Two quality stocks for when the tide goes out

This story features GOODMAN GROUP and other companies. For more information STOCK ANALYSIS: GMG

Alphinity Investment Management has identified two companies (including one listed on the ASX) that are expected to outperform during the test periods.

By Elfreda Jonker, Client Portfolio Manager at Alphinity Investment Management

Warren Buffett said it’s only when the tide goes out that you find out who swam naked.

We have hit low tides in recent months as the world of “free money” comes to an end, exposing collapsed “naked” businesses and assets.

However, the low tide also shines a light on great companies with strong management teams who can steer their customers — and their investors — to safety in these difficult times.

Great leadership teams can get through tough times like the present and come out stronger on the other side.

There are many examples of best-in-class management teams represented across our global and Australian funds and several management teams that have specifically done a phenomenal job of managing rising risk.

Some Australian examples include Goodman Group ((GMG)), Super Retail Group ((SUL)), CommBank ((CBA)), Medibank Private ((MPL)) and Orora Group ((ORA)). On the global side, we can congratulate the teams at McDonalds, PepsiCo, Diageo and Waste Connections.

Below we take a look at 2 lesser known national and global management teams.

1. Waste Connections (WCN) – – Pragmatic & differentiated

Waste Connections is the 3rd largest solid waste management services company in North America. They provide non-hazardous waste collection, transfer and disposal services to millions of customers in the United States and Canada. WCN was founded by the current President and this entrepreneurial culture is deeply embedded in the organization.

WCN operates a decentralized structure where NLP decisions and accountability are pushed from headquarters to operational companies across the country. You often see this type of management structure in Scandinavian capital goods companies, but we rarely see it in the United States. If done right, it creates a dynamic and flexible business that can react quickly to a changing environment.

With the challenges waste management companies have faced over the past 6 months, this approach has been a significant advantage for Waste Connections. We see the results of this decentralization through their leading margins and cash flow generation.

WCN has some of the best profit margins in the industry

Source: Bloomberg

In addition, the company generally seeks to avoid large, highly competitive urban markets and instead target management target markets where it can achieve high market share, either through exclusive contracts, vertical integration or positioning of assets.

WCN defines its markets as either “competitive” or “exclusive/franchised”. Competitive markets are markets where prices are a function of supply and demand and WCN deliberately focuses on underserved markets, which are less competitive.

This gives WCN very strong pricing power and market share. The remaining 40% of revenue is generated from the markets they serve based on an exclusive/franchise model, where contracts are priced on a CPI or yield basis.

Like its peers, WCN has recently faced many challenges including input price pressures (fuel spikes), labor shortages/higher wages (with drivers and mechanics in high demand ) and truck shortages, to name a few.

Despite this, they manage the business well and continue to execute their strategy. In their recent results, management delivered strong pricing results, discussed building M&A momentum, and maintained their full-year FCF guidance. Waste Connections is a stable and defensive producer with an enviable track record worth supporting in our view.

2. Orora (ORA) – Optimize, value & invest

Orora is an Australia-based company that provides packaging products and services. It manufactures glass bottles and beverage cans in Australia and operates medium-sized packaging distribution services in North America.

From wine tariffs in China to old legacy IT systems to higher input cost pressures, the ORA team has had no shortage of challenges over the past few years. In response, they approached each of their challenges logically and systematically and announced a clear growth strategy for the next few years.

Over the past few years, ORA has completed a comprehensive SAP onboarding process in the US which, after significant implementation challenges, is now resulting in improved operational efficiencies and management of customer pressures. input costs.

They also implemented a mix shift towards higher product-to-package ratios (e.g. the recent Tesla auto parts deal) and enhanced their digital capabilities through an e-commerce custom design platform and have diversified their product portfolio.

ORA – A quality defense benefiting from profit improvements

Source: Alphinity, Bloomberg, June 28, 2022

ORA has also been able to find low-risk capacity expansion opportunities such as beverage cans in Australia. Following a thorough review of some poorly judged and executed acquisitions in the United States by previous management, the company believes it is now ready to consider new M&A opportunities.

Although not without risk, we would support management given their conservative approach and successful management of the business since taking the reins. Last but not least, ORA is directing its investments towards more sustainable products and operations with a clear commitment and trajectory to net zero greenhouse gas emissions by 2050.

Despite the challenging environment, ORA recently reiterated its forecast for FY22 EBIT to be higher than FY21. Combined with a strong balance sheet, meaningful returns for shareholders (dividends and redemptions) and an attractive return on capital (25%), we consider ORA to be a high-quality defensive company in good hands.

Spend more time with management

When uncertainty increases and the environment becomes more challenging, we make a concerted effort to spend even more time with the management teams that drive our investments, to understand their thinking and their approach to current and new challenges.

We meet with various members of management teams at all hierarchical levels, responsibilities and divisions. Our due diligence process also includes site visits and meetings with the company’s suppliers, competitors and customers.

Through the ebbs and flows of investment cycles, investors must continually focus on identifying quality management teams that can perform well during high tides, but even better during low tides.

The opinions expressed above are not those of the FNArena association (see our disclaimer).

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