Reece Ltd (ASX: REH) is an importer, wholesaler, distributor, marketer and retailer of bathroom and plumbing products and services. The company also provides irrigation products, civil products, onsite services, and spare parts for heating, air conditioning, and refrigeration products.
The company operates in an industry where there is a steady and growing demand, and over the last 10 years Reece has reported meaningful and consistent growth. Annualised growth in sales has been 6% over this period, growth in earnings has been 7.2%, and growth in book value has been 10%. The company has also increased its operating margin from 12.8% to 14.7%.
Reece has consistently earned returns on its capital and shareholder equity in the high teens, which, if continued, will lead to healthy growth in intrinsic value. And over time, growth in intrinsic value should lead to growth in the share price. Further, the company has very low levels of debt, which puts them in a strong financial position.
The share price currently trades at a PE ratio of 21 based on forecasted earnings in the year to June 2018. Its enterprise multiple (enterprise value divided by EBITDA) is 13.5. So the stock isn't cheap based in these metrics, but growth is important to consider. Extrapolating the annual growth rate in book value (10%) for the next 10 years, and then assuming a growth rate of 3% into perpetuity, shareholders could expect around a 9% return at the current share price. This is around the market average over the last thirty years.
Foolish Takeaway
Reece is a strong company and looks to be fairly valued at this point in time. I'd be willing to buy a dip should the share price falter any time soon.
