Portfolio review 6

The final 4 shares – phew!

dignity

Dignity

Dignity is 2% of my portfolio and is up 6% on my purchase price. I identify most shares primarily through quantitative screening before having a closer qualitative look. This means I tend to be primarily led by the numbers when making decisions sometimes when I am less clear exactly whether or why a business has a durable competitive advantage (e.g XP Power, Diploma). However, for some shares, like Dignity this happens the other way round…

Quality

Dignity is the largest UK provider of funeral services. There are several reasons why I think Dignity is high quality:

  • It faces little competitive or technological threat. In addition it is likely to have some pricing power from consumer psychology: many people won’t want to scrimp on funerals or indeed spend too long thinking about prices. Dignity markets itself on quality. This is what its customers want but is also more profitable.
  • It is undoubtedly in a market with long term secular growth. It is very defensive. It is able to supplement this growth with occasional acquisition of independents.
  •  It has experienced steady but not terribly exciting growth in eps and FCF over time. It makes reasonably high margins and returns on capital. Its share price has steadily grown over the long term.

Pricing

Momentum is OK – there is currently a bit of a dip in the long term trend which for a highly defensive business like Dignity I think should be seen as a buying opportunity. It currently  seems to be good value given its likely growth rate. I’m looking to add to my position here.

abcam

Abcam

Abcam is 2% of my portfolio and is up 4% on my purchase price. I bought after it scored highly in my screening and because of its similarity to another favourite of mine, Bioventix.

Quality

Abcam is a supplier of antibodies for medical research and testing. I believe it is an excellent business:

  • It has a very strong moat from numerous factors: its IP, the scale of the data it collects from its users on its antibodies and its brand and now increasingly its digital distribution platform. It has developed itself into an ‘information hub’.
  • It is highly defensive.
  • It operates in markets with strong secular growth. It also has scope for further geographic expansion, and to leverage its digital platform and data advantages to drive growth into new markets and growth through acquisitions.
  • It has very high growth, margins and ROCE, though ROCE has been declining recently. I need to keep an eye on this.

Pricing

Momentum is good. I believe the valuation is reasonable given the defensive characteristics and growth prospects.

churchill

Churchill China

Churchill is 2% of my portfolio and is up 3% on my purchase price.

Quality

Churchill is a manufacturer and exporter of china crockery. I think it is a high quality defensive business:

  • It has a ‘moat’ from cost barriers to entry, its expertise and its brands. I don’t believe these are insurmountable, though it seems unlikely that Churchill faces much competitive threat. I also think the technological threat is low.
  • There appears to be scope for steady international growth.
  • it has historically demonstrated Very consistent growth with high ROCE and cash generation. It makes reasonable margins.
  • It appears unlikely to be very cyclical.

Pricing

Momentum is very strong and Churchill is currently also benefiting from a currency tailwind. It appears to be good value given its quality and growth.

compass

Compass Group

The final share and most recent addition to my portfolio is Compass Group. It is currently 1.9% of my portfolio and is at the same price I bought it for.

Quality

Compass is a caterer, predominantly providing outsourcing services to large businesses. It is a large business, much larger than others in my portfolio, currently worth £24bn and in the FTSE100. I think it is a very high quality business:

  • It has a competitive advantage from its scale and distribution network, which enable it to provide a higher quality and lower cost service to multinational businesses.
  • It has long contracts for which it may have an incumbency advantage in retaining.
  • It is very well diversified across its customer base.
  • It is in a market with secular growth due to a shift towards outsourcing. There are no apparent technological threats.
  • Though some of the business is commodity related overall it is defensive. I note its share price was not very negatively affected by the 2008 downturn.
  • It has high ROCE and turns profits into cash. It has steadily grown profits and cash flow over many years.
  • My one possible concern with Compass is the extent to which it can continue to grow given its size. I am relaxed about this for now.

Pricing

Momentum and newsflow are good. The valuation seems reasonable given the quality of the business. I’m happy to hold and may add to this position.

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