Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Auscap Asset Management portfolio manager Tim Carleton reveals the stock he'd be happy to have in his portfolio for decades.
The ASX share for a comfortable night's sleep
The Motley Fool: If the market closed tomorrow for four years, which stock would you want to hold?
Tim Carleton: I can't talk about one we've already talked about, so maybe I'll give you another instead. And that stock is Reece Ltd (ASX: REH).
Reece [is] a producer and distributor of plumbing and bathroom products, primarily. They have a dominant position in Australia. And then, in 2018, they made a transformative acquisition of a company called Morsco in the US. To us, it looks like that acquisition is going particularly well for them. It gives them a huge avenue for growth over the coming decades. And that's really the sort of time frame that these guys think about when they're assessing opportunities.
At the moment, you've got an Australian business which generates more than double the profitability of the US business. We expect that will change materially over time. Not because the Australian business won't grow, but just because we should see a very, very strong growth profile out of the US business, as they significantly increase the number of stores that they have in the US — and really have the potential to become one of the dominant players in that space in the US in what is still a very, very fragmented market.
So it's a classic bottom-drawer stock [with] high-quality management, a massive opportunity, a very, very profitable business model — if they can deliver on that, then the business should be substantially bigger in five, 10 years' time than it is today.
MF: And it's had a nice discount this year, hasn't it? The stock price has halved year to date?
TC: Listen, it was expensive, but we have been nibbling away recently. It's pulled back obviously on housing concerns of the US and here and the risks to expenditure related to housing [and] general interest rates.
But their business, I think, will prove to be more resilient than people expect. And a lot of it's replacement, refurbishment work, so the underlying business should remain resilient in the face of any downturn or a recession.
Over the cycle, because of the organic opportunities available to them, you should see very, very strong revenue and earnings growth.
