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Kone - Expanding Multiples

Analysing companies' finances and value from their financial statements using ratios and formulae
ADrunkenMarcus
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Kone - Expanding Multiples

#343021

Postby ADrunkenMarcus » September 26th, 2020, 2:26 pm

I purchased Kone in April 2017, subsequently nearly doubling my holding by topping up in April and October 2018. I bought it on the basis that I expected to buy and hold it forever - a 'coffee can' stock, if you will.

An overview of this attractive Finnish company can be found here - from the horse's mouth, so to speak, so DYOR(!): https://www.kone.com/en/investors/kone- ... t-in-kone/

The company has recurring revenues; a strong position in the market; and is benefiting from an expanding installed unit base of elevators/escalators with growing service revenues on top of that.

At its recent peak, the share price is up 88.5 percent in sterling terms (the vast majority from share price appreciation in its listed currency, however Sterling has weakened somewhat and given a slight boost). I have also received about 8.2 percent of my capital investment back in dividends, paid every March, meaning that every £1 I invested has almost doubled (counting both capital appreciation and cash dividends, 96.7 percent).

On a net basis, my dividend yield on cost is 2.8 percent and the dividend growth over three years has been a 0.3 percent CAGR. I suspect this will go slightly negative next year as Finland is raising their dividend tax from 30 to 35 percent, which will probably offset any dividend growth. :(

The average return on capital employed has been 35 percent from 2014 to 2019, while the operating margin averaged 13.2 percent and is expected to expand in the next few years after recent weakness.

I am frankly astonished that the company has re-rated so much. I purchased in 2017 at a p/e ratio in the low 20s, however now the p/e is just over 40. I expect the company to grow steadily and moderately over time but the near-doubling of my investment in 3.5 years is largely due to the market's valuation of the company surging rather than the cashflows being generated.

Pre-tax profit has not grown from 2017 to 2019 (it dipped in 2018 and is recovering). The 2022 forecasts represent 18 percent growth compared to 2017. Looking at the figures for 2020 to 2022, the current free cashflow yield is estimated at 2.7 percent and rising to 3.2 percent by 2022. It is a solid company and I am not selling, however I am acutely aware 'Mr. Market' might mark Kone down again! On the basis of business performance, you might expect the share price to rise by 20 percent from 2017-22 and then enjoy perhaps 14 percent from dividends on top, or a 34 percent total return.

It does seem that, for a number of companies, perceived safety and reliability is being rewarded with expanding valuation multiples, even if the growth is not there to support it in the short or medium term.

Thoughts?

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#343023

Postby TheMotorcycleBoy » September 26th, 2020, 2:31 pm

ADrunkenMarcus wrote:It does seem that, for a number of companies, perceived safety and reliability is being rewarded with expanding valuation multiples, even if the growth is not there to support it in the short or medium term.

I totally agree. I can think of several in me and Mel's portfolio, that ar exactly as you describe.

XPP, MSLH, SCT, SPX, CRDA, RSW etc.

Several are dividend cutters too. It seems that they are the new gold.

Matt

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Re: Kone - Expanding Multiples

#343037

Postby ADrunkenMarcus » September 26th, 2020, 3:36 pm

TheMotorcycleBoy wrote:
ADrunkenMarcus wrote:It does seem that, for a number of companies, perceived safety and reliability is being rewarded with expanding valuation multiples, even if the growth is not there to support it in the short or medium term.

I totally agree. I can think of several in me and Mel's portfolio, that ar exactly as you describe.

XPP, MSLH, SCT, SPX, CRDA, RSW etc.

Several are dividend cutters too. It seems that they are the new gold.

Matt


Now you mention it, I hold both SPX and RSW and we do see a similar thing. Here are my 'top four' holdings (held for over 2 years) on the basis of their share price CAGR:



We could take dividend CAGR as a proxy for actual business growth and compare to share price CAGR and we see the divergence in all cases! I used Renishaw's 2019 dividend for this calculation.

