One of the most satisfying feelings as an investor is when management consistently report to you how well their business is running and the high returns they are yielding for you, year after year.
As the table below shows, all three of these companies have been returning high rates of cash from operations relative to their book value.
|Company||Market Cap||Book Value||Cash flow from operations|
|FY 2017||FY 2016||FY 2015|
|Reece||$6.88 Billion||$1.2 Billion||$215 million||$190 million||$166 milion|
|ARB||$1.75 Billion||$284 million||$62 million||$45 million||$40 million|
|CSL*||US$63 Billion||US$4 Billion||US$1.2billion||US$1.2billion||US$1.4billion|
*NB: CSL reports in US dollars.
In the case of Reece and ARB, cash flow from operations has actually increased by 30% and 55% respectively since 2015.
Quality doesn’t come cheap
Perhaps unsurprisingly in this low interest rate environment, investors have been willing to pay more for high quality businesses such as these three.
Their shares are not cheap based on traditional valuation metrics as the table below shows.
|Company||Price to Earnings Ratio||Price to Book ratio||Price to Sales ratio|
Growth completes the picture
As the table below illustrates, long term sales and earnings growth is strong in all three companies (a further reflection of their quality).
|Company||10 year sales growth||10 year earnings growth|
Interestingly, CSL which initially looked like the most expensive of the three companies, appears to have a more reasonable valuation when you consider its growth rates. Its no surprise that the CSL share price is up 220% over the last 5 years.
I think there are three key lessons to take:
- Investing in high quality businesses can be very rewarding
- High-quality businesses are usually expensive as the market recognises this quality. The best way to get value out of them is to hold for the long term
- Growth rates make a big difference. Companies with high rates of return that are growing can power a portfolio to market beating returns.
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You can follow Kevin on Twitter @KevinGandiya.
The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.