Today I want to share a new investment idea for a company in my portfolio:
A global leader in a market with extremely high barriers to entry (regulation, reputation, switching costs). It offers services whose failures would have such serious legal and reputational consequences that no customer has a real incentive to switch providers. No competitor has managed to take away its market share in recent decades.
It doesn’t compete on price. It provides critical, not discretionary, solutions. Historically, it has been able to increase prices by 3% to 4% annually above inflation. Demand is inelastic. The high-value-added services represent a small portion of customer costs. More than two-thirds of EBIT is predictable and recurring.
Attractive valuation in both absolute and relative terms, considering the business’s durability and its margins, ROIC, and cash conversion rates that are well above the market average. Earnings per share growth has consistently outpaced revenue growth in recent decades, and there’s no reason to believe the future will be any different.