.png)
Imagine two scenarios.
Company A
Company A has strong management team who are focused on increasing returns on invested capital. Current cash flows are €3 billion per year, and top-line growth of 4% and EPS growth of 14% suggests even stronger cash flows down the road. Meanwhile, the industry is stable and growing secularly, and Company A holds the number one position in all three of its key geographies; and yet the sell-side analysts are bearish, anchored to a stale accounting-short thesis.
Company B
Company B also has strong management team who are focused on increasing returns on invested capital. Current cash flows are €3 billion per year, and top-line growth of 4% and EPS growth of 14% suggests even stronger cash flows down the road. Meanwhile, the industry is stable and growing secularly, and Company B holds the number one position in all three of its key geographies; and yet the sell-side analysts are bearish, anchored to a stale accounting-short thesis.
Company A is trading on a 2019 P/E of 21x, while Company B is trading on a 2019 P/E of 13x.
Which one are you going to buy, Company A or Company B?
Everything else being equal, we’d all like to buy the same thing at a lower price. At least on that much, value and growth investors should agree.
FOOTNOTES
DISCLAIMER
The views and opinions expressed in this post are those of the post’s author and do not necessarily reflect the views of Albert Bridge Capital, or its affiliates. This post has been provided solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The author makes no representations as to the accuracy or completeness of any information in this post or found by following any link in this post.
YOU MIGHT ALSO LIKE
Do Short Term Flows Permanently Affect Share Prices?
I’d like to think that prices can get out of whack for some period of time, and in that window, the nimble, unbiased, fundamental stock picker can take advantage of overreactions and underreactions. If they don't, then the M&M propositions truly hold, and I don’t have a meaningful job. However, if this paper is right, and it is only flows that matter, then while the M&M theorems are overturned, I don't have a meaningful job either. If it is all about flows, then I shouldn't play the game.
Read MoreAre American Companies Better than European Ones?
If we again go back and start the clock on January 1, 1980, and stop it thirty years later on December 31, 2009, we see that the S&P 500 generated annual total returns (with dividends) of 11.5%. During that exact same period, guess what the annual returns of the MSCI Europe were? Also 11.5%. This last decade, however, things have gotten out of whack.
Read More
