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'Quality' Global Growth - The Valuation Challenge

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
ADrunkenMarcus
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'Quality' Global Growth - The Valuation Challenge

#231585

Postby ADrunkenMarcus » June 23rd, 2019, 6:07 pm

Something to suck on:

https://www.lindselltrain.com/~/media/F ... 202019.pdf

Best wishes

Mark.

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Re: 'Quality' Global Growth - The Valuation Challenge

#231593

Postby toofast2live » June 23rd, 2019, 6:34 pm

Thanks. I would imagine similar thinking at fundsmith.

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Re: 'Quality' Global Growth - The Valuation Challenge

#231595

Postby ADrunkenMarcus » June 23rd, 2019, 6:41 pm

Yes, definitely.

I cannot find the article to hand but Terry Smith wrote about a study they did of companies including Colgate Palmolive and Coca Cola. If I remember correctly, an investor could have paid 4-5 times the market valuation (by P/E) in 1979 and still have got returns matching the index over the following decades.

As they acknowledge, the key is that these companies continue to generate good returns and invest the cashflow at the same sort of rate of return. If not, it does not work.

Best wishes

Mark.

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Re: 'Quality' Global Growth - The Valuation Challenge

#231817

Postby ADrunkenMarcus » June 24th, 2019, 7:20 pm

In March 2015, Spirax Sarco Engineering looked expensive to me: earnings that year were 129.4p a share and dividend 69p a share. My purchase price of 3267p a share came to 25.2 times earnings and the dividend yield was 2.1 percent.

Fast forward to today and the shares touched 9275p. Earnings are expected to be 260.5p a share and the dividend 108p. The price to earnings ratio has grown to 35.6 and the dividend yield 1.2 percent. (Looking ahead to 2021 projected earnings, the price to earnings ratio is still over 31.)

Earnings have doubled but the share price is up 2.8 times. Despite strong dividend growth, the dividend yield is much lower than it was four years ago. On a total return basis, it's almost trebled my initial investment in just over four years.

There's clearly a temptation to sell some, but there is a cost to that. I bought them on the basis of holding for a long period (decades, if the business's strengths remained intact). This is a business that has paid a dividend since about 1965, which was maintained or grown each year and has risen at about 11 percent CAGR. If it can maintain anything like it's past record, then it may 'grow into' its current valuation in a few years.

Best wishes

Mark.

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Re: 'Quality' Global Growth - The Valuation Challenge

#231849

Postby 77ss » June 24th, 2019, 10:51 pm

ADrunkenMarcus wrote:In March 2015, Spirax Sarco Engineering looked expensive to me: earnings that year were 129.4p a share and dividend 69p a share. My purchase price of 3267p a share came to 25.2 times earnings and the dividend yield was 2.1 percent.

Fast forward to today and the shares touched 9275p. Earnings are expected to be 260.5p a share and the dividend 108p. The price to earnings ratio has grown to 35.6 and the dividend yield 1.2 percent. (Looking ahead to 2021 projected earnings, the price to earnings ratio is still over 31.)

Earnings have doubled but the share price is up 2.8 times. Despite strong dividend growth, the dividend yield is much lower than it was four years ago. On a total return basis, it's almost trebled my initial investment in just over four years.

There's clearly a temptation to sell some, but there is a cost to that. I bought them on the basis of holding for a long period (decades, if the business's strengths remained intact). This is a business that has paid a dividend since about 1965, which was maintained or grown each year and has risen at about 11 percent CAGR. If it can maintain anything like it's past record, then it may 'grow into' its current valuation in a few years.

Best wishes

Mark.


An interesting article from Lindsell Train. I don't always pay that much heed to p/e myself.

Thanks for the comment on Spirax. Not a company I have looked at before. I did a quick comparison with another high p/e, low yield, engineering company that I hold (Halma). Both give very similar 5 year total returns of about 250%. I shall be checking out Spirax!

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Re: 'Quality' Global Growth - The Valuation Challenge

#232003

Postby ADrunkenMarcus » June 25th, 2019, 5:23 pm

I'm the same, 77ss.

Today was another odd one with the share price driven to new highs at 9315p. One bank has slapped a target price on at 10510p - if it carries on like this they may be doing a share split, as they split the shares in the 1990s when the share price was over £100 (going from memory).

Berenberg has kicked off coverage on three more of the UK’s biggest industrial engineers...The venerable Hamburg-based investment bank has Spirax as a ‘buy’, with a price target of 10,510p ...
Berenberg’s chin scratchers called FTSE 100-listed Spirax an “outstanding business”, which they are telling clients to hold for the long-term.

