether the position is sole-source for the life of the aircraft type, and how much aftermarket content the part carries.

World traffic, measured in revenue passenger kilometers, rose from 460bn in 1970 to 8,664bn in 2019, 6.2% a year, fell 65.9% in 2020 and first exceeded 2019 only in 2024. Orders swing far more than deliveries, from a combined book-to-bill (orders over deliveries) of 0.42 in 2009 to 3.08 in 2005 and 2007, and a 2006 to 2025 book-to-bill of 1.45 built the backlog that absorbs each shock, about 16,100 large jets at the two makers at August 31, 2026, 11.6 years of 2025's deliveries. The unit-economics chapter shows that every clean-sheet airliner launched after the 777 that has delivered was late, by one and a half to three and a half years, or never delivered, and that the engine model can also produce large losses: the geared turbofan's recall cost RTX Corporation (NYSE: RTX) a $2.9bn charge for Pratt & Whitney's 51% share.

On one definition from FY2015 to FY2025 the proprietary owners' returns on invested capital never fell below 11%, while Spirit went from 29.4% in 2015 to an after-tax operating loss of 77.6% of its invested capital in 2024. The airframers' moat protects them only from entrants, since COMAC took fourteen years from its founding to a first C919 delivery and still flies on a Western engine. The check on a sole-source price is the Parts Manufacturer Approval, a certified copy sold below the original maker's price, on which HEICO's Flight Support Group built $3,117.3m of net sales at a 24.1% margin in its 2025 fiscal year.

From Chapter 9: each company's operating margin in its latest fiscal year on its own measure, colored by station. The ladder runs from a 17.1% loss at Boeing Commercial Airplanes and 10.4% at Airbus's commercial business to 47.2% on GAAP operating income at TransDigm.

Part IV, The Players. The forty featured companies on one page at one date, two chapters on the owner-operators and the allocators, and the forces that set the chain's terms without a share price. Airbus and Boeing hold the same position and use it very differently. On €73.4bn of 2025 revenue Airbus earned €7,128m of EBIT Adjusted, 9.7%, and ended the year with €12.2bn of net cash; Boeing's $4,281m of GAAP earnings from operations included a $9,566m gain on the sale of Jeppesen and its sister businesses, so the year was an operating loss of about $5.3bn without it, with free cash flow of minus $1,877m and net debt of about $24.7bn. The same pattern shows inside the conglomerates: within RTX, Pratt & Whitney's margin was 7.9% and Collins's 16.3%.

The owner-operator chapters put every record on one basis, total shareholder return with dividends reinvested over each tenure, against the S&P 500 total return and French's portfolio over the same dates, with the window printed. Precision Castparts under Mark Donegan returned 12.24 times from March 31, 2002 to March 29, 2015, 21.3% a year, with earnings per share up 15.8-fold and no help from the multiple, before Berkshire Hathaway (NYSE: BRK.A, BRK.B) paid $235 a share in cash, completed January 29, 2016.

John Plant's Howmet has returned 41.6% a year since February 2019, and at the snapshot it traded at 40.3 times FY2025 EBITDA against 5.8 times in 2018, so part of that rate is a re-rating no downturn has yet tested. TransDigm's twelve special dividends came to $394.50 a share. The chapter on the unlisted forces covers the French and German states, which each held 10.8% of Airbus at March 31, 2025, the launch-aid dispute at the World Trade Organization and Precision Castparts inside Berkshire, which reported $10.8bn of revenue in 2025, more than Howmet's $8.3bn.

From Chapter 16: total shareholder return with dividends reinvested over each leader's tenure, in local currency, against the S&P 500 total return and French's aircraft portfolio over the same dates. Howley's TransDigm returned 31.2% a year from March 2006 to April 2018 against 8.3% for the S&P 500 total return.

Part V, Speaking the Language. Part V is the reference section: the vocabulary and the benchmark ranges, the places in the accounts where the estimates live, and a tour of the filings in the order the questions arise. Most arguments about an aerospace company are arguments about a definition, and the filing names the one in use: the margin's label (Airbus's EBIT Adjusted, Safran's recurring operating income, Rolls-Royce's underlying operating profit, TransDigm's EBITDA As Defined), the free-cash-flow definition, the aftermarket's perimeter and, for Boeing, which of three backlogs. Boeing's release put Commercial Airplanes at "over 6,200 airplanes valued at a record $597 billion" at June 30, 2026 on the ASC 606 basis, while press summaries of its orders-and-deliveries site counted about 6,750 unfilled orders at August 31, 2026.

Program accounting, under which Boeing spreads the cost of a program over the units it expects to deliver, is still in use for commercial airplanes, and two of the three critical audit matters in the FY2025 10-K are program-accounting estimates. The engine makers' estimates live in their long-term service agreements: Rolls-Royce's 2017 operating profit was £1,175m under the old standard and £321m under IFRS 15, with no change to cash. The 737 MAX crisis cost $14,586m in disclosed pre-tax charges in the 10-Ks, before the SEC's $200m penalty and about $6.3bn of higher costs absorbed into the program margin. Cash flow is the test of those estimates: Boeing burned $37.9bn of free cash flow from 2019 to 2025 as diluted shares rose from 565m to 762m, while in 2025 Rolls-Royce's free cash flow was 94% of its underlying operating profit and Airbus's, before customer financing, 64% of its EBIT Adjusted.

From Chapter 19: Boeing's earnings from operations, free cash flow, buybacks and dividends, and net debt, in $bn a year from 2013 to 2025, with the grounding, the pandemic, the door plug and the Jeppesen sale marked. Free cash flow of $13.6bn in 2018 became an outflow of $19.7bn in 2020, and net debt stood at $24.7bn at the end of 2025.

Part VI, Analysis & Valuation. The sequence a practitioner runs and what the record says it is worth. An aerospace company is analyzed from the installed base upward: the station and the sole-source content first, then the fleet that carries them and the aftermarket's growth against its flying, then the programs, and only then the margin, with leverage read as a statement about the steadiness of the aftermarket cash.

At the September 18, 2026 close the featured set traded at a median of about 20 times FY2025 EBITDA, from 14.0 times for the airframers to 29.1 for the proprietary-component makers, while the free-cash-flow yield ran the other way, from 5.1% to 2.1%. The aftermarket premium is real but weak: across sixteen companies the fitted line is EV/EBITDA = 17.1 + 0.107 × share, with an r-squared of 0.10, because the market pays for proprietary aftermarket margin and scarce capacity rather than aftermarket revenue, and it pays about as much for a US listing, a median of 25.6 times against 13.9 for companies listed elsewhere. Strategic buyers paid 12.7 to 17.4 times trailing EBITDA from 2011 to 2025, and GE Aerospace's price for CPP, about 26 times 2027 EBITDA before synergies, is well above that range.

The base-rates chapter decomposes the returns: across thirty-six listed companies over the twenty years to the snapshot the median returned about 11.6% a year and the spread was 23.6 points, with the proprietary-component makers from 16.5% to 27.1% and the airframers at a median of 6.5%. The suppliers compounded on growth, with revenue adding 13.3 points a year to HEICO's return from FY2009 to FY2025, while 15.4 points of Howmet's 48.7% a year since FY2020 came from the multiple.