In Spirax's case, we have seen very significant growth and the ordinary dividend is up 72 percent, however it's re-rated from a c. 23 p/e on purchase to c. 45 today! I would guess it's 'real' business performance is half what the share price implies and that is respectable enough, including a 5 percent or so dividend increase this year on the interim. From 2013 to 2018 we basically had a c. p/e 20 to 25 then it soared in 2019-20.

Renishaw's p/e has expanded from around 15 at purchase to an estimated 58 on next year's earnings (earnings virtually collapsed this year and, as you indicated, they've cut - i.e. eliminated - the dividend). There is genuine earnings progress there but not to the degree that the rating implies.

And then Diploma has gone from a p/e of about 15 to around 39. Again, there has been very good growth of the business but a re-rating has pumped up the returns markedly. The valuation was around c. p/e 15-20 range for years then started surging from 2018. We should note some caution that the recent acquisition will be earnings enhancing and is not accounted for, so I suspect the 'true' p/e is closer to the low 30s today.

You could probably say similar for Kone had I bought in 2011-12, as I'd have seen greater growth from the business itself as well, but the valuation varied from c. p/e 20 - 25 from 2012 to 2019 then rocketed.

They are all great businesses in my view and I intend to buy and hold, but it does mean we'll likely go through a period where returns are more modest. On the other hand, who's to say that expensive cannot stay expensive for a long time or even get more so?!

Best wishes


Mark.

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Re: Kone - Expanding Multiples

#343064

Postby TheMotorcycleBoy » September 26th, 2020, 6:10 pm

TBH I sold all our RSW when the SP went past 51.60. Of course they have gone a bit higher! But according to my last sums based on their statutory earnings and their "underlying earnings", considering the cancelled dividend they look far too expensive. I will consider re-opening a position if they SP drops below 40.00 should we have any market madness is the near future.

Matt

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Re: Kone - Expanding Multiples

#343093

Postby ADrunkenMarcus » September 26th, 2020, 9:24 pm

Renishaw had a dividend yield of about 4.5 percent when I bought them in 2011, as I recall, and that had fallen to 1.1 percent even if we take the last full year dividend of 60p combined with today's price. Yes, it certainly looks expensive. (If I went 'yield chasing', sold today and put the capital into something yielding - say - 5.5 percent, then I'd be getting a very healthy 16.7 percent yield on my original capital after nine years.)

It's a very cyclical company but does do well over the long term.

One of the hardest things to do is try not to tinker! I could easily sell and switch my capital into something which performs worse...

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#343107

Postby tjh290633 » September 26th, 2020, 10:57 pm

ADrunkenMarcus wrote:It does seem that, for a number of companies, perceived safety and reliability is being rewarded with expanding valuation multiples, even if the growth is not there to support it in the short or medium term.

I like to look at how my shares have done since January 1st, the current situation being:

Epic   Change    Yield
WMH 65.67% 0.00%
KGF 36.36% 0.00%
RB. 21.88% 2.34%
ADM 16.41% 5.49%
AZN 12.74% 2.52%
ULVR 9.48% 3.01%
RIO 5.11% 6.28%
SGRO 5.04% 2.26%
PHP -3.55% 4.04%
BHP -4.16% 5.39%
UU. -7.57% 4.89%
NG. -8.44% 5.62%
TATE -11.89% 4.42%
BATS -12.73% 7.46%
BA. -12.75% 4.71%
IMI -13.15% 3.29%
PSON -13.31% 3.53%
TSCO -15.36% 4.24%
S32 -16.14% 2.09%
GSK -17.12% 5.43%
SSE -17.27% 6.72%
DGE -21.22% 2.77%
IMB -25.31% 9.86%
SMDS -27.64% 0.00%
VOD -29.27% 7.59%
AV. -33.15% 5.54%
CPG -37.35% 0.00%
LGEN -41.25% 9.87%
TW. -47.67% 0.00%
BT.A -48.59% 0.00%
BLND -49.59% 4.96%
BP. -50.53% 8.77%
MKS -55.97% 0.00%
RDSB -56.59% 5.16%
LLOY -60.45% 0.00%
MARS -65.68% 0.00%

Why have the two leaders done so well?

