5 Amazing Companies I'd love to own at the Righ Price (My Watchlist)
These 5 companies have been on my watchlist for a while. I am waiting for the right price to enter, as some of these have lofty valuations. As we know, a great company bought at the wrong price can be a lousy investment.
1. ASML ASML 0.00%↑
ASML is a company from the Netherlands that produces photolithography which is an important step when producing semiconductors. ASML sells its products to major semi-producers and is considered one of the most important companies in the world.
The drivers for continued growth in the semiconductor market are essentially every technological category: smartphones, cloud computing, computing, 5G, AI/MR, and autonomous vehicles. ASML won’t run out of devices to create their photolithography for a long while.
The company’s return on invested capital is 29.7% and has been consistently high for years, ranging from 14-32%. Their free cash flow per share has grown 22.73% CAGR over the last 5 years. ASML’s gross margins are currently at 50%.
ASML’s sustainable competitive advantage is its EUV machine which is the most effective machine to create microchips. Microchips are essential in the creation of semiconductors.
Why own ASML?
Strong future growth prospects
Doesn’t need debt to achieve superior returns
Huge backlog (High demand for their EUV machine)
High return on capital
High FCF margins
At what price would I buy ASML?
My entry price would be £225BN - which is only a ~10% discount from today’s levels. This means I might soon initiate a position in ASML.
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2. S&P Global Inc. SPGI 0.00%↑
S&P Global is the leading provider of credit ratings on fixed-income securities. After the 2007-2008 Global Financial Crisis S&P Global separated itself from the underwriting process. This means that they are no longer a part of the debt prospectus and the risk of something similar happening again is reduced.
The Market and competitive advantage
90% of the world's debt has ratings from the duopoly S&P Global or Moody's. The trust in the financial systems of a business like S&P Global creates an environment where with high barriers to entry. Even if a newcomer had endless resources, the reputation, and trust of S&P Global are so stable, that customers would still prefer it over the newcomer.
The sustainable competitive advantage of S&P Global is the regulations that have solidified the duopoly in the rating agency business. The companies that choose a competitor of S&P Global will end up paying higher interest on their debt. Usually, the markup is 30-50 basis points higher. Competitors could offer to rate the customer’s debt for free, and it would still make economic sense for the companies to choose S&P Global or Moody's. Considering this, the S&P Globals moat is wide.
S&P Global has been on my watchlist for a while. I am waiting for the expected 15% pa. growth rate before I initiate a position. I'm being patient with this one, as I will probably own it for a very long time. If $SPGI would drop ~20%, I'm a buyer. The price I see as an entry is around ~$100BN market cap.
3. COPART CPRT 0.00%↑
Copart has done very well over the last decade. It has more than doubled the return of the Nasdaq and 4x’ed the returns of the S&P over the last 10 years. The company operates in an unsexy and boring industry and won’t be compared to high-growing “hot stocks”. This is a good thing for investors as it means the business probably won’t be unreasonably priced and provide an opportunity to make a good investment.
Copart operates an online auction platform and several scrapyards worldwide. Let’s take a look at the business.
Copart operates an online car auction website. It is the largest platform in the market with approximately 265k vehicles in total.
The business operates several scrap yards in metropolitan areas where it salvages car parts from cars that are not worth repairing. One important advantage Copart has is that it owns the real estate on which its salvage yards operate. This gives them better margins than their competitors that rent the land.
According to IAA, which is Copart’s biggest competitor, the used vehicle market will expand by 2 million vehicles per year.
Cars have increased lifespans and vehicle complexity increases the likelihood of salvaging cars. This is primarily because increased complexity means increased cost of repairing the vehicles. The salvaging number has gone from 8.5% in 2010 to 20% in 2020 reflecting the increased complexity.
Copart is the market leader and has a market share of 40%. The second largest player is IAA. IAA is set to merge with Ritchie Brothers. This merger is questionable from investors, as it increases Ritchie Brothers’ leverage, and the synergy is questionable. The increased leverage at this point in the economic cycle is considered a higher risk than it would’ve been if the merger was done in 2018-2021 due to lower interest rates and low inflation levels.
The founder of Copart, Willis Johnson owns ~7% of the company. Johnson has stepped down as CEO, but his family continues to run it. The current CEO is Jay Adair. Adair is Johnson’s son-in-law and is married to his daughter. Adair began his career in 1989 and was promoted to CEO in 2010. He owns around ~4% of the company. The CEO has a salary of $1 plus equity, this means that management and shareholder values are aligned. As we know, owner-operator businesses and businesses where the management has skin in the game provide superior returns for shareholders.
The management is also a long-term thinker. Adair talks about the next 40 years, as opposed to the next 1-3 quarters, which is the focus of Wall Street. This is also a trait to look for when evaluating management.