“It has strong and resilient organic revenue growth (4-5% through the cycle), sector-high operating margins (23%), very attractive returns on invested capital (>30%), strong cash generation (90% FCF conversion) and a dividend that has increased for 51 consecutive year,” they said in a note to clients.

“It is a well-managed, quality compounder, that is highly diversified by end-market, customer, and geography and we believe it absolutely warrants the premium valuation that it trades on.”
Source: https://www.proactiveinvestors.co.uk/co ... 20417.html


These things were all true when Spirax was substantially cheaper! I think there may be much forced buying now that Spirax is in the FTSE 100? Mind you, forecasts for 2019-21 don't show stellar growth. Maybe the business will do better.

Current 2021 forecasts (Sharescope):
EPS: 297.1p
DPS: 123.4p
Free cash flow yield (today's price vs. 2021 estimates) 2.7%.

It's more expensive on a free cash flow basis than MasterCard, which is growing much faster.

Best wishes

Mark.

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Re: 'Quality' Global Growth - The Valuation Challenge

#235749

Postby Gadgeisbackagain » July 11th, 2019, 6:46 am

I hold Mastercard and its doing well for me but I bought it as a result of Apples move into services.

Apple announced they will be offering their own sexy whitec titanium credit card soon.
I imagine that this will prove highly desirable to own and flash about by everyone from the Kardashians downwards (or upwards depending on your point of view),

The scheme will be operated by Mastercard for Apple.

Much like Disneys move into streaming services, this struck me as something that I wanted to be a small part of

Gadge

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Re: 'Quality' Global Growth - The Valuation Challenge

#235925

Postby SalvorHardin » July 11th, 2019, 3:54 pm

The Lindsell Train article can be summed up as "Buy companies with decent moats"; "moats" being Warren Buffett's term for factors which prevent a company's business from being turned into a price taker by competition and technological change. Examples are strong brands, geographical factors, patents, proprietary technology, distribution networks, trade secrets and network effects (these are very strong with some technology companies such as Facebook).

In some cases the moat is a high barrier to entry for the company's markets that it stops competitors from introducing their own versions of what is otherwise an otherwise easily commoditised product.

In theory competition over time will eat into your profit margins. Companies earning a superior return on their goods and/or services encourages others to enter the same market with their goods and/or services. Eventually the level of competition eats away at the superior returns, thus reducing the company to earning normal returns.

A company with a strong moat exhibits premium pricing power (and thus stability), because competition finds it very hard to eat into its markets, which means that its shares trade at a higher P/E ratio. Furthermore retained profits can often be reinvested at similar superior returns, which leads to much higher earnings in the future.

If you look at the typical Lindsell Train and Fundsmith company, it has good moats. For example, Unilever with its strong brands and global reach giving it vast economies of scale and ease of distribution. The converse is to look at the typical HYP company as favoured on TLF; generally its moats will be weak and some of them (oils, miners) have become price-takers (they have little or no pricing power because their products have been commoditised).

One of my favourite examples (my second largest holding) is America's Union Pacific (UP). UP owns and operates a freight railroad in 23 states west of Chicago and New Orleans. UP has a colossal moat; building a competitor railroad will be all but impossible and horribly expensive. Furthermore trains have a massive cost advantage over trucks when it comes to moving freight over several hundred miles; exactly the sort of distances that you encounter in the western United States. UP's weakness is that its business is cyclical as it is highly geared to the American economy as a whole, so its P/E ratio tends to be lower than a less cyclical strong moat company (e.g. Unilever)

A good example of an industry which used to have an excellent moat, but which no longer does, is local newspapers. These used to be a licence to print money in pre-internet days when they had an effective monopoly over classified advertising in their local region. This moat was destroyed by competition from the internet (especially eBay and Craigslist). The result is that the share price of Johnston Press, the biggest publisher of local and regional newspapers in Britain, had fallen by more than 99% from its peak when it was taken private last year.

https://www.investopedia.com/ask/answer ... icmoat.asp

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Re: 'Quality' Global Growth - The Valuation Challenge

#235986

Postby ADrunkenMarcus » July 11th, 2019, 7:14 pm

Gadgeisbackagain wrote:I hold Mastercard and its doing well for me


Ditto.

I bought in April this year and the share price, in sterling terms, has risen 22% for me. Most of that is genuine growth as opposed to the falling Pound. Sharepad data has c. 64% ROCE, 44% CROIC and 56% Operating Margin. Great stuff. You could halve all these figures and it would still be a great investment.