WMH looks like being in a bidding war, and KGF seems to be benefitting from a DIY surge associated with "Working from Home".

At the other end you have companies hit by Covid or Government restrictions or dictat. The oil companies are notably hit. Catering and hospitality is an obvious victim. But why the insurers AV. and LGEN, when ADM has done well? It is obviously not closely related to not paying dividends, although that must take some of the blame.

TJH

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Re: Kone - Expanding Multiples

#343157

Postby ADrunkenMarcus » September 27th, 2020, 10:57 am

There are some very significant fallers there, including Lloyds, Royal Dutch Shell and BP.

I do find Legal & General's performance surprising given that they are paying such a healthy dividend. I do not think a 9.9 percent dividend yield is sustainable so shareholders will have to hope that it changes as the dividend is maintained or grown modestly and the share price rises to bring the dividend yield down.

I hold Reckitt Benckiser, Unilver and AstraZeneca myself. Although they have performed relatively well this year in share price terms, Unilever - for example - trades on a 3.2 percent dividend yield and supported by a 4.8 percent free cash flow yield. The valuation is little different to when I purchased in 2013 and the growth in the share price reflects the underlying growth in the business. That seems decent value to me and reflects that not all 'quality' businesses have seen a surge in their valuation.

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#343321

Postby TheMotorcycleBoy » September 28th, 2020, 7:10 am

tjh290633 wrote:
ADrunkenMarcus wrote:It does seem that, for a number of companies, perceived safety and reliability is being rewarded with expanding valuation multiples, even if the growth is not there to support it in the short or medium term.

I like to look at how my shares have done since January 1st, the current situation being:

Epic   Change    Yield
WMH 65.67% 0.00%
KGF 36.36% 0.00%
RB. 21.88% 2.34%
ADM 16.41% 5.49%
AZN 12.74% 2.52%
ULVR 9.48% 3.01%
RIO 5.11% 6.28%
SGRO 5.04% 2.26%
PHP -3.55% 4.04%
BHP -4.16% 5.39%
UU. -7.57% 4.89%
NG. -8.44% 5.62%
TATE -11.89% 4.42%
BATS -12.73% 7.46%
BA. -12.75% 4.71%
IMI -13.15% 3.29%
PSON -13.31% 3.53%
TSCO -15.36% 4.24%
S32 -16.14% 2.09%
GSK -17.12% 5.43%
SSE -17.27% 6.72%
DGE -21.22% 2.77%
IMB -25.31% 9.86%
SMDS -27.64% 0.00%
VOD -29.27% 7.59%
AV. -33.15% 5.54%
CPG -37.35% 0.00%
LGEN -41.25% 9.87%
TW. -47.67% 0.00%
BT.A -48.59% 0.00%
BLND -49.59% 4.96%
BP. -50.53% 8.77%
MKS -55.97% 0.00%
RDSB -56.59% 5.16%
LLOY -60.45% 0.00%
MARS -65.68% 0.00%

Why have the two leaders done so well?

WMH looks like being in a bidding war, and KGF seems to be benefitting from a DIY surge associated with "Working from Home".

At the other end you have companies hit by Covid or Government restrictions or dictat. The oil companies are notably hit. Catering and hospitality is an obvious victim. But why the insurers AV. and LGEN, when ADM has done well? It is obviously not closely related to not paying dividends, although that must take some of the blame.

TJH

The wife, Mel, works for Screwfix (part of KGF). SF are actually doing pretty well, are continuing to grow. Indeed her store has only been open for the past year or two.

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Re: Kone - Expanding Multiples

#343511

Postby dspp » September 28th, 2020, 4:34 pm

ADrunkenMarcus wrote:I purchased Kone in April 2017, subsequently nearly doubling my holding by topping up in April and October 2018. I bought it on the basis that I expected to buy and hold it forever - a 'coffee can' stock, if you will.