The results speak for themselves, Adair has outperformed both Nasdaq and S&P500 since he took over as CEO and he will continue to do so in the future. The management performance is reflected in their return on capital numbers:
ROC numbers from 2007-2022. Source: Roic.ai
Buybacks and Capital Allocation
Another sign of great management is capital allocation. Knowing when to buy back stocks, when to pay dividends, do M&A, or pay down debt is a key management skill that translates into shareholder value.
Copart has bought back shares in times when the business has been a buy. When they determine that the stock is cheap compared to the future outlooks and current valuations, the management buys back huge quantities of the stock.
In 2011 Copart bought back 29% of shares outstanding - Copart had a PE of 0.6 vs. the S&P in 2011.
In 2016 Copart bought back 12% of shares outstanding - Copart had a PE of 0.4 vs. the S&P in 2016.
These two buyback sequences have been an amazing investment for Copart and show management competency.
Barriers to entry
Scale - You need sufficient scale to compete. To achieve the scale you can build up your reputation over the years as Copart has, or you can try to buy your way into the market - hard to do and likely to fail.
Relationships & Trust - 80% of listings come from insurance companies that Copart has built a relationship with for decades. Trust is an underrated variable in markets.
Real estate - needed near all major metropolitan areas. This will cost a ton to invest in upfront, or it will hurt your margins significantly if you choose to rent the land like IAA.
Intangible assets: Website/Platform
Network effects: The more insurance companies and consumers that use their platform increases the efficiency of the platform. It provides better products for the consumer, and it provides more data points for Copart to increase the effectiveness of the platform.
Copart is a High-quality business with a great management team that is aligned with its shareholders to provide value. The management has a proven track record of being great capital allocators, they hold a high level of shares, and they have managed Copart into a market leader with a 40% market share and a strong market position. Management talks 40 years in the future. All signs of a great management team.
Copart is currently trading at an OK valuation and is expected to return ~10% annually from current levels given a conservative 11% annual growth rate. Copart is currently sitting high on my watchlist and I might pull the trigger if we see a pullback. In my opinion, it’s an amazing business at a fair price.
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4. L’oréal $OR.PA
L’oréal is the largest beauty company in the world. It has consumer products in makeup, skincare, hair care, and fragrance. The company is more than 100 years old, founded in 1909. It has a track record of quality compounding.
The company has a global presence, with about 25% of sales from the EU, 25% from the NA, and 50% from emerging markets.
L’oréal’s return on invested capital is 17.5%, and they have compounded their Free Cash Flows by ~10% per year for the last 10 years. Their gross margin is currently 74% which is close to their 5-year average of 73%.
The sustainable competitive advantage that has made them relevant for more than 100 years, is their strong brands. L’oreal has 8 brands that generate more than $1BN per year. They continuously invest in R&D to stay on top of their industry, resulting in countless patents and integration of technology into beauty - the company is experimenting with AI and beauty.
Why own L’oréal?
The high versatility of the earnings
Deep knowledge of beauty set into the system (with patents to protect their revenue streams)
Effective brand/product management
Consistently high returns on capital and growth
Doesn’t need debt to earn superior returns
What price would I consider L’oréal?
The price of the company would have to be ~£150BN to meet my requirement (Currently, $230BN). I’d love to own L’oréal, but the price is currently out of reach for me to justify taking a position.
5. Texas Instruments TXN 0.00%↑
Texas Instruments is a chip manufacturer with 95% of its revenue from semiconductors. The business works in two segments, Analog, and Embedded Processing.
Texas has more than 100.000 clients globally, and 66% of its revenue comes from Asia - ~15% from the EU, the middle east, and Africa, and 10% from the US. Their product portfolio consists of more than 80.000 products, and they deliver products to many different industries. This gives Texas Instruments great diversification geographically and in terms of industries. This indicates stable earnings which is a plus for investors.
Texas Instruments currently has a return on invested capital of 37%, and the ROC has been in the high 30s for the last 5 years. Their free cash flow per share has grown from $2.63 to $6.42 over the last 5 years, a CAGR of 19.54%. TXN has a gross margin of ~69%.
The competitive advantage
Texas has more than 45.000 patents which solidify its competitive advantage and protect its revenues from competitors. It has a long-standing relationship with its clients and a reputation for delivering high-quality semiconductors and products to its clients. Texas Instruments long-standing growth and high gross margins suggest a wide moat.
TXN is a high-quality business that is exposed to a growing industry where its competitive positioning is strong, has high earnings stability, and is delivering stellar fundamental results. Given this, I don’t have a very high margin of safety requirement (unlike ASML 0.00%↑ which is very concentrated). I'd still like a 25% MOS in case I'm wrong.
Given this, I’d like to initiate a position in Texas Instruments, if the market cap falls to the $112-$118BN range (25%-22% discount from current levels).
As with other quality investments, if you hold it long enough, you will achieve market-beating results. But I’m being disciplined with my 15% pa. requirement.
You can read more in-depth articles about these 5 companies here: