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One great company you should be happy to pay a bit more for
Overpaying for growth is one of the biggest mistakes investors make. But if the company is good enough, you can justify paying a bit more. And this power supply company is certainly worth it, says Phil Oakley.
When you are investing in shares, it's worth being flexible in your thinking. It's all too easy to pigeonhole yourself as a certain type of investor, such as strictly 'value' or purely 'growth'.
That's fine, but it can sometimes mean you miss out on good long-term investment opportunities. And ultimately, that's what we're all after.
Take temporary power provider, Aggreko (LON: AGK). It trades on 20 times this year's earnings, and pays a miserly dividend yield.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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At that price, most value investors will not be interested. And that sounds sensible. Overpaying for growth is one of the biggest mistakes investors make.
So insisting on a margin of safety buying things at a big discount to what they are probably worth is usually good advice.
It's difficult to buy good businesses cheaply
But what if the business is a really good one? What if it can keep growing? Given the choice, I'd rather not pay 20 times earnings for any stock.
But buying good companies such as Wal-Mart or Coca-Cola at these prices in the past has paid off in the long run. Sometimes, what would look like an expensive price to pay for any other business, is in fact cheap if the company is good enough.
Now, I'm not saying that Aggreko is exactly the same as companies like Coca-Cola, but it has many of the hallmarks of a great business. Let me explain.
Aggreko is the world's leading provider of temporary power generators and temperature control equipment (chillers and air conditioners). It has 8,000 megawatts of mobile power generators that can go anywhere in the world at short notice.
Its customers include oil & gas companies, utilities, and sports events organisers. If you were wondering who provided all the power for the Olympic opening ceremony, it was Aggreko.
The world's electricity grids are struggling to cope
The demand for Aggreko's equipment has been growing strongly in recent years. It's not hard to understand why.
The world's power networks are not in a good state. The chaos caused by massive power cuts in India this week is a stark example of this.
But it's not just the emerging economies. Many grids in the Western world are old and creaking. They desperately need upgrading.
Meanwhile, huge demand for natural resources means that oil and mining companies also need plenty of mobile power units. This is good news for Aggreko.
The thing is, building new power plants and upgrading grids costs money and takes time. By renting Aggreko's kit, customers can have a quick and flexible answer to their temporary power problems without shelling out lots of cash.
Profits continue to grow strongly
Given all this, it's no surprise that Aggreko's profits have gone up a lot in recent years. Today it announced that underlying sales had grown by 16% with earnings per share up by 30% during the first half of 2012.
There are good reasons to think that profits can keep growing for a while yet. Its order book in the international power projects business is at record levels. Demand in Asia, Africa and Latin America continues to grow. Aggreko is also growing its business with local companies in these markets, and has just bought a company in Brazil.
It's investing over £400m in its power assets this year and expanding its manufacturing capacity in Scotland. As these new assets get deployed across the world, profits should keep growing.
but it's the high returns on investment I really like
However, the favourable outlook isn't the main reason I like Aggreko (although it helps).
No, the think I like most about Aggreko is its ability to get lots of money back from the money it puts into its business. In financial jargon, it has a high return on capital employed (ROCE).
When interest rates are low, it's very easy to over invest and grow profits. Just take a look at UK supermarkets for an example of this. They have built lots of new stores but the return on these struggles to get above 10%.
Aggreko return on capital employed (ROCE)
Contrast that with Aggreko (see chart above). It can consistently get double or treble this amount. How can it keep doing this?
Well, partly it's because it's providing a critical service to its customers and doing it well. It can move its assets around quickly to make sure that they are always earning money.
But more importantly, it doesn't have lots of competitors forcing its prices down.
So even as the global economy is slowing, Aggreko should keep on growing. By having more assets earning high returns, it looks as if its profits will be a lot higher in the years ahead.
That's why you should consider paying up for the shares today and tucking them away.
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