Company examples

Actions speak louder than words, in my opinion. Saying I intend to invest in great businesses is one thing, doing it is quite another. The five companies below are all featured in the Quality Shares Portfolio. While they are very different, I believe each has the qualities I’m looking for in spades.

Important: This is not personal investment advice. The information about individual companies represents the view of Charlie as portfolio manager but it is not a personal recommendation to buy, sell or hold shares in any company. The value of shares can fall as well as rise: you should not invest money you cannot afford to lose. Experienced investors should form their own considered view or seek advice if unsure. Charlie personally holds shares in Croda, RELX, Roper, Diploma, and Danaher.


Relx-Charlie-800x200.jpgRELX (FTSE 100) – a data geek

How can a car insurer give you an accurate quote in an instant? The answer is data, and lots of it. RELX is a leading provider of such data – 20 of the world’s top 25 insurers rely on it. Many other professionals, from lawyers to academics, also depend on RELX’s data every day to make critical decisions. As the data revolution takes hold, RELX could be well placed to capitalise.

Why I like RELX

Resilience

  • Supplying must-have information, required in good times and bad
  • High proportion of recurring/repeat income, often from multi-year contracts
  • Well diversified by customer, sector and geography

Moat

  • Dominant positions in specialist niches
  • Deep and broad data-sets, some of which is proprietary
  • Software deeply embedded in customer’s operations, resulting in high switching costs

Cash

  • No factories or heavy machinery
  • Receives payment from customers before paying suppliers
  • Prodigious free cash flow, used for bolt-on acquisitions, dividends and share buybacks

Culture

  • Sensible, conservative management team, whose words have aligned with actions
  • Good track record of new product development
  • Strong history of bolt-on acquisitions and disposals that have raised business quality

Roper-Charlie-800x200.jpgRoper Technologies (S&P 500) – a rare vintage

I see Roper like a fine wine collector that focuses only on the best vintages. But instead of wine, it acquires niche software and technology businesses, providing an environment where they can flourish. Over time, I expect Roper to use the cash flow from these businesses to add more high-quality companies to its collection.

Why I like Roper

Resilience

  • Mission-critical products, required in good times and bad
  • High proportion of recurring revenue, strong customer retention
  • Widely diversified by customer and industry

Moat

  • Dominant positions in well-defined niches
  • Software deeply embedded in customer’s operations, resulting in high switching costs
  • Long-term and high-touch customer relationships

Cash

  • Ability to grow without consuming cash
  • Obsessive focus on cash flow, with Managing Directors incentivised accordingly
  • Uses cash to acquire other businesses

Culture

  • Highly decentralised collection of separately managed businesses
  • Long-term focus, high standards and a culture of trust
  • Highly disciplined approach to acquisitions and disposals, which has raised business quality

Diploma4-Charlie-800x200.jpgDiploma (FTSE 100) – a niche industrial

Have you ever noticed those big Caterpillar machines on construction sites? They cost hundreds of thousands and if they break, work grinds to a halt. Diploma supplies components to repair those machines. It’s one small part of its business, patiently built up through two decades of shrewd acquisitions. Diploma focuses on delivering low-cost but critical products, with each acquisition further diversifying the portfolio and entrenching its niche market positions.

Why I like Diploma

Resilience

  • Supplying mainly low-cost, critical components
  • Well diversified by customer, supplier, sector and geography
  • Products unlikely to go out of fashion, e.g. seals for heavy mobile machinery

Moat

  • Leading positions in niche markets, underpinned by distribution networks that are difficult to replicate
  • Provides value-add services, like next-day delivery and bespoke components
  • Exclusive and semi-exclusive supplier relationships, meaning customers often have few alternatives

Cash

  • A middleman connecting customers and suppliers, not a manufacturer, meaning capital isn't tied up in factories
  • Healthy margins and fast-moving inventory
  • Prodigious free cash flow, used mainly to fund acquisitions

Culture

  • Highly decentralised collection of separately managed businesses
  • Agile, entrepreneurial and accountable with fast-decision making
  • Highly astute acquirer with strong returns on capital

Croda-Charlie-800x200.jpgCroda International (FTSE 100) – a chemicals company, with a twist

Think of a chemicals manufacturer and you probably picture large refineries, smoking chimneys, and the odd industrial spill. Croda is different. Its chemicals come in test tubes and go into skin creams and drug delivery systems. In fact, Croda’s chemicals played a key role in the Pfizer Covid-19 vaccine. I believe Croda’s best days are ahead, with its vaccine success potentially spawning a rich seam of opportunities.

Why I like Croda

Resilience

  • Its chemicals are critical, e.g. they ensure drugs get delivered correctly
  • Serves defensive industries – personal care and healthcare
  • Widely diversified by customer, industry and geography

Moat

  • Products often patent-protected and sold into specialist niches
  • High switching costs, e.g. Croda’s drug delivery systems are specified on regulatory documents
  • Long-term, trusted customer relationships

Cash

  • Making test tube quantities of chemicals, significantly reducing capital requirements
  • A focus on value over volume, leading to very high margins
  • Uses cash to acquire other businesses and pay dividends

Culture

  • Decentralised business model with decisions taken close to the customer
  • Innovative and entrepreneurial
  • Strong track record of bolt-on acquisitions

Charlie-Examples-800x200-new.jpgDanaher Corporation (S&P 500) – the picks and shovels of biological therapies

In the California gold rush, it wasn’t the gold miners who made the most money. It was the companies supplying the picks and shovels. By providing the equipment to research and create biological drugs, Danaher has positioned itself as the picks and shovels provider to the medical science industry. Demand for these therapies is exploding, but picking winners isn’t easy. Danaher’s broad product portfolio means it could be well positioned to benefit, without bearing the risk of drug development.

Why I like Danaher

Resilience

  • Serving defensive industries – healthcare and diagnostics
  • Recurring revenue from single-use consumables linked to capital equipment
  • Widely diversified by therapy area

Moat

  • Installed base of critical equipment leading to high switching costs
  • Leading positions in highly regulated markets
  • Broad product portfolio and global scale

Cash

  • A focus on technologically advanced products, sold at high margins
  • Cash conscious culture
  • Uses cash mainly to acquire other businesses

Culture

  • Culture of operational excellence underpinned by a unique way of doing business (the Danaher Business System)
  • High performance standards and accountability
  • Disciplined approach to acquisitions and disposals, which has raised business quality

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Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 

The details

Type
Discretionary Share Portfolio
Minimum investment
£10,000
Geography
Global
Initial charge
Nil
Annual custody charge
0.25%
Annual management charge
1%
Next deadline
10 Jul 2024 (5pm)
Last updated: 24 October 2023