October 07, 2024 | Listen Online | Read Online | | Vaue Investor Daily #49 Capital Efficiency at a Reasonable Price |
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| Subscribe for Free | | As an investor, you want a management team that can compound your capital at high rates of return. | Return on Invested Capital (ROIC) is one way to screen for that type of company. | If a company can sustain a high ROIC over time, there's likely a strong moat coupled with a prudent, shareholder-friendly capital allocator running the business. | In 2011, Microsoft was earning over 50% on its invested capital: | | FinanceCharts: MSFT ROIC |
| But its stock was trading at just 10x earnings: | | FinanceCharts: MSFT P/E Ratio |
| Here's what the total returns on the stock look like since then: | | FinanceCharts: MSFT Total Return |
| Here's a simple screen we ran to find some potential companies with high ROIC at a discounted valuation: | 5-year average ROIC over 24% P/E ratio under 24 (vs. S&P 500 at 30 right now) Positive net cash position (so you can sleep well at night)
| You're getting above-average capital efficiency with below-average valuation with this screen. | But remember, a screener is always just a starting point. | This screen led to many trusts and holding companies, mostly in oil and gas exploration. | | StockAnalysis.com |
| But if we sort by revenue, we get more "operating companies." Over many years, these companies should be able to grow their businesses organically, with very efficient capital allocation and/or shareholder returns. | | StockAnalysis.com |
| The top five all look interesting here: | Ticker | ROIC | ROIC (5Y) | P/FCF |
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AMP | 43% | 29% | 7.8X | NVR | 24% | 24% | 19.4X | LULU | 28% | 24% | 19.5X | NSP | 23% | 31% | 11.4X | RHI | 11% | 24% | 18.6X |
| Let's look closer at Ameriprise Financial (AMP). | It's got a history of increasing revenue per share, EPS, FCF, stock repurchases, and dividends. | | GuruFocus: AMP revenue per share |
| | GuruFocus: AMP EPS |
| | GuruFocus: AMP Free Cash Flow |
| | GuruFocus: AMP Share Buyback Ratio |
| | SeekingAlpha: AMP Annual Dividends |
| In the last 12 months, here's how the company's operating metrics look: | Revenue: $16.9 billion | Free cash flow: $6 billion | Share buybacks: $2.2 billion | Capital expenditures: $169 million | Dividends paid: $560 million | Return on tangible equity: 68% | So, it's not compounding the cash flow with heavy reinvestment into CapEx, but it's aggressively returning cash to shareholders. | And it's beaten the index return over the last ten years: | | SeekingAlpha |
| So, it looks like a very interesting idea we found in just a couple of minutes with an ROIC-focused screener. | Even though the stock is at all-time highs, there may still be value there. | What do you think? Is it worth a deep dive? | As always, make sure you do your own research before investing. | We encourage you to play with the screener and always be on the lookout for capital-efficient companies at reasonable prices. | Thank you for reading today! | | Join this Viral Daily Trade Alert Subscription, Free | Receive daily stock trade alerts sent directly to your phone and email. Stay informed with timely market insights and expert analysis. Join a community of 150,000+ subscribers benefiting from these alerts Stay ahead of market trends and capitalize on emerging opportunities.
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