Three cash-rich companies that crunch the competition

A professional investor tells us where he’d put his money. This week: Algernon Percy of Waverton Portfolio Fund highlights three quality growth stocks.

Waverton’s approach is to look for companies not only capable of consistently generating surplus cash from operations, but also of growing these cash flows through a sustainable competitive advantage. That means we tend to favour durable business franchises that can result in the long-term compounding of returns for shareholders: we choose quality growth companies over deep cyclicals. Three examples that have been added to the portfolio this year illustrate this theme well.

Accounting in the cloud

Intuit (Nasdaq: INTU) develops tax, accountancy and payments software for smaller companies, accountants and consumers. Intuit’s products are based in the cloud, making it easy for companies all over the world to access and adopt. The need for regular accounting and the growing importance of being compliant with new legislation mean that Intuit sees a great deal of repeat business and enjoys good pricing power.

As a result, Intuit generates cash with low capital intensity, and the company has net cash on its balance sheet. While Intuit already has a dominant market share in the US through its consumer-focused application, TurboTax, America nonetheless remains underpenetrated; there is also enormous opportunity in other markets such as the UK, for example, where its QuickBooks brand for small firms is taking market share from Sage.

America’s renovation boom

Home Depot (NYSE: HD) is the world’s largest home-improvement retailer, with an impressive 40% market share in the US. Management has been successful in integrating additional services into the group’s offerings, including installation and training workshops, which improve customers’ loyalty. We think Home Depot should profit from a structural increase in home renovations in the US as housing supply falls and prices rise. This means that fewer Americans will be able to buy houses and will instead focus on renovation.

Not only does the market backdrop bode well, but Home Depot will also avoid the competitive threat from online retailers that, say, clothing stores face owing to the bulky and specialist nature of many of the items it sells. It is important to bear in mind that the US DIY sector is very different from that in the UK, where
the retailers are apt to be squeezed by their suppliers.

Japanese automation technology

Finally, the Japanese industrial technology company Keyence (Tokyo: 6861) is the worldwide market leader in certain categories of sensors used in automation. There is a strong structural trend towards automation and Keyence is extremely well placed to benefit from this. The company works closely with its customers to develop specialised solutions to meet their needs. Keyence can then leverage this spending on research and development to provide similar solutions to other clients. So the company is constantly innovating; of all its products, 30% have been made in the last year and 90% in the last three years. Each component makes up a relatively small part of customers’ overall spend; clients are therefore not too price-sensitive. Keyence also has significant opportunities overseas.