Buy Hold Sell

Buy Hold Sell: 5 long-term compounders for the bottom drawer

Fri 26 May 23, 9:30am (AEST)
BUY HOLD SELL PrimaryYoutube (65)
Source: Livewire Markets

Key Points

  • TechnologyOne is a high PE stock, but it is not too bad for a software company. The analysts recommend holding this stock
  • Breville is doing well but far too expensive
  • Analysts view Sonic Healthcare as a quality company with a strong balance sheet

There's something to be said of reliable compounders. While they may not double overnight as a growth darling can, these stocks definitely make it easier to sleep at night. 

Why? Well, reliable long-term compounders can continue to provide solid returns over the years to come without the volatility or downside risk that comes with more speculative stocks. 

And while the secret to long-term success may be hitching our bandwagon to said compounding stocks, the price you pay for their shares is equally, if not more important. 

So in this episode, Livewire's Ally Selby was joined by Perpetual Asset Management's Sean Roger and Sage Capital's Sean Fenton for their analysis of three steadily growing stocks. 

And they also name their own bottom drawer stock that they will be backing for the foreseeable future too. 

Note: This episode was recorded on Wednesday 17 May 2023 and first published for Livewire Markets on Friday, 26 May. You can watch the video, listen to the podcast or read an edited transcript below. 

Edited Transcript 

Ally Selby: Hey, how are you doing? Welcome to Livewire's Buy Hold Sell. I'm Ally Selby. The secret to success in investing is finding quality stocks that can compound their earnings over the long term, but the price you pay is equally important. So, today we are joined by Sean Fenton from Sage Capital and Sean Roger from Perpetual Asset Management for their analysis of five quality long-term compounders.

Okay, first up today we have TechnologyOne. It has delivered 13 consecutive years of record profits, but it is on a PE of around 54 times. Sean, starting with you, is it a buy, hold, or sell?

TechnologyOne (ASX: TNE)

Sean Fenton (HOLD): I'm going to go with hold. It is a high PE, but not too bad for a software company. High margin, it's been transitioning to a SaaS model, software as a service. It's got pretty safe clients. It's largely in local government and healthcare and a bit of financial services.

Probably the downside is that a lot of its growth has been coming out of Australia - where it's getting a little bit more fully penetrated, so it's had to look to the UK and is expanding there. That's a bit of a different market. It's harder to get a feel for how they can tailor their offering as they do with local governments to councils in the UK.

Still, as you say, a very steady grower. Not an unreasonable price for a software business.

Ally Selby: It is trading near all-time highs, though, and its share prices are up 46% over the past 12 months. Sean, over to you. Is it a buy, hold, or sell?

Sean Roger (SELL): TNE's a sell for us. Again, very hard to fault the performance of the business. Even during COVID, it delivered excellent results. I think in the short term there are some tailwinds for revenue there as the CPI increases come through their contracts.

The company gives really detailed targets out to FY26, both revenue and profit. If you assume the company hits those targets and runs it through, you're still paying 30 times FY26 on those numbers. For us, good company, going well, but it's just too expensive, so sell.

Breville Group (ASX: BRG)

Ally Selby: Okay. Next up we have Breville group. Everyone knows this company. It has a return on equity of around 16% and its revenues have been consistently growing over the past five years. But it is trading on a PE of around 27 times. Sean, is it a buy, hold or sell?

Sean Roger (HOLD): Breville's a hold for us. I'm a coffee fan and I love the Breville products, and they've got a great history of successful new product development. I think over the past few years you've seen them really increase their advertising and product development spending, which puts the company in good stead for revenue growth over the next few years.

Obviously in the short term, though, it's a challenging, demanding environment. You've seen volumes turn negative in that in the latest result.

Whilst they have pulled back on some advertising more recently to try and sustain the earnings growth, we think that that'll be hard to repeat into a second year. Really good company. It is trading on a reasonably full multiple. We just think given that near-term risk that it's a hold.

Ally Selby: Okay. Its share price is down around 5% over the past year. Sean, is it a buy, hold, or sell?

Sean Fenton (HOLD): I'm going to say unusually all of the above. By that I mean, I think long term it's probably a buy because it's a great brand, great product innovator, coffee machines, a high proportion of R&D, they create their own products. They've got a global rollout story, so they're taking that brand and taking it to the world. There's a good gross track record, but it is a consumer stock.