Part VII, The AI Inflection. Aerospace has been computational for half a century, so the part counts only claims with a number, a date and a base. In the featured set's FY2025 annual filings artificial intelligence is a risk factor, not a business line: across 27 filings the median uses the phrase once, against about 44 uses of "cyber," and Curtiss-Wright (NYSE: CW) writes that it does not currently use AI in the design and development of its products.

Three deployments carry a dated company figure: GE Aerospace's blade inspection, extended to more than a dozen LEAP engine shops on February 13, 2025; GE's internal AI Wingmate tool at 52,000 employees; and Airbus's Skywise data platform at "over 12,000 connected aircraft" on April 1, 2026. Certification keeps machine learning off flight-critical functions until about the end of the decade. The risk that matters is the fight over the fleet's data: the IATA principles giving the airline its data were signed on October 2, 2024 by Airbus, Embraer (NYSE: EMBJ) and Rolls-Royce only. The largest effect so far has come through power demand for data centers, which pulls on the same foundries: Howmet's Gas Turbines revenue rose 25.0% to $944m in 2025 and 38% in the second quarter of 2026.

Part VIII, Risks & Debates. Nearly every aerospace failure in the record is a program bet larger than the balance sheet, a loss of engineering control, or leverage carried into a traffic shock, and each shows first in the inventory, the customer advances, the regulator's letters and the production rate before it reaches the income statement. Most of those indicators have a live reading in 2026: Airbus needed about 99 deliveries a month from September to December to reach around 870 for the year, against about 59 a month through August, and Honeywell Aerospace (NASDAQ: HONA) cut its organic growth guidance to 4% to 5% on August 5.

Eleven debates follow, each with the facts first, the proponents named and quoted, and the number that would settle it. In the first half of 2026 the engine and parts makers grew by a fifth to a quarter while both airframers consumed cash, Boeing's free cash flow at minus $823m. The aftermarket's growth meets its first dated forecast of a slowdown in Melius Research's downgrade of September 14, 2026; the engine model is questioned from inside, by RTX's Chris Calio on July 23, 2026; and the price of buying suppliers is an open question, with GE Aerospace paying about 26 times forward EBITDA for CPP, twice Berkshire's 12.7 times trailing for Precision Castparts.

The appendices. The investable universe, 82 listed companies along the chain grouped by station and region with their listings, the forty featured companies marked, and the unlisted forces an investor must still understand set out beside them; a twenty-six-question due-diligence checklist in eight sections, in the order of the analytical procedure of Chapter 21, with the place to look named for every question; a reading course of the companies' letters, proxies and investor days, the accident and regulatory reports, books, outlooks, hearings and calls, and data sources; and the numbered notes that source the report.

The companion deck. The report in the format of the Monday Morning Briefing, designed to be read without the report: the eight propositions of the Executive Summary with the number that carries each, every exhibit re-rendered for the slide format under a title that states its lesson, the three businesses in FY2025 numbers, the history in three eras, the tables that carry the argument from the business models by station to the multiples by station and the calendar of the debates, and slides on the four cases, the moats, the unlisted forces, the analytical procedure and the failure modes, material that has no exhibit in the report, followed by the universe, the checklist and the summary corrected for survivorship bias.

What the primer is for. A reader who works through it should be able to explain how aerospace makes money, and why the airframe, the engine and the proprietary part are paid at different points in an aircraft's life; use the industry's vocabulary, from the type certificate, the shop visit and the Parts Manufacturer Approval to the accounting quantity of program accounting and TransDigm's EBITDA As Defined; read the filings without being misled by an air-show order tally taken for a firm order, a backlog quoted on the wrong basis or earnings that rest on program-accounting estimates; appraise a company the way specialists do, from the installed base upward in the sequence of Chapter 21 and against the multiples by station and the prices strategic buyers have paid; and recognize the managers and business models that have compounded value over decades, and the ones that returned more cash than they earned.

How to use this primer

The report does not need to be read in order. Suggested paths:

• a generalist with limited time, Parts I and VI plus the checklist in Appendix B;

• a reader interested in the history, Part II;

• an accountant, Part V with Chapter 11;

• an analyst working on a specific company, Chapter 14, then Parts III, V, and VI in order;

• a risk officer, Part VIII with Chapter 8;

• a technologist, Part VII;

• a reader who came for the owner-operators, Chapters 15 and 16, with Chapter 23 for what their records are worth against the index.

Every chapter ends with a "What to remember" box, and the twenty-seven boxes read in sequence summarize the report. The checklist follows the order of the analytical procedure in Chapter 21, and its five questions on the installed base and the company's position come first, because in this industry the money is made on the installed base rather than on the delivery.

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Please reply to this email or leave a comment with what was useful, what was missing, any errors you find, and the industries you would like covered next. Member requests will inform the order of coverage.

This content is published by MOI Global for educational purposes only. It is not investment advice, an offer, or a solicitation, and no security mentioned herein is recommended for purchase or sale. The publisher and contributors may hold positions in securities discussed. Figures are believed accurate as of the dates stated but are not warranted; readers should verify all data against primary sources before relying on it. Nothing herein constitutes legal, tax, or accounting advice.

Through the tightening cycle that ran from the first quarter of 2022 to the third quarter of 2023, the American banking industry passed half of the policy move into the price of its interest-bearing money, a cumulative deposit beta of 0.50. Westamerica Bancorporation (Nasdaq: WABC) passed through 0.02. Texas Capital Bancshares (Nasdaq: TCBI) passed through 0.80. In fiscal 2025 Westamerica paid 0.26% for its total deposits and Live Oak Bancshares (NYSE: LOB) paid 3.54%, against a median of 1.92% across the forty-eight banks the report features. At the industry’s price Westamerica’s interest expense would have been about $77m a year higher before tax and about $57m after it, against fiscal 2025 net income of $116m. The ranking also persists: the same eight banks have sat in the bottom quartile of deposit betas across three tightening cycles and twenty years.

That spread is where a bank’s earnings come from. A bank buys money from depositors in a defined territory, lends it back into that territory and lives on the difference at roughly ten times leverage, and the leverage is not a choice, since equity was 10.31% of assets across all insured commercial banks at December 31, 2025 against 6.14% at the end of 1984. What a management chooses is the price of the liability, the quality of the asset and the size of the cost base. Cullen/Frost Bankers (NYSE: CFR) works the model end to end: at December 31, 2025 it held $42.9bn of deposits, a third of them paying no interest at all, lent $21.9bn of that out, earned $1,736m of net interest income on a 3.66% taxable-equivalent margin, and after fees, operating cost, credit and tax was left with $649m of net income, a 1.23% return on average assets, 12.5 times leverage and a 15.3% return on average equity at a 63.5% efficiency ratio. There are three ways that line breaks: credit through the provision, where the industry charged off 0.57% of loans in the second quarter of 2026; rates through the margin and the equity at once, because deposits reprice when the bank chooses and fixed-rate assets do not; and liquidity, which is not a term in the equation at all. Silicon Valley Bank reported a 16.05% total risk-based capital ratio at December 31, 2022 beside an unrecognized held-to-maturity loss of $15,158m against $11,847m of tangible common equity, and more than $40bn left it on March 9, 2023 with about $100bn more expected the next day.