An overview of this attractive Finnish company can be found here - from the horse's mouth, so to speak, so DYOR(!): https://www.kone.com/en/investors/kone- ... t-in-kone/

The company has recurring revenues; a strong position in the market; and is benefiting from an expanding installed unit base of elevators/escalators with growing service revenues on top of that.

At its recent peak, the share price is up 88.5 percent in sterling terms (the vast majority from share price appreciation in its listed currency, however Sterling has weakened somewhat and given a slight boost). I have also received about 8.2 percent of my capital investment back in dividends, paid every March, meaning that every £1 I invested has almost doubled (counting both capital appreciation and cash dividends, 96.7 percent).

On a net basis, my dividend yield on cost is 2.8 percent and the dividend growth over three years has been a 0.3 percent CAGR. I suspect this will go slightly negative next year as Finland is raising their dividend tax from 30 to 35 percent, which will probably offset any dividend growth. :(
Thoughts?

Best wishes

Mark.


Good pick, I think we discussed it here at the time.

Kone have imho benefited from some things going their way. Firstly they stick to their knitting and do so in a way that is very compatible with Finnish culture. Secondly they have benefited from the ongoing macro trend towards increased urbanization and high rises which I don't expect to encounter much of a speed bump from cv19 though I could be wrong. Thirdly Otis have (imho) suffered from all the UTC restructuring.

Going forwards I believe there are significant design change opportunities opening up in elevators courtesy modern motors, power electronics, etc. I do not know the extent to which Kone are ahead/abreast/behind in this.

I don't know how to generalise these points to make them more widely applicable. Therein lies the rub.

regards, dspp

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Re: Kone - Expanding Multiples

#343585

Postby ADrunkenMarcus » September 28th, 2020, 8:23 pm

TheMotorcycleBoy wrote:TBH I sold all our RSW...I will consider re-opening a position if they SP drops below 40.00 should we have any market madness is the near future.


CityWire quoted a Berenberg analyst who likes Renishaw:
He highlighted the group’s ‘market leadership, founder-led, high insider ownership, net cash balance sheet, and exceptional margins of 30% and return of 40% in good markets’.
‘Crucially, we also do not expect the stock’s strong momentum to fade in the near term,’ he said.
‘Our full year 2021/22 forecasts sit 8% and 22% ahead of consensus with history suggesting a two-year upgrade cycle is on the way.’
He said ‘billions in value’ could be added through the group’s novel Parkinson’s disease treatment and ‘additive manufacturing’ operations.


It looks like some are therefore anticipating substantial upgrades which might help explain the strength of the share price, which is comfortably in the mid £50s and not far from all-time highs.

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#343588

Postby ADrunkenMarcus » September 28th, 2020, 8:30 pm

dspp wrote:Going forwards I believe there are significant design change opportunities opening up in elevators courtesy modern motors, power electronics, etc. I do not know the extent to which Kone are ahead/abreast/behind in this.


Let's hope Kone can capitalise on this opportunity. :)

They remind investors that 'we revolutionized the industry in 1996 with the world's first machine room-less elevator' and they have contributed a number of innovations over the years. (The MonoSpace 500 is one of their machine room-less models being marketed in the USA: https://www.kone.us/new-buildings/eleva ... space-500/) They do seem to have a good culture and retain the influence of the founding family.

In a Yemen(!) brochure, they claim: 'The secret behind KONE MonoSpace is the permanent magnet, gearless KONE EcoDisc® motor. KONE EcoDisc weighs less than half of a conventional geared traction machine and is approximately twice as efficient.'

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#343670

Postby TheMotorcycleBoy » September 29th, 2020, 11:14 am

ADrunkenMarcus wrote:
TheMotorcycleBoy wrote:TBH I sold all our RSW...I will consider re-opening a position if they SP drops below 40.00 should we have any market madness is the near future.


CityWire quoted a Berenberg analyst who likes Renishaw:
He highlighted the group’s ‘market leadership, founder-led, high insider ownership, net cash balance sheet, and exceptional margins of 30% and return of 40% in good markets’.
‘Crucially, we also do not expect the stock’s strong momentum to fade in the near term,’ he said.
‘Our full year 2021/22 forecasts sit 8% and 22% ahead of consensus with history suggesting a two-year upgrade cycle is on the way.’
He said ‘billions in value’ could be added through the group’s novel Parkinson’s disease treatment and ‘additive manufacturing’ operations.