Of course, it's too short a period to draw conclusions and what I want to see over the long run is those figures improve even further.

You hold Disney, then - what other US shares?

Best wishes

Mark.

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Re: 'Quality' Global Growth - The Valuation Challenge

#235993

Postby ADrunkenMarcus » July 11th, 2019, 7:36 pm

SalvorHardin wrote:The converse is to look at the typical HYP company as favoured on TLF; generally its moats will be weak and some of them (oils, miners) have become price-takers (they have little or no pricing power because their products have been commoditised).


That's why I don't tend to touch any of them. :(

SalvorHardin wrote:One of my favourite examples (my second largest holding) is America's Union Pacific (UP). UP owns and operates a freight railroad in 23 states west of Chicago and New Orleans. UP has a colossal moat; building a competitor railroad will be all but impossible and horribly expensive. Furthermore trains have a massive cost advantage over trucks when it comes to moving freight over several hundred miles; exactly the sort of distances that you encounter in the western United States. UP's weakness is that its business is cyclical as it is highly geared to the American economy as a whole, so its P/E ratio tends to be lower than a less cyclical strong moat company (e.g. Unilever)


I added it to my Watchlist. Thanks. One to explore further. And, I think, a great company to own a stake in if it falls to 8x earnings as it did ten years or so back.

Do you mind me asking what your top holding is?

Best wishes

Mark.

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Re: 'Quality' Global Growth - The Valuation Challenge

#236011

Postby SalvorHardin » July 11th, 2019, 8:35 pm

ADrunkenMarcus wrote:Do you mind me asking what your top holding is?

Disney. It has a great moat with the theme parks and many of its characters and franchises (especially Marvel). But its moats in network television and ESPN aren't what they used to be.

I still like it because of the possibilities for streaming with Disney+. This announcement has driven the big rise in the share price this year. The market has priced in quite a bit but there's the prospect of Disney+ seizing a lot of the streaming market. Consequently some investors are now likening Disney to the Netflix of three or so years ago and now value Disney at a much bigger PE ratio than they gave it last year.

I got into Disney when it bought Marvel, having owned Marvel shares since 2002 (I bought them after seeing the first Sam Raimi Spider-Man film).

Number 3 company is Madison Square Garden. Massive PE of around 180 forecast for this year. It's a trophy asset play as its main assets are The New York Knicks and The New York Rangers professional sports teams.

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Re: 'Quality' Global Growth - The Valuation Challenge

#236077

Postby Gadgeisbackagain » July 12th, 2019, 7:12 am

Hi Mark

I made a decision to hold US shares as individual holdings due to Brexit faff ages ago.
Sold everything in the uk in my Sipp to do so, apart from fgt.

I hold quite a list but they include Mastercard, Paypal, Disney, and Microsoft as my biggest bets plus smallest holdings in tiddlers trade desk and workday. A raft of other smaller bets in the middle. Been in and out of Tesla like a fiddlers elbow, so far successfully.

Have also invested directly outside US where I have a big conviction, examples include Nestle and brand owners like EL who make ray bans and LVMH owners of LV/Moet, etc.

I still though also kept a couple of global funds, (fundsmith and lindsell train global), and am aware these may overlap with my direct holdings a bit eg McCormick.in Fundsmith

More recently, I have been reducing stocks and buying fixed income especially vuty and high yield corporate bond ITs.
Not sure really on market direction but I was missing my previous income levels. Also wanted to crystalise some profits from the recent good run on shares whilst staying in the game on a reduced level.

I am also enduring a disaster this week after switching fgt for lti too soon in my isa and sipp and am down at least a stainless steel new rolex on that idea today....eek
Still you can't get all right all the time. Hopefully this will come good overtime.
Gadge

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Re: 'Quality' Global Growth - The Valuation Challenge

#236092

Postby richfool » July 12th, 2019, 9:09 am

Gardeisbackagain wrote:I hold quite a list but they include Mastercard, Paypal, Disney, and Microsoft as my biggest bets plus smallest holdings in tiddlers trade desk and workday. A raft of other smaller bets in the middle. Been in and out of Tesla like a fiddlers elbow, so far successfully.

Have also invested directly outside US where I have a big conviction, examples include Nestle and brand owners like EL who make ray bans and LVMH owners of LV/Moet, etc.