The long record is better than most investors assume and the recent one is worse. Kenneth French’s value-weighted portfolio of American bank stocks compounded at 11.46% a year from July 1926 to July 2026 against 10.35% for the market, and at 6.54% a year over the twenty years to December 2025 against the market’s 11.06%; the regional tier did 4.03% a year from June 2006 to December 2025 against 11.14% on the S&P 500 total return. The case for owning the industry rests on the dispersion rather than the average: over the twelve years to December 31, 2025 the featured banks grew tangible book value per share with dividends at a median of 9.82% a year, in a range from 4.87% to 20.11%, and over the twenty years to December 31, 2025 eight owner-operator records compounded at a median of 10.57% a year against the bank portfolio’s 6.54%, while Gregory Becker compounded SVB Financial at 16.57% a year for thirteen years and went to nothing on March 10, 2023. Every variable behind that gap was observable in advance in free public documents, and this primer is a working manual for reading them. This is one of a weekly series of primers whose purpose is to help readers expand or deepen a circle of competence, one industry at a time.

The companion deck. US Regional Banks: a self-contained summary of the report in slide form.

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The primer has two parts, both attached to this post: a 248-page report and a companion deck that can be read on its own. The report has eight parts, twenty-seven chapters, and four appendices, with 30 exhibits, 23 tables, and two photographs; every figure is dated and sourced in the notes. The highlights, part by part:

Part I, Orientation. Why the industry is worth a week of work, the whole of a bank’s economics in one equation with one bank’s accounts behind it, and the map that statute rather than strategy drew. At June 30, 2026 there were 4,238 federally insured institutions holding $26.46tn of assets and $20.72tn of deposits, and each files the same quarterly Call Report, in the same line items, whether it holds $4bn or $700bn. The ten largest insured banks held $14.34tn of that, and the industry this primer is about is the next two hundred charters down. Chapter 2 builds the return on equity in two stages, five lines as a percentage of average assets and then a leverage multiple, so that what a management chooses is separated from what a regulator sets. Chapter 3 gives the size lines that govern strategy, from the $10bn debit-interchange threshold to the $100bn and $250bn supervisory lines, and the difference between the bank that files the Call Report and the holding company that files the 10-K, which is the most common source of error in reading bank data.

Part II, Evolution. Two and a half centuries told as one event repeated. The American peculiarity of thousands of small banks is a legal artifact: a federal tax on state banknotes in 1866 pushed state banks onto deposits and made the deposit the product, and the McFadden Act of 1927 froze the branching map for sixty-seven years. Deposit insurance changed what a bank is, turning roughly nine thousand suspensions in the four years to 1933 into nine insured failures in 1934. Deregulation then arrived in the wrong order, the price of deposits freed in 1980 and the powers to invest them in 1982 while the guarantee rose to $100,000, and Continental Illinois proved in May 1984 that a wholesale-funded bank can lose its funding in a week, at a cost to the FDIC of about $1.1bn. Between 1980 and 1994, 1,617 banks and 1,295 thrifts were resolved, and in Texas 425 commercial banks failed and nine of the ten largest holding companies failed or were sold, having been better capitalized than their peers by more than a quarter in 1980 to 1982. The crisis of 2008 to 2014 took 507 banks and $69.6bn of the insurance fund and drove the fund to a negative $20.9bn. March 2023 was the same lesson at modern speed: Silicon Valley Bank closed on March 10 against $175.4bn of deposits, Signature Bank followed on March 12 and First Republic Bank on May 1, all depositors were made whole under a systemic-risk exception, and the industry was charged a $16.3bn special assessment for it. The era the primer is written inside opened with the regulators moving faster: approvals now take four to six months against a year and more in 2021 to 2024, Banco Santander completed the purchase of Webster Financial for about $12.3bn on August 20, 2026, and five banks failed in 2026 through September 21 with under $700m of assets between them.

From Chapter 6: the three banks that failed in 2023, their uninsured deposit shares at December 31, 2022 against the industry’s, and the deposits withdrawn and queued, with the closing date and the acquirer on each bar. More than $40bn left Silicon Valley Bank on March 9 with about $100bn more expected the next day.

From Chapter 7: insured institutions by year against failures and assistance transactions, with the 1984 peak and the failure waves flagged. There were 14,496 insured commercial banks at the 1984 peak and 3,728 at June 30, 2026, and mergers rather than failures did almost all of the work.

Part III, Structure & Economics. The two halves of the balance sheet, then the return, the models and the moats. The deposit chapter is first because the deposit is the product: the cost of interest-bearing money across the featured set ran from 0.50% to 3.95% in fiscal 2025, an eightfold range on the largest cost line of a business levered ten to one, and the uninsured share measures what can leave quickly rather than how firmly the money is held, because what matters is whether a balance is operating or investable. The loan book is read for concentration before yield, since the average loss is survivable by design: the industry’s net charge-off rate has averaged 0.71% a year since 1967 and has exceeded 1.25% in only two episodes in sixty years, peaking at 1.58% in 1991 and 2.62% in 2009, and the 2021 reading of 0.24% is the worst possible base for a through-the-cycle assumption. Concentration is measured against capital on the interagency guidance of December 2006, where Bank OZK (Nasdaq: OZK) is the only featured bank above the construction line at 120% of total risk-based capital while Westamerica does no construction lending at all. The rate chapter puts $326.7bn of industry unrealized securities losses at June 30, 2026 beside the $689.9bn peak of the third quarter of 2022. The moats chapter keeps two edges that can be measured from free data, the cost of the liability and the community lender’s knowledge of borrowers who do not fit a score.

From Chapter 9: the cumulative interest-bearing deposit beta of forty-eight lead banks across the tightening windows of 2004 to 2006, 2015 to 2019 and 2022 to 2023, with the industry line on the third. The industry passed through 0.50 in the last cycle and the featured banks ran from 0.02 to 0.80.

Part IV, The Players. The forty-eight featured banks on one page at one date, then the people. On one set of definitions the net interest margin runs from 1.69% to 5.12%, the efficiency ratio from 31.7% to 93.2%, common equity tier 1 from 10.23% to 21.11%, the uninsured share from 16.6% to 66.4% and price to tangible book from 0.75x to 2.50x, which is why the industry cannot be analyzed as one business. Two chapters give the owner-operators and the allocators their records on one basis, tangible book value per share with dividends added undiscounted, with both dates printed: over the twenty years to December 31, 2025, against an index at 6.54% a year, Frank B. Holding Jr. compounded First Citizens BancShares (Nasdaq: FCNCA) at 15.13%, David Zalman compounded Prosperity Bancshares (NYSE: PB) at 12.59% and Johnny Allison compounded Home BancShares (NYSE: HOMB) at 12.46%, at a median of 10.57% across the eight comparable records. The levers are few and they repeat, and the largest is the purchase of a failed institution from the receiver, used by seven of the seventeen leaders profiled and available only in 1988, in 2008 to 2014 and in 2023: First Citizens bought roughly $72bn of Silicon Valley Bridge Bank’s assets at a $16.5bn discount on March 27, 2023. The group’s common and unpriced exposure is succession, since George Gleason has run Bank OZK for forty-seven years and David Payne has run Westamerica for thirty-seven with no announced successor between them. A chapter on the balance sheets that file no proxy covers the FDIC, which held $161.1bn at a 1.48% reserve ratio at June 30, 2026 and decides who buys a bank when one fails; the Federal Home Loan Banks, whose advances rose from $827bn at December 31, 2022 to $1.05tn at March 31, 2023; and the credit unions, 4,250 tax-exempt institutions holding $2.48tn.

