From US railroads to e-commerce platforms. We highlight five diverse businesses with one thing in common - strong competitive advantages.
11.10.2024 | 06:15 Uhr
After initial US jobless claims rose in the summer, equity markets globally had a tantrum. Closely watched, the July labour market data sparked fears that the Federal Reserve risked falling behind the curve in revitalising a slowing economy. Reported at the beginning of August, the numbers were viewed as an economic weather warning.
The price action that followed was amplified by short-term investment strategies closing positions on a massive scale, but it was further confirmation that economic growth is slowing. The odds of recession have gone up, although they are still slim.
This uncertainty could change the short-term pricing of risk assets but it doesn’t diminish the attractions of quality growth stocks. We look for quality businesses with durable competitive advantages that offer scope for generating attractive returns on capital.
Uber has almost become a verb. “How are you getting back from the airport?” “I’m getting an Uber.” For many of us, calling an Uber is a habit. Uber dominates the rides business in the US market.
As scale matters in ride hailing, Uber is comfortably profitable and our analysis indicates that it’s set to generate over $5bn in free cash flow this year, while competitors continue to struggle with costs. The long-term growth prospects of the business look positive.
As the second biggest railroad in the US, Union Pacific is distinctly ‘old economy’. So why would we be interested in it? The US is a very big country and sending freight over long distances by rail costs less than by truck. Union Pacific has a programme to reduce costs while improving the speed of its trains.
As the trains get faster, they deliver a better service. It’s a virtuous circle: they gain market share in transportation and grow profits. As no one will ever build another railroad network, Union Pacific only adds as many new miles of track a year as it did in two days back in the 1880s. The free cash flow generated by the business is supportive of dividends and buy-backs.
The UK’s dominant telecom business seems an unlikely investment for our portfolio as it’s regulated and hardly high growth. Yet it’s also defensive at a time when inflation has eroded the pricing power of many consumer-facing businesses.
Think of McDonald’s and the success of its $5 meal. What’s more, BT Group has now finished the capital expenditure programme for connecting fibre to UK homes that started in 2016. Capital expenditure will fall for the rest of the decade which means that cash could be returned to shareholders.
We have held this US vision and women’s health business for a long time. Recently it has been investing in manufacturing and initiatives like a product for myopia.
We believe Cooper’s manufacturing investment gives it a cost advantage. Quarterly results from the firm appear to show a return to delivering operating leverage, and this could prove positive for profit margins from here. We anticipate earnings growth compounding at over 10% in the coming years.
Are you a small or medium sized retailer that wants an online e-commerce channel? If so, Shopify is your answer: it can design your website, handle logistics, take payments and help you expand your business. It has a full line of product offerings, for small customers through to large enterprises.
Shopify’s 50% gross profit margin is now starting to scale, and in recent quarters it has achieved double digit operating margins and has generated free cash flow. Looking forward, we believe that there’s scope for this business to increasingly benefit from economies of scale.
In our view, these are the sort of businesses that offer long-term potential and can operate well in a range of economic conditions and weather short-term fluctuations in markets. Indeed, in our experience, it’s often in tougher periods that businesses such as these with strong competitive advantages gain market share at a faster pace than ever.
The mention of any specific shares should not be taken as a recommendation to deal.
Past performance does not predict future returns. All intellectual property rights in the brands and logos set out in this article are reserved by respective owners.
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