Hi Gadge, I hold most of the above through: JPGI, MATE and HINT. ;)

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Re: 'Quality' Global Growth - The Valuation Challenge

#236179

Postby doug2500 » July 12th, 2019, 1:26 pm

I quite like HINT as well (Henderson International Income) and LTI, and Fundsmith.

I tend to buy IT's for international exposure because I can't quite get past brokers exchange rates to buy myself.

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Re: 'Quality' Global Growth - The Valuation Challenge

#236402

Postby ADrunkenMarcus » July 13th, 2019, 11:54 am

Thanks SalvorHardin. I looked it up and found Disney is on my watchlist.

Gadgeisbackagain wrote:I hold quite a list but they include Mastercard, Paypal, Disney, and Microsoft as my biggest bets plus smallest holdings in tiddlers trade desk and workday. A raft of other smaller bets in the middle. Been in and out of Tesla like a fiddlers elbow, so far successfully.


Some quality companies there! I like the look of Paypal myself. It seems to be growing well. Then again, MasterCard gives me certain exposure - many people don't seem to link the benefit of Visa/MasterCard being linked to Paypal accounts.

Paycom seems to be growing very quickly. It provides HR and payroll solutions for companies and should benefit from greater scale. I don't know how 'sticky' their systems are.

Best wishes

Mark.

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Re: 'Quality' Global Growth - The Valuation Challenge

#239497

Postby Gadgeisbackagain » July 26th, 2019, 3:02 pm

I like the idea of the coming soon Apple credit card.

I think this will prove very popular.
The scheme is being run by Mastercard.

I also like Visa and would like to hold if spare cash came available.

Gadge

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Re: 'Quality' Global Growth - The Valuation Challenge

#239611

Postby Lootman » July 26th, 2019, 11:12 pm

SalvorHardin wrote:Disney. It has a great moat with the theme parks and many of its characters and franchises (especially Marvel). But its moats in network television and ESPN aren't what they used to be.

Number 3 company is Madison Square Garden. Massive PE of around 180 forecast for this year. It's a trophy asset play as its main assets are The New York Knicks and The New York Rangers professional sports teams.

With you on Disney. MSG is a funny one because the pro sports teams that play there aren't that good but it doesn't matter because, given its location, there are sell-out crowds every game. Saw Squeeze play there in the mid-1990s, he digressed.

I also hold Union Pacific which you mentioned. There are other US names I like, although not always for the same reasons. Given the quality requirement, I like to buy best of breed. Some names:

1) I don't much like banks, but JP Morgan is surely the strongest bank on the planet, and just announced a 12.5% increase in dividend.

2) Exxon is the highest quality play in the energy space.

3) Honeywell is the best industrial name. A focused conglomerate, if that is not an oxymoron.

4) In Tech, MicroSoft and Apple, S/W and H/W. Value names really, but still growing at a decent clip, and paying a dividend.

5) United Health (UNH) is the clear leader in the managed healthcare and insurance space, although potentially vulnerable to "MediCare for All" (if it ever happens).

6) Micky D's - the king in the fast/junk food space and just keeps going up and up.

7) If you have to buy retail, WalMart - very defensive as we saw in 2008-2010.

8) The US government does not like to buy foreign military equipment. It has bought Harriers and Israeli avionics in the past, but the US defense (sic) names are solid: General Dynamics, Lockheed Martin, Northrop Grumman, Raytheon (and maybe Boeing but that is up in the air (ha) right now for other reasons).

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Re: 'Quality' Global Growth - The Valuation Challenge

#239676

Postby Walrus101 » July 27th, 2019, 11:25 am

Great post this

MSG is interesting, slightly nervous about the resurgence of the Nets as a force, but it is a bit different and I do hold some.

I would add Pepsi as a best in class snackfood company as something that has performed for me.

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Re: 'Quality' Global Growth - The Valuation Challenge

#258937

Postby ADrunkenMarcus » October 19th, 2019, 11:37 am

ADrunkenMarcus wrote:These things were all true when Spirax was substantially cheaper! I think there may be much forced buying now that Spirax is in the FTSE 100? Mind you, forecasts for 2019-21 don't show stellar growth. Maybe the business will do better.

Current 2021 forecasts (Sharescope):
EPS: 297.1p
DPS: 123.4p
Free cash flow yield (today's price vs. 2021 estimates) 2.7%.


I note Spirax has since fallen about 20% after my posting at the end of June 2019. Even so, the P/E (for 2021!) is still over 25. However, the EPS and DPS forecasts have edged up very slightly.

Best wishes

Mark.


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