Which of today’s businesses will still be performing well when we reach retirement age? It’s not easy to be sure. Although we can be fairly certain sectors such as technology and pharmaceuticals will continue to grow, predicting individual winners is very difficult.
To try and solve this problem, I’ve selected two companies that provide essential services to the markets they serve. This is similar to the ‘picks and shovels’ approach favoured by some mining investors — you don’t know which miners will strike gold, but you do know that they’ll all need the same tools.
To make sure both companies still have some room to grow, I’ve chosen them from the mid-cap FTSE 250 index, rather than the big-cap FTSE 100. But I’ve also chosen companies that are already fairly large, with good market share and solid finances.
Testing is guaranteed
I think we can be certain that mobile and wired communication networks will continue to be an essential part of modern life. That’s why my first pick is FTSE 250 firm Spirent Communications (LSE: SPT).
This £930m company specialises in providing testing, assurance, security and analytics services for network operators. Customers include mobile networks, corporate IT departments and the automotive sector.
In my view, this business that can only become more essential as network technology continues to develop. I think the main challenge for Spirent is simply to make sure it stays in tune with changing requirements. So far, the company has managed well. Major areas of demand at the moment include 5G mobile network assurance, Gigabit Ethernet testing and GPS positioning products.
The shares trade on 18 times 2019 forecast earnings and offer a 2.6% dividend yield. That’s not cheap, but Spirent enjoys double-digit profit margins and ended last year with $121m of net cash — roughly two years’ profits.
I think there’s a chance Spirent will be acquired at some point in the future. But if it isn’t, then I expect it to continue the profitable expansion we’ve seen in recent years.
Beat the property cycle
Property is one of the oldest business sectors around, but it’s heavily prone to boom and bust cycles. That’s not ideal for a long-term investment. To get around this, I’ve selected a firm that’s exposed to more than one geographical market and more than one type of property.
The company I’ve chosen is Savills (LSE: SVS). This 160-year-old business describes itself as an “international real estate advisor.” I’d call it an estate agent or property broker, but it’s fair to say the company does a lot more than this too.
One attraction for me is that the firm is active in both residential and commercial property. Savills also tends to operate at the upper end of the market, which typically bounces back from recessions more quickly.
Only half the group’s profits come from the UK. Last year, nearly 40% of its £144m underlying profit came from the Asia Pacific region, with the remainder split between North America and the Rest of the World.
The shares haven’t escaped the general nervousness surrounding the UK property market. But they’ve done better than many locally-focused rivals and have only fallen about 5% over the last year. Trading on 12 times forecast earnings and with a well-supported 3.6% dividend yield, I think Savills could be a good long-term buy.
