What's made this FTSE 100 business so successful?
They say elephants don't gallop, but shares in £5.7bn FTSE 100 power services company Aggreko (LSE: AGK) have risen by over 300% since 2007. Over the same period, the company has outperformed the FTSE 100 by a significant margin every single year.
Aggreko makes money by renting out temporary power solutions for utilities, the military and big events. So far this year, it's up 11.6% on a total returns basis, against 4.6% for the FTSE 100.
What's the secret?
What has made Aggreko so successful? How has it escaped the downturn and posted solid improvements in revenue, profits and dividends every year for the last five years?
For me, two factors stand out:
1. A commanding position in the market, with few global competitors -- only US-based Caterpillar (NYSE: CAT.US) and upstart APR Energy (LSE: APR), a recent spin-off from parent company Alstom.
Aggreko's maturity, fleet size and in-house manufacturing capacity give it a substantial moat, making it hard for new competitors to enter the market successfully.
2. Consistent growth in demand across its key markets, especially emerging markets with ageing power stations that cannot keep up with growing demand.
As a case in point, this morning Aggreko announced a two-year, $80m deal to provide 100MW of gas generation in the Dominican Republic, to help stabilise its national grid.
Local and international
Aggreko's business is made up of two divisions, International Power Projects and Local. Both have a global presence but they serve different markets.
Local provides hired power generation equipment for events and other temporary requirements. This equipment is provided from Aggreko's standing fleet of equipment at around 150 bases around the world.
In 2011, Aggreko's Local business accounted for 53% of its revenues and 36% of its trading profit.
Aggreko's International Power Projects division supplies, installs and operates large-scale generation facilities to serve the needs of utilities and other large, long-term customers. In 2011, it secured 1,200MW of new work and delivered 47% of Aggreko's revenues but 64% of its profits.
Can the growth continue?
Aggreko has been an amazing growth story and for several years, people have been suggesting that it must slow down.
It trades on a high price-to-earnings multiple of around 23 and its PEG ratio -- a popular growth indicator -- is above 1, suggesting that slower growth is likely. The dividend is also an unattractive 1% or so.
Yet Aggreko is experiencing growth in all of its global markets and it is just completing the acquisition of a regional competitor, Poit Energia, in South America, which will help to expand its share of this big market.
Aggreko's overall trading margin was 24.2% in 2011, and so far in 2012 it has reported underlying revenues up by over 20% for both the International Power Projects and Local businesses.
Aggreko is a little too expensive for me, but I have a strong suspicion it will continue to deliver solid growth, albeit at a reducing rate as the business gets larger.
If you feel that you've missed the boat on Aggreko but would like to find similar companies at an earlier stage in their development, then you need to find businesses with the same key ingredients -- a high barrier to entry, healthy margins and growing demand.
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