From Chapter 16: the leaders’ records on tangible book value per share with dividends added undiscounted over each tenure’s free window, drawn as the spread against the index named on each row. The cautionary rows end at zero.

Part V, Speaking the Language. Part V is the reference section. Nine descriptors travel with every bank figure, from the entity and the period convention to the efficiency-ratio definition and the fiscal year, and a figure without them cannot be compared with anything, which is why Cullen/Frost’s fiscal 2025 cost of deposits is 1.89%, 1.87% and 1.85% in three defensible places. M&T Bank (NYSE: MTB) reports a 56.0% efficiency ratio for 2025 on its own definition against 56.7% on the standard one from the same filing, which is what an honest adjustment looks like. The accounting chapter shows that reported capital and book value are the output of three choices, the securities classification, the size of the reserve and the treatment of the marks, and that the work is to undo all three: the industry’s allowance went from 1.15% of loans at the end of 2019 to 2.16% at the end of 2020 and 1.61% at the end of 2025 while realized losses ran the other way. The filings chapter reads a bank 10-K in the order the questions arise rather than the order it is bound, and notes that some of the best banks in the set, Bank OZK and Hingham Institution for Savings (Nasdaq: HIFS) among them, file with their banking regulators rather than with the Securities and Exchange Commission, so an EDGAR search reports that they do not file at all.

Part VI, Analysis & Valuation. The sequence a practitioner runs, in order, and what the record says it is worth. The analysis is liability-side first because every failure began on the right-hand side of the balance sheet: the mix, the price, the beta, the uninsured share and the tenure of the deposits, then the loan book read for concentration, then the securities book, then capital read twice, as reported and with the marks taken. Price to tangible book is a statement about the return on tangible common equity and about the honesty of the book, and the market says the second clause carries most of the weight: regressed across ninety-five listed banks at the September 11, 2026 close, the fitted line is 0.94 plus 0.0635 times the return in percent, with an R² of 0.26, and the residuals show Glacier Bancorp (NYSE: GBCI) paid 2.03x tangible book on an 8.1% return while Western Alliance Bancorporation (NYSE: WAL) earns 12.8% at 1.15x. A private buyer settles the same question in cash, and the 2025 and 2026 wave was struck at 1.53x to 1.93x tangible book and 6.6% to 8.6% of total deposits. Statistical cheapness is usually a funding or a credit problem still being reported, which is what Flagstar Financial (NYSE: FLG) at 0.75x tangible book is, with the set’s highest cost of interest-bearing money at 3.95% beside it. The base-rates chapter carries the leaderboards with their survivorship correction: of roughly 18,463 insured charters alive at the end of 1984, 3,451 were still operating in September 2026, and most of the exits were sales at a premium rather than failures.

From Chapter 22: ninety-five listed American banks at the September 11, 2026 close on June 30, 2026 tangible book, with the fitted line and its R² of 0.26 printed and the featured set marked. The return explains about a quarter of what an American bank costs on one day.

Part VII, The AI Inflection. American banking has been algorithmic since bureau-based credit scoring spread in the late 1980s, so the part counts what can be counted and names the ratio that would have to move. Through the middle of 2026 the featured set shows no move in the cost line: the median efficiency ratio at the lead bank is 1.4 points better than in 2019 while the ten super-regionals are 1.3 points worse, and the median fiscal 2025 annual report mentions artificial intelligence twice, almost always in risk factors. The competitive fact is the absolute dollar rather than the share of revenue, since JPMorganChase’s tagged technology caption was $11.0bn in fiscal 2025 against M&T’s $558m and Westamerica’s $10.8m, which is why a regional bank buys its core processing from a market in which three vendors hold 72% of bank relationships. The exposure that matters sits on the liability side and no bank publishes it: what a bank’s deposits would cost if every retail customer held a tool that moved balances to the best insured rate weekly has no published answer at any of the forty-eight.

Part VIII, Risks & Debates. Banks die of credit, of rates or of liquidity, and the three are separable in the filings even when they arrive together. Each announces itself two to eight quarters ahead in lines a reader can watch, from loan growth far above peers and the concentration ratios to unrealized losses against common equity tier 1 and the uninsured share beside brokered funding. One mode gives no warning: several of the failures since the March 2023 cohort were frauds rather than credit or rate events, among them the chief executive of Heartland Tri-State Bank who embezzled about $47.1m, and a falsified collateral file moves no ratio until the loss is recognized. Most capital in this industry is destroyed without a failure at all, by growth into a hot market, by wholesale funding, by holding-company leverage and above all by the dilutive rescue raise. The closing chapter describes the position in September 2026, facts first and proponents named: insured institutions earned $90.1bn in the second quarter at a 1.37% return on assets on a 3.32% net interest margin with forty-seven banks on the problem list, while the Federal Open Market Committee raised the target range to 3.75 to 4.00 percent on September 16, 2026 against $326.7bn of unrealized securities losses of which $216.9bn sits where no mark is taken. Eleven debates follow, among them commercial real estate and lending to non-depository financial institutions, up 22.4% in the year to about $1.5tn.

The appendices. The investable universe, 109 listed banks and thrifts grouped by tier and region with tickers, venues, assets, market values and one-line descriptions, and the card and consumer-finance charters set out as a labeled adjacent block with the reason they are not regional banks; a forty-two-question due-diligence checklist in seven sections, in the order of the analytical procedure of Chapter 21, with a free source named for every question; a reading course of shareholder letters, transcripts, regulators’ post-mortems, books and data sources; and the 312 numbered notes that source the report.

The companion deck. The report in the format of the Monday Morning Briefing, designed to be read without the report: the exhibits re-rendered for the slide format, the eight propositions of the Executive Summary, the tables that carry the argument, the universe and the checklist, and slides for material that has no exhibit in the report.

What the primer is for. A reader who works through it should be able to explain how a regional bank makes money, and why two banks earning the same return on equity are not the same business; use the industry’s vocabulary, from the deposit beta and the uninsured share to the efficiency ratio, the accumulated other comprehensive income election and the allowance; read the filings without being misled by a capital ratio struck before the marks, an adjusted efficiency ratio or an acquirer’s accreting loan mark; appraise a bank the way specialists do, in the sequence of Chapter 21 and against price to tangible book, return on tangible common equity and the prices private buyers pay for deposits; and recognize the managers and business models that have compounded value over decades, and the ones that ended at zero.

