I don’t own REH but I follow it because I own shares in a company which has many apparent similarities to REH. For example, both companies are substantial, established business (over 2 billion revenues p.a.) with long track records. Both claim to lead their respective segments of their respective markets. Both focus on supplying trade customers (plumbers/builders) with the goods they need to service their customers (eg, homeowners). Both seek competitive advantage based on superior price, wide product range and high product availability, easy physical access provided by extensive physical distribution networks (each with more than 600 outlets), and both offer attractive terms to their trade customers to help them manage their own working capital. Both seek to be the lowest cost player in their market. Both have good management, owners, and I think their own strong cultures/business practices reinforcing these competitive strengths (the culture/practices of mine is quite distinctive, and REH may be too but I don’t really know). I believe, both companies value and look after their staff despite being having what may appear to be relatively lowly skilled workforces (mine was rated 7th best large employer to work for in 2017; I understand REH has scored highly in staff satisfaction surveys also). Both supply products which are essential and used every day, with no risk of becoming obsolete through changing technology or consumer tastes. Both are exposed to the risk of a slowdown in consumer spending, or housing market downturn, but based on their strong competitive positions and prudent financial management and positions, both would be expected to emerge from a prolonged downturn in stronger shape than many competitors.
But there are differences too. Mine is more vertically integrated (it also manufactures some of the product it sells), it operates in a different market, and supplies kitchens and associated stuff (including appliances, sinks and taps, worktops, flooring, lighting and hardware) rather than plumbing & bathroom products. To the extent that demand for kitchens and kitchen components is more affected by an economic downturn than demand for plumbing and bathroom supplies thin mine is relatively more exposed to a consumer/housing slowdown – but this may be offset in part at least by greater underlying housing shortage in the market in which my company operates. Mine only supplies trade (no retail customers), and has no showrooms (retail customers need showrooms, trade customers don’t), which avoids quite a bit of cost. Which company is the superior business, and which is the superior investment, may be an interesting but I think an unnecessary debate. I suspect, however, that most REH holders may not have looked at the company I‘m invested in – possibly because my investment is UK domiciled and listed and many investors much prefer the greater familiarity of investing in their home market [more on that point, which I have a problem with, in a footnote * below].
Looking at the numbers, the appeal of both business is readily apparent.
5yr ROE avg: 17.2% vs 37.9%
5yr rev avg growth: 9.8% vs 8.9%
5yr eps avg growth: 13.3% vs 17.7%
5 yr avg growth in issued shares: nil vs +0.3% (currently undertaking a small buy back)
Net Debt: nil vs net cash (215m) but does have a pension deficit (124m)
5yr avg gross margins: 33% vs above 60%
5yr avg operating margins 11.7% vs 16.7%
P / E ~19.5x vs ~15x
EV / EBITDA ~11.5x vs 10.5x
EV / EBIT ~13.5x vs 11.6x
Company tax rate 30% vs 18%
Footnote * Preferring a more familiar home market is a characteristic of investors in most (all?) markets. But while greater familiarity may feel reassuring, it does concentrate investors to risks specific to that market (ie, investors are very poorly diversified against those risks which affect all/most of their investments and any employment income). I wonder if people really think much about this risk (which I think is significant, even if it feels somewhat distant)? It’s all good when local is going well, but what happens if/when the local economy really tanks? I personally play in 4 different markets, and what I lose from having less familiarity/less detailed understanding of each, I think I at least offset from seeing a wider range of market conditions/company stories (there are some quite striking differences in how differently investors view the same sectors in different markets) and from greater diversity protection against those risks. I also think investors place too much weight on high familiarity /high self-assessments of their understanding of performance and risk – it always reminds of the behavioural studies & experiments which consistently demonstrate that whilst people’s confidence increases as they get more information, forecasting accuracy/decision making quality doesn’t improve as they get more information (indeed it declines in some studies).
REH Price at posting:
$41.50 Sentiment: None Disclosure: Not Held
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