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Why I’d hold onto this FTSE 100 six-bagger for another five years

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Finding companies whose performance justified a long-term hold isn’t always easy. Today, I’m going to consider two potential candidates for a long-term slot in your portfolio.

A turning point?

Small cap Accsys Technologies (LSE: AXS) doesn’t have any problems finding customers for its super-durable acetylated timber product, Accoya. Sales have grown from just €15m in 2012 to €56.5m last year.

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Accsys estimates that Accoya now accounts for 12% of the UK joinery market. It’s also sold in a number of overseas markets.

Today’s AGM trading statement makes it clear that demand remains strong. Sales rose by 20% during the five months to 31 August. There are only two problems.

The first is that production is already running at maximum capacity. Chief executive Paul Clegg admitted today that “we are working with our customers in order to minimise the impact of this temporary capacity limitation.”

The company doesn’t expect the benefit of new capacity to be available until the start of the next financial year, in April 2018. So there could be some risk of losing trade to competitors.

Struggling to break even

The second problem is that Accsys is struggling to become profitable.

Sales rose by 7% to €56.5m last year, but gross profit fell by 21% to €14.4m due to factors including higher timber costs and lower licensing revenues. As a result of this decline, the group’s pre-tax loss increased from €0.4m to €4.4m.

The group expects margins to improve over time. But today’s statement made further mention of rising materials costs and said the company was “reviewing the implementation of a price increase”. It sounds to me like customers might be quite price sensitive. So if Accoya prices rise too far above standard timber, I suspect sales could fall.

Broker forecasts suggest the company will report a full-year loss for both 2017/18 and 2018/19. The shares currently trade on 1.8x sales. That looks fully priced to me. I suspect there will be cheaper opportunities to buy over the next 18 months.

A six bagger since 2006

When chief executive Richard Cousins took charge at FTSE 100 catering firm Compass Group (LSE: CPG) in May 2006, the firm’s shares traded for 236p. Today that figure is 1,580p. That means Cousins has delivered a 570% gain for shareholders in just over 11 years.

Unfortunately, he has decided to retire next year. Compass shares dropped 2% today following the news, but the handover to new boss Dominic Blakemore should be orderly. Blakemore is already very familiar with the business, as he was appointed its chief financial officer in 2012 and is currently chief operating officer for Europe.

Buy, sell, or hold?

Cousins’ sure-handed guidance has resulted in Compass shares becoming quite expensive. The stock currently trades on 22 times forecast earnings, with a prospective dividend yield of just 2.2%. So should investors take profits?

I don’t think so. Although there’s a risk that Compass stock may underperform for a while, the group’s fundamental appeal shouldn’t change. Return on capital employed has averaged 20% since 2011, during which time the dividend has grown by an average of 9% per year.

In my view, Compass is likely to remain a profitable stock to hold. I’d see any significant falls as a buying opportunity.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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