It looks like some are therefore anticipating substantial upgrades which might help explain the strength of the share price, which is comfortably in the mid £50s and not far from all-time highs.

Best wishes

Mark.

Hmm.

Thanks for this Mark. Well I may well have acted rashly. Only time will tell I guess. In my defence, I don't see my actions as tinkering so much as plain old profit-taking and risk management. (I say risk management because I used to own the share BUR which was somewhat overvalued, and it's value destroyed when it came under the radar of analyst/short-seller Muddy Waters. Prior to BURs fall from grace I remember me and Mel staring at the holding when it was +35%, and me ignoring Mel when she remarked "perhaps we should clip some of that down?").

Clearly RSW is a completely different entity to BUR, a much better reputation and more understandable product. However, currently RSW's valuation just seems crazy to me, it's at about PE=13750 by statutory and PE=107 on RSWs "adjusted" number. These numbers (in my very limited and short experience) surely imply massive earnings growth, which I can't see possible in the first few years of a post-covid world. But of course, a la Benjamin Graham, Mr. Market can be rather irrational.

When I compare the above numbers to some of my other high flyers e.g. SPX and GAW which are at PEs 49 and 46 (GAAP) respectively (at least according to google just now) which financially have been affected no way near as badly as RSW, then the disconnect seems quite glaring.

With that said, watch this space!

Matt

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Re: Kone - Expanding Multiples

#343773

Postby ADrunkenMarcus » September 29th, 2020, 7:28 pm

Oh, I wouldn't criticise - we all need to do what we're comfortable with. And I completely appreciate your point on valuation. Even with earnings growth projected at 79 percent for 2021, 35 percent for 2022 and 35 percent for 2023, Renishaw's free cash flow yield in 2023 would be 2 percent at today's market valuation!

In fact, it's the most expensive company in my portfolio at the moment with a 1 percent free cash flow yield and the nearest is MasterCard with 1.9 percent. MasterCard's operating metrics - return on capital employed, cash return on invested capital and operating margin - are all far superior, allied with a dividend that was increased 21 percent and is still being paid.

If I wished to, I could sell Renishaw and really crank up the dividends. I do wonder if we'll see specials, as it's forecast they'll have 1.6 times EBIT on their balance sheet in net cash by 2023. They certainly reinvest in the company and R&D, but it gives them options.

As an aside, Kone touched another all-time high today at 76.2 Euros, while Spirax Sarco hit £112. I am left wondering if they will do a ten-for-one share split as, I think, they did in the 1990s when the shares went above £100.

Best wishes


Mark.

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Re: Kone - Expanding Multiples

#344300

Postby ADrunkenMarcus » October 1st, 2020, 8:22 pm

Renishaw hit what seems to have been an all-time high (again) today at 5860p. I am beginning to suspect Mr. Market knows - or thinks he knows - something I don't! Even if the dividend was restored at its prior 60p (annual rate) then the yield would be only just over 1 percent.

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#344512

Postby TheMotorcycleBoy » October 2nd, 2020, 12:55 pm

ADrunkenMarcus wrote:Renishaw hit what seems to have been an all-time high (again) today at 5860p. I am beginning to suspect Mr. Market knows - or thinks he knows - something I don't! Even if the dividend was restored at its prior 60p (annual rate) then the yield would be only just over 1 percent.

Best wishes

Mark.

It seems like a bubble to me. Given their recent rise, it looks as if they are being treated like a "defensive" (i.e. like ULVR) in this world of general gloominess.

Only time will tell!

Matt

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Re: Kone - Expanding Multiples

#344551

Postby Spet0789 » October 2nd, 2020, 2:07 pm

TheMotorcycleBoy wrote:
ADrunkenMarcus wrote:Renishaw hit what seems to have been an all-time high (again) today at 5860p. I am beginning to suspect Mr. Market knows - or thinks he knows - something I don't! Even if the dividend was restored at its prior 60p (annual rate) then the yield would be only just over 1 percent.

