The recent fall in the Australian share market to six-month lows has presented investors with an opportunity to stock up on quality companies at reasonable prices. When considering which companies I might buy myself, I thought about combinations of companies that have a captive and long-term market and complement each other.
Three companies that jumped out at me were XERO FPO NZ (ASX: XRO), AGL Energy Ltd (ASX: AGK) and ResMed Inc. (CHESS) (ASX: RMD). These companies all address industries or customers that are unlikely to disappear in the medium to long term and have demonstrated adaptability to market conditions.
Xero Limited operates the dominant cloud-based accounting software in Australia. Cloud-based applications are still in their infancy and Xero's product has received almost universal acclaim for its simplicity and scalability. It also makes life much easier for accountants and has an incredible amount of growth possible in Australia and New Zealand, let alone the US!
Credit Suisse recently estimated that it had overtaken MYOB as the leading cloud-based accounting software firm in Australia. I believe this is already the case in New Zealand and will hopefully be the case in the US in the future, however takeup could be slower.
AGL has an interesting position as one of Australia's big three energy retailers and also the largest energy producer on the National Energy Market following the purchase of Macquarie Generation's assets. As one of the lowest cost producers, AGL has been able to steadily increase customer numbers, however aggressive pricing from rivals and lower-than-expected demand has slashed margins recently. Macquarie (the broker) recently reviewed AGL and concluded that the company remains a BUY based on its low cost position and a possible improvement in margins.
Finally, sleep apnea device maker ResMed stands to benefit from the changing demographics in developed countries and the introduction of new products into the market. Analysts believe the last six months have likely been soft, but a boost may be provided by the the introduction of the group's new AirFit10 mask, which complements the company's devices aimed at reducing illness and death related to sleep apnea.
Xero addresses a quickly growing and important market, AGL has a stable consumer base and dominant market position, and ResMed has a growing market reliant on its products for improved quality of life. Importantly too, their prospects are aided by a lower Australian dollar and not overly affected by a downturn in the local economy, unlike the big four banks!
