Computershare Limited (ASX: CPU) is a great Australian success story. Founded in 1978, it listed on the ASX in 1994 and now has a market capitalisation of almost $7 billion. Since listing, the share price has risen more than 100 fold, but can investors expect similar returns over the next 20 years?
Computershare is a truly global company, operating on four continents and generating almost half of its revenues in the US. Its core business is the provision of share registry services but the company also offers a multitude of business and stakeholder communication services.
The common thread running through the various business lines is that they all offer administrative services to clients, utilising technology to improve efficiency. The problem with this type of work is that it is easy for competitors to provide a similar service and so Computershare must compete on cost.
In many of Computershare's markets, there is a trend towards increasing regulation to ensure that people are kept fully informed and that their rights are protected when engaging in financial transactions. Management sees this as a positive because although initial compliance costs will be high, stricter regulations will ultimately provide a barrier against competition.
Too complicated?
In a low cost industry, participants with scale usually prosper and on this basis Computershare should be able to keep winning market share whilst expanding profit margins.
However, this hasn't happened and the reason is that Computershare does not compete in one big market, but in many little ones where customers seek out the lowest cost solution.
For example, each country where Computershare provides share registry services will have different rules surrounding shareholder communication, handling client money and the format and storage of data. Therefore, even within the company's largest division, it needs to develop and maintain numerous systems which limits efficiency.
Consequently, companies such as Advanced Share Registry Limited that are much smaller than Computershare, can compete with them on cost. In fact, these little businesses may be able to do the job more efficiently thanks to lower head office costs and fewer layers of management.
Computershare has grown by acquiring related businesses, but has now reached the point where it is so big that there are few companies left which would make a significant contribution to the existing operations.
In addition, the company is now very complicated and personally, I had trouble understanding all of its various business lines. I expect this makes it a difficult business to manage as such complex structures tend to breed bureaucracy.
Financials
Earnings per share have slightly declined between 2009 and 2014 which further supports the view that the business is not in the high growth phase that it once was. However, low interest rates partly explain this average performance.
At any given time, the company holds billions of dollars of client cash on which it earns an interest yield, which was US$193 million in 2014. This income is significant given net profits were about US$250 million last year.
Foolish takeaway
Computershare might offer an opportunity to those looking to benefit from the expected rise in interest rates. However, there is no guarantee that this will happen and Computershare looks expensively priced regardless.
I estimate that current normalised earnings when translated to Australian dollars are about $325 million per year. Therefore, Computershare is trading on a price to earnings ratio of more than 20x, which is too much for a company that appears to have stopped growing.
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