How to use this primer

The report does not need to be read in order. Suggested paths:

• a generalist with limited time, Parts I and VI plus the checklist in Appendix B;

• a reader interested in the history, Part II with Chapter 8;

• an accountant, Part V;

• an analyst working on a specific bank, Chapter 14, then Parts III, V, and VI in order;

• a risk officer, Part VIII with Chapter 26;

• a technologist, Part VII;

• a reader who came for the owner-operators, Chapters 15 and 16, with Chapter 23 for what their records are worth against the index.

Every chapter ends with a “What to remember” box, and the twenty-seven boxes read in sequence summarize the report. The checklist follows the order of the analytical procedure in Chapter 21, and the eight questions on the deposit franchise come first, because a bank whose funding fails that block will not be saved by the thirty-four questions after it.

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Please reply to this email or leave a comment with what was useful, what was missing, any errors you find, and the industries you would like covered next. Member requests will inform the order of coverage.

Corrected September 26, 2026. ServisFirst Bancshares trades at 2.35x tangible book, not 1.17x; the earlier figure paired a share count from before the company’s two-for-one split of August 21, 2026 with the post-split price. The fitted line in Chapter 22 and the chart above are now 0.94 plus 0.0635 times the return, with an R² of 0.26, and the report, deck and Part Two audio have been replaced. Our thanks to the member who caught it.

This content is published by MOI Global for educational purposes only. It is not investment advice, an offer, or a solicitation, and no security mentioned herein is recommended for purchase or sale. The publisher and contributors may hold positions in securities discussed. Figures are believed accurate as of the dates stated but are not warranted; readers should verify all data against primary sources before relying on it. Nothing herein constitutes legal, tax, or accounting advice.

On December 6, 1951, The Commercial and Financial Chronicle printed a one-page article headed “The Security I Like Best” by a twenty-one-year-old from Omaha. The security was Government Employees Insurance Company, and the argument was an expense ratio. GEICO’s underwriting profit was 27.5% of premiums earned in 1949, against 6.7% for the 135 stock casualty and surety companies in the Best’s compilation, because GEICO sold direct and had no agents and no branch offices. Seventy-five years later GEICO is part of Berkshire Hathaway (NYSE: BRK.B), and the gap is still there. In fiscal 2025 GEICO ran an 84.7% combined ratio on a 12.4% expense ratio, against a statutory combined ratio of 92.2 for the US industry.

The report describes an insurer as a leveraged investment vehicle whose leverage is priced by underwriting. An insurer collects premiums before it pays claims, and it invests the money in between, which the industry calls float, for its shareholders. Berkshire held about $176bn of float at December 31, 2025 at a cost of minus 5.45% a year: it earned $9,460m of pre-tax underwriting profit on an average float of $173.5bn, so it was paid to hold the money. The combined ratio, losses plus expenses as a share of premium, sets the price of that leverage. At a combined ratio below 100 the insurer earns an underwriting profit and holds its float for less than nothing; above 100 it pays for the float out of investment income. Return on equity is the underwriting margin times premium leverage plus the investment yield times asset leverage, less tax. Progressive (NYSE: PGR) earned 35.3% on average common equity in fiscal 2025 from a 12.6% underwriting margin at 2.92 times premium leverage. RenaissanceRe (NYSE: RNR) earned 25.9% from a nearly identical margin at 0.96 times, because its return comes from the investment side.

The report starts from the long-run record. Nineteen listed insurers and reinsurers that survived to be ranked returned a median 11.84% a year with dividends reinvested, against a median 10.86% for the S&P 500 over the same windows, and fourteen of the nineteen beat the index. The spread is wide. Kinsale Capital (NYSE: KNSL) compounded at 35.18% a year from its July 2016 listing against 15.19% for the index, while AIG (NYSE: AIG) returned minus 1.83% a year over 33.6 years. Those are the returns of survivors: of roughly twenty companies formed in the Bermuda reinsurance classes of 1993, 2001, and 2005, four were still independently listed on September 4, 2026. The primer’s larger claim is that a reader can understand this industry from public documents, because the accounting is published, every United States filing must carry a ten-year loss-development table by line of business, and the base rates run for forty years. This is one of a weekly series of primers whose purpose is to help readers expand or deepen a circle of competence, one industry at a time.

The companion deck. Property and Casualty Insurance & Reinsurance: a self-contained summary of the report in slide form.

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The primer has two parts, both attached at the end of this post: a 267-page report and a 53-slide companion deck that can be read on its own. The report has eight parts, twenty-seven chapters, and four appendices, with 26 exhibits, 22 tables, and three photographs; every figure is dated and sourced in the notes. The highlights, part by part:

Part I, Orientation. Why the industry is worth studying, how an insurer makes money, and a map of the industry. The United States industry wrote about $1.1tn of direct premiums in 2024 against policyholders’ surplus of $1,131.6bn; $800bn of global reinsurer capital stood behind the world’s carriers at June 30, 2026; and the largest American writer, State Farm, has no shares, with $93.8bn of direct premium in 2023, or 9.9% of the market. The listed universe is about forty-four investable majors. Berkshire alone is roughly 38% of their market value, and without Berkshire, Europe rather than the United States is the largest bloc. Chapter 2 sets out float, the combined ratio, and the return decomposition on one page, and it shows why a combined ratio means nothing without its basis: Progressive reported 87.4% for 2025 under GAAP, 87.1% on the statutory basis, and 89.1% for the 2025 accident year, and all three are correct.

From Chapter 3: the forty-four listed groups as bubbles at their headquarters, sized by market capitalization at the close of September 4, 2026, with a numbered key. Berkshire Hathaway, at $1.08tn, is drawn at the scale’s cap of $200bn; at true scale its bubble would cover the Midwest.

Part II, Evolution. The history of the industry from the coffee house to the January 2023 renewals, told as one event repeated: a correlated loss arrives, carriers find they have written more exposure than they knew, some pay in full and some do not, and capital is destroyed and then returns at a higher price. Chicago in 1871 broke 68 of the 182 companies carrying its risks, and only 31 paid in full. San Francisco in 1906 produced insured losses of $235m in dollars of the day, bankrupted at least twelve American insurers, and wiped out the industry’s profit of the preceding forty-seven years; Munich Re (Xetra: MUV2) paid its 11 million marks in full. The professional reinsurer was the answer to correlated fire loss: Cologne Re in 1846, Swiss Re (SIX: SREN) in 1863, Munich Re in 1880. The century that followed turned a property business into a liability business. The era of catastrophe capital opened with Hurricane Andrew on August 24, 1992, after which eleven insurers became insolvent. Each large catastrophe then brought a new class of Bermuda reinsurers: about $695m of capital raised in 1985 and 1986, $4.8bn in 1993, $8.5bn in 2001, and $13.3bn in 2005. Four case studies close the part: GEICO’s near-failure in 1976, Progressive’s published 4% underwriting-profit objective, AIG’s three simultaneous failures in 2008, and the twenty-one years Lloyd’s took to move from the first loss of its reinsurance spiral in 1988 to legal finality in 2009.

