The world is undergoing rapid change amid the degradation of the natural environment and the looming breakdown of the global climate system. There is therefore a worldwide pan-industrial effort to use resources with much greater efficiency. To exploit this secular theme, we identify companies that either deliver or benefit from the efficient use of resources. We have strict criteria covering both quality and value.
We like to own firms with enduring assets that generate predictable long-term cash flows. They must benefit from high barriers to entry (so it is difficult for potential rivals to gain a foothold in the market) and trade at a reasonable valuation. This approach has served us well: the Menhaden investment trust’s net asset value (NAV) has risen by an annual 11% in the past five years.
Helping technology go green
Google’s parent company Alphabet, (Nasdaq: GOOGL) is helping the entire technology industry transition to a more sustainable footing. The company is one of the largest corporate buyers of renewable-power worldwide and aims to run only on carbon-free energy by 2030. The firm occupies a dominant position in search engines and has the ability to monetise an unparalleled level of user interaction, which should underpin revenue growth for many years. Furthermore, there should be significant potential to expand margins as YouTube, Cloud and other business lines mature and investments in start-ups mature.
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Sophisticated internet infrastructure
Telecoms and media group Charter Communications (Nasdaq: CHTR), a key broadband provider to over 20 million households, is set to play an important role in enabling significant improvements in resource and energy-efficiency with the development of the internet of things (IoT). Its hybrid fibre-coax network (comprising a mix of fibre-optic cables and coaxial cables, the type used to deliver cable television), is critical for infrastructure. Traditional telecom providers still partly rely on copper telephone wires, while high upfront costs serve to limit fibre build-outs by incumbents and new entrants.
Charter offers a superior bundled connectivity product (including mobile) at a lower price than competitors. We believe it can continue to deliver robust growth in free cash flow per share based upon a combination of revenue growth, falling capital intensity, share buybacks and lower customer turnover.
On track for industry-leading profits
Canadian Pacific Railway (Toronto: CP) owns infrastructure that can’t be replicated. Prohibitive start-up costs and building regulations ensure that no one is building railways today. Economies of scale mean that transporting freight by rail is up to four times more fuel-efficient than by road, which helps provide rail operators with a significant cost advantage over their main competitor, trucks, on longer-haul routes.
We believe these scale benefits will persist even as we shift to electric and autonomous vehicles because rail should be able to harness the same technologies. The proposed merger with Kansas City Southern will create a unique footprint linking Canada, the US and Mexico. The ensuing opportunities should help the company deliver industry-leading earnings growth in the years ahead.
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