In the short term, we are facing consumer uncertainty, and it has a high valuation, so it is vulnerable. It's been a bit of a COVID beneficiary if you get some recessionary impacts. In the short term it might be a sell, so maybe hold until you get a better opportunity to buy it and then it's a long.

Sonic Healthcare (ASX: SHL

Ally Selby: Okay. Next up we have Sonic Healthcare. In February, it announced that its earnings per share had lifted 52% compared to the pre-pandemic period. It's trading just above the market multiple at 16.8 times. Is it a buy, hold, or sell?

Sean Fenton (BUY): I'm going to go with a buy. I mentioned before, we like healthcare because it's quite solid and stable, defensive through downturns. Sonic Pathology is a pretty regular income stream. They're a leading share in the Australian market but have been pushing globally into the US and Europe and Germany.

They've got a good growth pipeline ahead of them. They do a lot of that through acquisition, and they're a big beneficiary obviously through COVID. They earnt a massive amount of money through PCR COVID testing. That's really helped strengthen their balance sheet.

Those earnings are out of the way now, but it's left their balance sheet in a very strong position to continue to grow. There's still a bit of work to come back as surgeries and GP visits recover from COVID lockdowns as well. We see a bit of growth, a very strong balance sheet, reasonable multiple.Ally Selby: Okay. The share price is pretty flat over the past 12 months, but it has rebounded around 20% since the beginning of the year. Sean, last one for you today, is it a buy, hold, or sell?

Sean Roger (BUY): I'm going to agree with Sean and call Sonic here a buy. We think that at its core it's a quality company and really well run. I think that's been demonstrated with the performance of the pathology-based business over the past 12 months. They've taken share and had really good cost control compared to some of their competitors.

I think, again, to Sean's point, the strength of the balance sheet and the windfall profits that they had from those PCR tests, they haven't gone and spent and deployed at times when valuations have elevated. Now they've got the capacity to go and make acquisitions after the valuations have come back to more reasonable levels.

We think the valuation's fair for the quality of the business and they've got a balance sheet ready to go.

Ally Selby: Okay. We asked you to bring along one long-term compounder today, a stock that investors could put in the bottom drawer and leave it there. What have you brought for us?

Goodman Group (ASX: GMG)

Sean Roger (BUY): The stock is Goodman Group. It's not a stock we've historically owned until recently, but it's a company that we've admired for a long time. It's founder-led. They're the best at what they do globally and they've traditionally run with quite a conservative balance sheet.

Obviously in recent history, and in the short term, there's some pressure on valuations with rising cap rates, but we think the rental growth in the markets that Goodman's located in will offset most of that valuation pressure.

I think the thing that interests us the most is they're probably one of the only large Australian REITS that's gone into this downturn with balance sheet capacity, both on their balance sheet and in their funds.

We think in an environment where you're starting to see some stress in the industry, they're going to be now competing for assets with a lot fewer competitors. We think that there's the potential for them to buy quality assets at reasonable prices and set the business up for the next five to 10 years for them to deliver similar sorts of earnings growth to what they have over the proceeding years. So, Goodman's a buy.

Ally Selby: Okay. Sean, your time in the hot seat. What's your bottom drawer stock and why?

WiseTech Global (ASX: WTC)

Sean Fenton (BUY): We're going to go with WiseTech Global. WiseTech is basically software for the global trade industry. They're customers are in freight forwarding, so things like DHL and FedEx. If you're buying something online, how does the package get there?

They've been gradually taking share, acquiring companies, pushing in there with those big contracts to the point where you can't really do business without them, and that gives us them enormous pricing power.They're also moving into new verticals, so they're moving into customs and moving from sea-based freight into land-based freight in the US. They've got a great growth pipeline ahead of them as they continue to penetrate and expand into those new verticals.

With pricing power and the huge margins that you get in software, we think that justifies the big multiple that you're paying for the stock, so definitely one for the bottom drawer.

Ally Selby: Okay, well, I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, don't forget to give it a like. Remember to subscribe to our YouTube channel. We're adding so much great content every single week. 

Written By

Buy Hold Sell

Buy Hold Sell is a regular video series where Australia's leading professional investors share their views on Australian and Global Shares. This content is produced by Livewire Markets and has been syndicated to the Market Index website.

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