From Chapter 4: the dated turns from the Great Fire of London in 1666 to the 2026 renewals, on an axis that changes scale at 1906 and at 1992. The great fires and storms are in red; the foundings, the regulatory turns, the deals, and the Bermuda classes are in the era colors.

Part III, Structure & Economics. This part follows the premium dollar through the industry and shows who keeps what. A premium passes through as many as seven hands, from the retail agent to the reinsurer and the capital markets, and every intermediary gets paid whether the business is profitable or not, while the risk-takers do not. The US industry paid 10.8 points of net written premium in commissions and brokerage in 2023 and ran a 24.9% expense ratio, but the average hides a dispersion of models: GEICO ran a 12.4% expense ratio in fiscal 2025 and The Hartford’s commercial book ran 31.2%. The cycle chapter dates twenty years of the industry’s combined ratio to the losses that turned it. Calendar 2025 was the best US underwriting year in a decade, a statutory combined ratio of 92.2 against 101.9 in 2023, earned while premiums were falling. The unit-economics chapter builds float, the combined ratio, and investment leverage into a return on equity for four types of company. The moats chapter tests each candidate advantage against the record and keeps four: a distribution cost advantage, pricing sophistication where the feedback loop is short, underwriting culture and specialization, and capital and ratings as a license to write.

From Chapter 11: Berkshire Hathaway’s insurance float on the left axis, from $17m in 1967 to $176bn in 2025, and the cost of float on the right axis. The cost was below zero in 17 of the first 31 years and in each of the last three; in 1984 it reached 18.98%.

Part IV, The Players. Profiles of the forty-four listed majors, each with its market value, its combined ratio on the basis the company reports, and its price to book. No two of the three accounting regimes in use produce comparable combined ratios, so every figure in the table carries its basis. Two chapters go to the owner-operators and the master allocators, from Warren Buffett and Ajit Jain to Peter Lewis at Progressive, Hank Greenberg at AIG, Prem Watsa at Fairfax Financial (TSX: FFH), and Michael Kehoe at Kinsale: their records, the incentive plans in their proxy statements, which in this industry pay on book value per share, and their letters. Three of ten owner-operators beat the index on book value per share plus dividends over the decade to 2025; the long tenures beat it and the last decade did not. A chapter on the unlisted forces covers the mutuals, the state, and private capital. State Farm began paying a $5bn cash-back dividend on more than 49 million vehicles on July 31, 2026. Florida’s Citizens fell from 1,407,805 policies in September 2023 to 266,093 in August 2026. Third-party reinsurance capital stood at $144.5bn at June 30, 2026.

From Chapters 15 and 16: fourteen owner-operators and allocators, each with the move that defined the tenure and one number on the basis the report states. Warren Buffett’s 19.7% a year in per-share market value from 1965 to 2025 heads the list; one row is a record of destruction.

Part V, Speaking the Language. Part V is the reference section. Every figure in this industry carries seven descriptors, from the premium base and the accounting regime to the fiscal year and the currency, and a figure without them cannot be compared. A glossary and a guide to the key performance indicators separate the metrics managements report from the ones the reader must compute: accident-year results excluding catastrophes, reserve development by line, reserves to surplus, and earned rate against loss trend. The accounting chapter shows how a loss-development triangle turns into earnings, why the calendar-year combined ratio contains prior-year development in full and the accident-year ratio does not, and which markers separate an aggressive balance sheet from a conservative one. The filings chapter walks through a Form 10-K, with Travelers (NYSE: TRV) as an example, and sets out the reporting calendar an insurance investor keeps.

Part VI, Analysis & Valuation. The sequence a practitioner runs, in order: business mix and the length of the tail first, then the reserve verdict read line by line, then the combined ratio normalized on the company’s own definition with rate set against the disclosed loss trend, and only then a return on equity, with the incentive test last. The reserve verdict comes early because a favorable headline can hide strengthening: Travelers’ $1,593m of adverse development on general liability accident years 2016 to 2024 sits inside nine of ten calendar years of reported net favorable development. The valuation chapter shows that price to book tracks return on equity closely across 54 listed insurers and reinsurers, and that the companies sitting off the line are the ones to study; it gives twenty years of price-to-book bands by type of company; and it prices control from the acquisitions of 2011 to 2026, a band of roughly 0.8 to 1.9 times book. The base-rates chapter carries the leaderboard, its survivorship correction, and the decomposition of the returns.

From Chapter 23: annualized returns, dividends reinvested, of nineteen listed insurers and reinsurers against the S&P 500 over each company’s own window from its first trading day to September 4, 2026. Fourteen are ahead of the index, and the median edge is about a point a year.

Part VII, The AI Inflection. Part VII separates what can be counted about AI in this industry as of September 2026 from what cannot. The report takes the catastrophe model of the 1990s as the precedent: the model replaced the underwriter’s distribution rather than the underwriter, and the losses came from what the model left out. The countable facts are few, and each is an operating fact rather than a ratio. AIG’s Lexington unit quoted 30% more submissions with AI assistance. Travelers consolidated its claims call centers from four to two, and roughly a third of its claims now settle without a human touch. Lemonade’s cost per claim is $19. The expense ratio, where the change would show, has not moved for it; Progressive’s went from 20.4% to 21.5% over the decade to 2025. Regulation is a filing burden rather than a prohibition, and the EU AI Act names life and health pricing as high-risk, not property and casualty. The test that would settle the argument is the loss ratio by underwriting cohort, which no company publishes.

Part VIII, Risks & Debates. Insurers fail in three ways, on three timescales: under-reserved long-tail casualty, which takes five to twenty-one years to end in insolvency; catastrophe concentration, which takes about two; and, once, a holding company’s borrowing while its insurance subsidiaries stayed solvent. Each failure showed up first in published disclosures, and the chapter lists ten early-warning indicators with where to read them and their current readings, from Everest Group’s (NYSE: EG) $1.5bn of adverse development in the fourth quarter of 2024 to the industry’s own other-liability line. The closing chapter describes the industry’s position in September 2026, the best results in a generation earned on falling premium, and works through the twelve live debates, facts first and proponents named: the cycle, the casualty reserves, insurability, alternative capital, the boom in excess and surplus lines, and whether AI ever reaches the loss ratio among them.

The appendices. The investable universe, one hundred listed names by segment with tickers, listing venues, market capitalizations, and one-line descriptions; a fifty-four-question due-diligence checklist in ten sections, in the order of the analytical procedure of Chapter 21; a reading list of books, shareholder letters and investor materials, interviews and podcasts, and data sources; and the sources for the report.

The companion deck. Fifty-three slides in the format of the Monday Morning Briefing, designed to be read without the report. It contains all 26 of the report’s exhibits, re-rendered for the slide format; the Executive Summary’s eight propositions on one slide; tables condensed from the report on the defining catastrophes, the return decomposition, the featured set, the several combined ratios one company reports, the expense-ratio record, and the early-warning indicators; the universe and the checklist; and three slides on material that has no exhibit in the report: the incentive structures at twelve owner-operated insurers, the four case studies, and the moats and the three tests that separate a moat from good weather.