Best wishes

Mark.

It seems like a bubble to me. Given their recent rise, it looks as if they are being treated like a "defensive" (i.e. like ULVR) in this world of general gloominess.

Only time will tell!

Matt


I sold out of RSW a week or so ago at about £51. Right now, that looks like the wrong call but having bought at £16 in Summer 2016 it has done very nicely for me. Still a great company but the valn looks very very stretched and board members are sellers here.

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Re: Kone - Expanding Multiples

#345075

Postby ADrunkenMarcus » October 4th, 2020, 11:47 am

Yes, it's stretched by any metric and this is a company that paid no dividend for 2020 - understandable given its cyclicality, but this is a company which had paid a dividend every year since (at least) 1986 and increased it at a 15 percent CAGR. (Before this year, the record was one of continuous growth, save for a near 70 percent dividend cut in 2009 which was more than restored to the previous level in 2011.)

If my quick sum is right, the share price has risen from 65p on 1 January 1988 to 5860p at its recent peak a few days ago and dividends of 678p have been paid, giving a total return of 6473.7p (5795p in capital gains and 678.7p in dividends) or 9,960 percent (just adding up the dividends as cash and assuming no reinvestment).

Renishaw's long-term record is, therefore, a very good one. However, it seems you can only justify the current market valuation if we factor in 'billions' in revenues which are yet to be generated and are not included in the 'consensus' forecast!

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#346304

Postby ADrunkenMarcus » October 8th, 2020, 8:18 pm

I found more detail on the analyst's comments via ProactiveInvestors:

“Competitive pressures in the metrology industry do appear to have increased in recent years but with sector-leading [research and development] investment (c15% of sales), we believe Renishaw can sustain a compelling through-cycle sales [compound annual growth rate] of 5-10%”, the broker said.

Looking ahead, Berenberg said Renishaw has developed a range of neurological products including a robotic system and a novel drug delivery device that is being trialled in what it said is a “potentially game-changing” treatment for Parkinson’s, while the firm also has another major long-term investment through its additive manufacturing business.

“It will likely take 10-15 years but, if successful, we believe these two businesses could add over c£500mln in [earnings] and billions more in value to the group”, the broker said.


For context, 2021 EBITDA is forecast at £124.5 million so if some are factoring in £500 million or more in the next 15 years then that might help explain the strength of the share price, which hit another all-time high today at 6015p. On the other hand, if this value does not materialise then there will be a clear downside!

Best wishes


Mark.

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Re: Kone - Expanding Multiples

#353521

Postby ADrunkenMarcus » November 4th, 2020, 6:59 pm

ADrunkenMarcus wrote:In Spirax's case, we have seen very significant growth and the ordinary dividend is up 72 percent, however it's re-rated from a c. 23 p/e on purchase to c. 45 today! I would guess it's 'real' business performance is half what the share price implies and that is respectable enough, including a 5 percent or so dividend increase this year on the interim. From 2013 to 2018 we basically had a c. p/e 20 to 25 then it soared in 2019-20.


Spirax hit another all time high today at £118.30 a share, representing c. 29% CAGR in the share price. On current year earnings, it's a 49 p/e (they're forecast to decline somewhat) but it's over 40 p/e even on the basis of 2022 estimates. A great performer and one that has now nearly quadrupled my money in 5.5 years, however I keep wondering how high these multiples are going to go!

Best wishes

Mark.

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Re: Kone - Expanding Multiples

#353523

Postby doug2500 » November 4th, 2020, 7:09 pm

Hi Mark,

I have the same thoughts about some of my holdings, and two in particular - Diploma and Focusrite

I have kind of decided to not sell on valuation alone but that policy has cost me with some holdings. I'm not devastated because they're good companies and I'm in for the long haul but it does make me question my approach.

Many shares rise to multiples I think daft only to keep going so it's a very tricky issue. It's a better problem than the other one though!

Doug


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