Macro-economic uncertainties can be buzzkill for equity markets. And with Brexit hanging in the air, I don’t think cyclical stocks make for the best investment suggestions at the moment. This is because cyclical companies, as the term suggests, are highly sensitive to turns in the business cycle. As a result, during downturns, their performances (as well as their share prices) can show sharp declines, although they can turn upwards during booms.
But what if there were companies that combined the best of both worlds, showing high growth during booms and staying safe during downturns? They do exist. FTSE 100 construction major CRH (LSE: CRH) is one such, I believe. It managed a pretty good financial performance in 2018 and I believe it’s likely to continue doing so in the future as well.
Go (further) west
It might be an Ireland-based company, but its major operations are in the Americas, which account for 66% of the revenues. Europe accounts for most of the remaining business for the firm. I’ve spoken before about the merit of geographical diversification, for instance, in the case of British American Tobacco, and a broad geographic spread is a good hedge against macro risks. So, with the US economy on an upswing, CRH did well financially in 2018. And in so far as its fortunes are tied to economic growth, continued strength in the US economy should continue to bode well for the company.
Far from risk-averse
As good as the risk-management strategy of an intercontinental presence might be, I wouldn’t see this company as risk-averse for even a minute. Its growth is partly driven by a very fast pace of acquisitions, with 46 deals being completed in 2018 alone. The largest of these was the US-based cement company, Ashgrove. The others are what the firm refers to as ‘bolt-ons’, that is, companies that fill gaps in its existing business, and bolt-on buys are expected to continue. As the annual report says, this is “an integral part of CRH’s acquisition model generating above average returns.”
Despite the acquisitions, the company’s debt is under control at 2.1x earnings before interest, taxation, depreciation and amortisation (EBITDA). While absolute debt levels have risen in the last year, healthy growth in EBITDA of 7%, has helped in keeping the ratio manageable. And of course, the company isn’t only buying. I also like the fact that it has balanced acquisitions with disposals to generate more cash.
And it’s still cheap!
Despite all the positives in its favour, CRH is far from expensive. Its trailing price-to-earnings ratio is a very low 5.6x. While the share price has recovered significantly from its December slump, it’s still lower than its one-year average. There’s likely to be some more steam in this stock going forward and I believe it’s a clear buy.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.