What the primer is for. A reader who works through it should be able to explain how a property and casualty insurer makes money, and why the same risks earn one company a profit and another a loss; use the industry’s vocabulary, from float and the combined ratio to the accident year, the triangle, and the attachment point; read the filings without being misled by a calendar-year ratio, a headline development figure, or a book value struck on a different basis; appraise an insurer the way specialists do, in the sequence of Chapter 21, against price to book, return on equity, and the acquisition record; and recognize the managers and business models that have compounded value over decades, and the ones that destroyed it.

How to use this primer

The report does not need to be read in order. Suggested paths:

• a generalist with limited time, Parts I and VI plus the checklist in Appendix B;

• a reader interested in the history, Part II with Chapter 8;

• an accountant, Part V;

• an analyst working on a specific company, Chapter 14, then Parts III, V, and VI in order;

• a risk officer, Part VIII with Chapter 26;

• a technologist, Part VII;

• a reader who came for the owner-operators, Chapters 15 and 16, with Chapter 8 for the episodes behind them and Chapter 23 for what their records are worth against the index.

Every chapter ends with a “What to remember” box, and the twenty-seven boxes read in sequence summarize the report. The checklist follows the order of the analytical procedure in Chapter 21, and the questions that can end the work come first.

Feedback and requests

Please reply to this email or leave a comment with what was useful, what was missing, any errors you find, and the industries you would like covered next. Member requests will inform the order of coverage.

This content is published by MOI Global for educational purposes only. It is not investment advice, an offer, or a solicitation, and no security mentioned herein is recommended for purchase or sale. The publisher and contributors may hold positions in securities discussed. Figures are believed accurate as of the dates stated but are not warranted; readers should verify all data against primary sources before relying on it. Nothing herein constitutes legal, tax, or accounting advice.

In 1997 Jeffrey Sprecher, then a power-plant developer, bought the Continental Power Exchange, a struggling electronic energy-trading platform in Atlanta, for a token sum plus the assumption of its liabilities: a dollar by the oft-told account, a thousand by others, and Sprecher has said he cannot remember which. He relaunched the platform in 2000 as Intercontinental Exchange (NYSE: ICE). ICE now owns the New York Stock Exchange, the Brent crude oil and TTF natural gas benchmark contracts, and the European Union’s carbon market. Its FY2025 net revenue of $9.9 billion was its twentieth consecutive annual record, and its market capitalization on August 31, 2026 was roughly $90 billion.

The report describes the investment case as toll roads on capitalism: an exchange collects a very small fee on a very large and recurring volume of trading, hedging, and price referencing, on a platform whose costs are mostly fixed. CME Group (Nasdaq: CME) earned just under $0.70 per contract in FY2025; on an E-mini S&P 500 future with about $300,000 of notional value, the roughly $0.61 it collects is about one-fiftieth of a basis point. Operating and EBITDA margins across the major exchange groups were 50–79% in FY2025, and derivatives volumes rise in periods of market stress, when most other businesses suffer. The fee is not guaranteed, however. Between 1993 and 1998 the all-electronic DTB, later Eurex, took the Bund futures contract from LIFFE’s London trading floor: its share of volume went from roughly 24% in 1993 to above 50% in January 1998 and above 99.9% by October 1998. The report explains why that migration happened and why no cleared derivatives franchise has migrated to a rival in the twenty-eight years since. Those two answers cover most of what an investor needs to know about competitive advantage in this industry.

Shareholder returns since these businesses became investable are the report’s starting point. Fourteen major venues have returned a median of roughly 16.7% a year since their IPO or demutualization, against about 10.5% for the S&P 500 measured from CME’s December 2002 listing. Ten thousand dollars invested at the first day’s close became roughly $1.24 million at Hong Kong Exchanges and Clearing (HKEX: 388) and $699,000 at CME, but only about $15,000 in dollar terms at the predecessors of Brazil’s B3 (B3: B3SA3), a spread of roughly 80x within one industry. The report’s argument is that the variables behind that spread, captive clearing, entry price, the shift toward data revenue, and the quality of capital allocation, were observable in advance and still are. This is the first primer in a weekly series whose purpose is to help readers expand or deepen a circle of competence, one industry at a time. Exchanges are a good place to start: the industry’s history is well documented, its unit economics are disclosed monthly, and its long-run return data go back decades.

The companion deck. Exchanges & Financial Market Infrastructure: a self-contained summary of the report in slide form.

Companion Deck - Exchanges

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What’s inside

The primer has two parts: a 223-page report (attached below) and a 53-slide companion deck (attached above). The report has eight parts, twenty-five chapters, and four appendices, with 26 exhibits, 28 tables, and three photographs; every figure is dated and sourced in the notes. The highlights, part by part:

Part I, Orientation. Why the industry is worth studying, how an exchange group makes money, and a map of the industry: eight venue types with different economics, the clearing and settlement layer that determines who keeps the profits, and the data and index businesses where most of the strategic activity of the last fifteen years took place. The listed universe is roughly 45 companies with a combined market capitalization of about $700bn, less than that of a single mega-cap technology company, plus several user-owned utilities that cannot be bought.

From Chapter 1: annualized total shareholder returns of fourteen venues since their first trading day. The two best performers, Euronext (Euronext Paris: ENX) and Japan Exchange Group (TSE: 8697), were also the cheapest at listing, at roughly 10.6x and 7x earnings. The table includes only survivors; an unscreened buyer of demutualized exchanges earned high-single-digit returns.

Part II, Evolution. The industry’s history from 1602 to 2026: the Dutch East India Company’s share issue and the Amsterdam exchange of 1611; the Buttonwood Agreement of 1792, whose minimum commission survived until 1975; the invention of financial futures and listed options in Chicago in the 1970s; the end of fixed commissions in New York in 1975 and London in 1986; electronic trading, demutualization, and the consolidation that followed, in which vertical and data acquisitions closed while antitrust and national politics blocked nearly every large cross-border exchange merger after 2011. Four case studies: the Eurex–LIFFE contest for the Bund, ICE’s acquisitions from 2001 to 2026, the regulatory reduction of the NYSE’s share of trading in its own listings from roughly 80% to about 22.5%, and the two modern clearing crises, the Aas default at Nasdaq Clearing in 2018 and the LME nickel crisis of March 2022.

From Chapter 5: the share of Bund futures volume traded on DTB/Eurex versus LIFFE, 1993 to 1998. The report identifies three preconditions for the migration: order flow sponsored by the challenger’s owners, a genuine all-in cost advantage, and open access. No later challenger has had all three.

Part III, Structure & Economics. Where the profits sit along the life of a trade and why: execution margins are low wherever the product can be traded elsewhere; clearing margins are high wherever positions are held in the exchange’s own clearinghouse, which earns both fees and interest on margin balances; and data and index revenue earns software-like margins. Volume drives transaction revenue and volatility drives volume; the report tests the claim that exchange volumes rise in market stress against the episodes of 2008, 2022, and April 2025 and finds that it holds. Each exchange group is a combination of six business models on a largely fixed cost base, which is why incremental margins at the major groups were 76–95% in FY2025 and why earnings fall as fast as they rise when volumes turn. The chapter on moats examines seven attempts since 1998 to take a benchmark futures franchise from its incumbent. Six failed; the seventh, FMX, backed by BGC Group (Nasdaq: BGC), is still running.

