One of the first things I consider when looking at an investment is the company’s record of creating value for investors.
While it is true that past performance is not a guide to the future, it does provide some insight into how enterprises work, and what they can achieve.
Take DCC (LSE: DCC) for example. Over the past five years, this company has grown net profit at a compound annual rate of 19.8% thanks to a string of sensible acquisitions. The distribution business has grown from an unknown small-cap, into one of the UK’s biggest companies and it has done this without raising any money from investors.
Book value per share has increased 80% since 2013, while the number of shares in issue has remained virtually flat. This tells me DCC has been sensibly reinvesting profits to grow its business, in much the same way Warren Buffett’s Berkshire Hathaway grows.
And like Buffett’s Berkshire, DCC has crushed the broader market. Over the past five years, the stock has outperformed the FTSE 100 by 146.7% excluding dividends.
As part of its growth strategy, DCC has announced two more bolt-on acquisitions today. The company has bought Stampede Global, a specialist distributor of professional audio-visual products and Kondor Limited, a distributor of audio and mobile accessory products to retailers.
Management believes these deals will help the group achieve another year of “profit growth and development” for the year ending 31 March 2019. Performance in the first fiscal quarter (ending 30 June) already hints at a strong performance for the full-year with profits “well ahead of the prior year, driven by acquisitions completed in the prior year.“
It is clear to me that DCC is a well-run business that should be able to continue to grow steadily for many years to come. The one sticking point I see is DCC’s valuation. Right now, the stock trades at a forward P/E of 18.7, which is a bit on the expensive side. That said, considering the company’s past growth and market-beating performance, I believe it is worth paying a premium price to get in on DCC’s growth story.
Benefitting from rivals’ collapse
Another company with a history of beating the market is low-cost airline easyJet (LSE: EZJ). As earnings have taken off, easyJet’s shares have returned 356% excluding dividends over the past 10 years, compared to the FTSE 100’s return of just 37%.
I believe this standout performance can continue as the group builds on the competitive advantage it has established. City analysts have pencilled in earnings growth of 44% for 2018, and growth of 18% for 2019. More planes, more customers and better prices are expected to be the primary drivers of earnings growth. EasyJet is also looking to build out its holiday business and loyalty scheme as alternative revenue streams.
For June, passenger numbers grew 2.3%, and the firm reported a load factor of 95.4%, meaning that its planes were virtually full. Management also expects the company to benefit this year from the collapse of some smaller rivals.
Trading at a forward P/E of 14.5 the stock is hardly cheap, but easyJet has always commanded a high valuation. Today’s multiple is a shade below the five-year average of 14.6, so on that basis, the stock looks attractive at current levels.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
Rupert Hargreaves owns Berkshire Hathaway (B shares). The Motley Fool UK has recommended Berkshire Hathaway (B shares). 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.