Motley Fool Australia

2 founder-driven stocks to watch

When asked to explain the difference between stocks and bonds, a market veteran once replied ‘people’. Bonds are driven by momentum factors beyond the control of individual investors, while the share market is always offering opportunities for long-term capital returns.

The best investments can sometimes be those where you invest alongside the business founders and builders – especially if they show no desire to retire. The companies below are just two current opportunities on the ASX.

Flight Centre (ASX: FLT)

Founded by Graham ‘Skroo’ Turner in 1981 (and listed in 1995), Flight Centre has grown into Australia’s largest travel business, with substantial operations in the US, UK, Canada, Asia, South Africa and New Zealand.

Preferring to be known as a ‘travel retailer’, Flight Centre caters for the corporate, leisure and tickets to go segments of the travel market. Far from ignoring the retailing advantages of bricks and mortar, Flight Centre invests heavily in high street shops, hyper stores and face to face transactions. Relationships with customers are supported through well developed online channels.

Mr Turner’s influence on the progress of Flight Centre became apparent when he stood down from operational matters in 2002. By 2005 profits had fallen substantially and Mr Turner was reinstated as CEO. The company resumed a growth path, largely by international expansion, and it isn’t difficult to see compound underlying profit growth of 10%+ per annum over the next five years as offshore businesses gain further traction.

Central to Flight Centre’s success is the development of specific products and services for the contemporary travel market – by segment, by category and by price points. After strong earnings per share growth of 22% in 2013, profits are expected to increase by 7%-8% in 2014.

Flight Centre is traditionally conservative with financial projections and this could well prove a base case. On these estimates Flight Centre is trading at a 2014 price earnings ratio of 18 and a 3.3% yield. It’s no bargain, but it may deserve its market premium.

Servcorp (ASX: SRV)

Founded by Alf Moufarrige in 1978 (and listed on ASX 1999), Servcorp is now the world’s second largest serviced office operator with 130 floors across the globe. Servcorp’s major competitive advantages include top class facilities, locations and industry-leading cloud-based technology systems. Alf Moufarrige and Marcus Moufarrige are effectively joint CEOs in this business.

In a significant 2010 move, Servcorp began an aggressive expansion into the US and now has 22 floors in that country. Additional floors were also opened in the Middle East, North Asia and Europe. These expansionary moves have limited profit scope over the past few years, however, with new floors maturing over the next 12 months Servcorp’s profit outlook is set to surge.

Earnings per share in 2014 should be around 26c, an 18% rise on 2013. This would place Servcorp on forward price earnings of 14 and a 5% yield. With no debt, $90 million in the bank and healthy cash flow, Servcorp is well positioned for sustained profit growth over the next few years.

Foolish takeaway

Flight Centre and Servcorp are financially strong, have no net debt, are extremely good forward planners and have a habit of continual innovation in their chosen fields. Both merit inclusion in longer term portfolios.

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Motley Fool contributor Peter Andersen owns shares in Flight Centre and Servcorp.

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