From Chapter 11: the two ownership structures for clearing. Clearing the same trade supports margins of 60–80% where the exchange owns the clearinghouse and roughly 0% where clearing is done by a user-owned utility at cost.

Part IV, The Players. Profiles of the listed companies, organized by three variables: whether clearing is captive or shared, how much revenue is recurring, and whether the franchise depends on a regulatory grant. CME, ICE, and Cboe Global Markets (Cboe: CBOE) hold the main derivatives and options franchises; London Stock Exchange Group (LSE: LSEG), Nasdaq (Nasdaq: NDAQ), and Deutsche Börse (Xetra: DB1) have shifted toward data and subscriptions; the regional exchange groups each depend on one structural feature of their home market; and India’s exchanges, which form the world’s largest derivatives market by contract volume, are the most exposed to regulatory change, with the National Stock Exchange’s IPO filed in June 2026 at a valuation of up to roughly $60bn. A chapter on the executives with long value-creation records compares Sprecher’s acquisition-led strategy at ICE with Terry Duffy’s distribution-led strategy at CME; they produced returns of about 18% and 19.6% a year respectively, and both kept clearing inside the company. A final chapter covers the unlisted institutions, DTCC, OCC, and Euroclear, whose governance determines where the listed companies’ profits form.

From Chapter 12: the share of net revenue from transaction and clearing fees at four groups in fiscal 2005, 2015, and 2025. ICE went from 88% to 49%; LSEG from 46% to 32%; Nasdaq’s share was already 18% in 2005 and Deutsche Börse’s about half, and neither changed much.

Part V, Speaking the Language. A glossary of the industry’s terms and a guide to its operating metrics, distinguishing the ones managements emphasize from the ones that matter. A chapter on accounting covers the features that make comparisons difficult: gross versus net revenue (Cboe reports $1.94 of revenue for every $1 it keeps after liquidity payments, regulatory pass-through fees, and index royalties), clearing-member collateral carried on both sides of the balance sheet (CME’s total assets grew from $137bn to $198bn in one year for this reason alone), and the gap between adjusted and GAAP earnings, which ranged from 7% to 76% at the acquisitive groups in FY2025. A chapter on the filings covers the monthly volume releases, which allow transaction revenue to be estimated before it is reported, and the CPMI-IOSCO quantitative disclosures, where the clearinghouses publish their risk figures.

Part VI, Analysis & Valuation. A six-step procedure for analyzing an exchange, which builds the revenue model product by product and normalizes volumes before capitalizing them; twenty years of valuation multiples by type of exchange, against which the sector in August 2026 sits near the middle of its historical range, at a median of 25.1x trailing earnings across eighteen companies; acquisition multiples, which rank assets in the same order as the public market does; and a decomposition of long-run returns into their sources. CME’s return of 19.6% a year since 2002 came in roughly equal parts from per-share revenue growth, a one-time increase in margins, and reinvested dividends, with the change in its multiple contributing only about two points a year. MarketAxess (Nasdaq: MKTX), which ICE agreed in July 2026 to acquire for $167.00 a share in cash, is the chapter’s example of entry price mattering as much as the quality of the franchise.

From Chapter 19: MarketAxess’s revenue, share price, earnings per share, and trailing price-earnings ratio, 2019 to 2025, with ICE’s offer at right. A shareholder who bought at the record close of December 22, 2020, about 75x that year’s earnings, and holds to ICE’s offer loses roughly 20% a year over 5.6 years, although revenue rose every year.

Part VII, The AI Inflection. What can be measured about AI in this industry as of mid-2026. There is no credible public evidence that language models make money as autonomous traders; the development that is real is order entry by software agents, which routes through exchanges rather than around them. Within the exchange operators, AI is used mainly in surveillance, financial-crime detection, and operations; Nasdaq’s Verafin unit is the only AI-related business in the sector with disclosed financials; and the matching engines themselves are largely closed to AI by design. The largest open question is whether consumption of market data by machines will raise or lower its price. The most measurable opportunity is hedging demand from the AI economy: ICE’s US power futures volumes rose 30% in 2025, and CME’s compute futures launch on October 5, 2026.

Part VIII, Risks & Debates. Six ways investors in this industry lose money, each with the indicators that give early warning: clearinghouse losses shared among members (the 2018 default at Nasdaq Clearing consumed €107m of a €166m default fund; in March 2022 the LME canceled every nickel trade executed since midnight); regulation that opens the matching business to competition; long periods of low volatility, and record-year earnings capitalized as if they were permanent; technology failures; acquisitions at multiples of 30x; and the model of clearing without intermediaries that FTX proposed and Hyperliquid now operates offshore. The final chapter sets out the seven main debates of 2026, with the bull and bear case for each: prediction markets, the US Treasury clearing mandate, tokenization, the SEC’s proposal to rescind the trade-through rule at a time when 55.7% of US equity volume already trades off-exchange, same-day options at two-thirds of SPX volume, exchange consolidation in Europe, and the volume booms in India and Hong Kong, including the NSE IPO.

The appendices. The investable universe, roughly 45 listed companies by segment with tickers, listing venues, market capitalizations, and one-line descriptions; a sixty-question due-diligence checklist ordered to match the analytical procedure of Chapter 18; a reading list of books, shareholder letters, interviews, podcasts, and data sources; and the sources for the report.

What the primer is for. A reader who works through it should be able to explain how an exchange group makes money, and why the same activity earns 60–80% margins under one ownership structure and roughly nothing under another; use the industry’s vocabulary, from ADV and RPC to open interest, net capture, and the default waterfall; read the filings without being misled by gross revenue, clearing-member balances, or adjusted earnings; appraise an exchange the way specialists do, product by product, through the cycle, against twenty years of multiples and the acquisition record; and recognize the managers and business models that have compounded value over decades, and the four observable variables that distinguished them.

How to use this primer

The report does not need to be read in order. Suggested paths:

• a generalist with limited time, Parts I and VI plus the checklist in Appendix B;

• a reader interested in the history, Part II with Chapter 13;

• an accountant, Part V;

• an analyst working on a specific company, Chapter 12, then Parts III, V, and VI in order;

• a risk officer, Part VIII with Chapter 17;

• a technologist, Part VII.

Every chapter ends with a “What to remember” box, and the twenty-five boxes read in sequence summarize the report. The checklist follows the order of the analytical procedure in Chapter 18; a company that fails the franchise questions in its first section rarely needs the rest.

Feedback and requests

Please reply to this email or leave a comment with what was useful, what was missing, any errors you find, and the industries you would like covered next. Member requests will inform the order of coverage.

This content is published by MOI Global for educational purposes only. It is not investment advice, an offer, or a solicitation, and no security mentioned herein is recommended for purchase or sale. The publisher and contributors may hold positions in securities discussed. Figures are believed accurate as of the dates stated but are not warranted; readers should verify all data against primary sources before relying on it. Nothing herein constitutes legal, tax, or accounting advice.