Hey
@MarsC,
It's quite difficult to respond to your post, because it deals with so many indeterminate factors - most of which to which you elude - such as:
- composition of the various elements of "building activity", "residential building activity", "renovation building activity" or "HBG" to which REH's sales might be exposed at any given point in time;
- how much of each of those data sets is represented by plumbing and bathroom supplies, and how that has changed over time;
- how REH's market share has changed over time, and in what product categories;
- sales mix, and how that has changed over time, and
- the acquisition of Actrol, which has muddied the water.
It appears that the gist of your post is that you are concerned that REH's Revenue growth might only be able to be delivered on the basis of increased capital intensity.
With the ROE having fallen to 20%, from above 25%, a decade ago (despite operating margins
[*] rising meaningfully time, meaning that asset turn must have fallen a lot... which it has
[*]), this is something I too have thought about in recent years.
But, like you, I haven't found the answer.
I think it is very hard to know for certain because we've simply got too many variables, and too few equations.
Maybe it is the law of diminishing returns that we see being at work.
But I'm not sure if that is necessarily the end of the world.
Because, even if the inherent capital intensity of the business is rising structurally )as opposed to cyclically) over time, as long as the incremental capital that gets invested in the business still generates a return that is multiples of REH's cost of capital - or, at the worst, one that is higher than an investment return exceeds that which I am able to generate on a sustainable basis - then it does not concern me too much.
Sure ROE's might be capped, which will affect Price-to-Book values, but so long as the book value of the company is expanding at rates of financial return that are many multiples of the rate of inflation, so will the share price rise in similar fashion.
[*] REH's EBIT Margins, Asset Turn and ROE
FY2002: EBIT Margin = 9.7% ; Asset Turn = 1.91x =>
ROE = 24.7%
FY2003: EBIT Margin = 9.1% ; Asset Turn = 1.96x =>
ROE = 19.8%
Fy2004: EBIT Margin = 10.2% ; Asset Turn = 2.01x =>
ROE = 24.6%
FY2005: EBIT Margin = 10.7% ; Asset Turn = 2.04x =>
ROE = 24.6%
FY2006: EBIT Margin = 11.2% ; Asset Turn = 1.97x =>
ROE = 25.5%
FY2007: EBIT Margin = 11.5% ; Asset Turn = 1.97x =>
ROE = 26.5%
FY2008: EBIT Margin = 11.5% ; Asset Turn = 1.96x =>
ROE = 24.4%
FY2009: EBIT Margin = 9.7% ; Asset Turn = 1.84x =>
ROE = 19.1%
FY2010: EBIT Margin = 10.9% ; Asset Turn = 1.75x =>
ROE = 22.0%
FY2011: EBIT Margin = 11.1% ; Asset Turn = 1.70x =>
ROE = 18.0%
FY2012: EBIT Margin = 10.9% ; Asset Turn = 1.55x =>
ROE = 16.2%
FY2013: EBIT Margin = 10.7% ; Asset Turn = 1.47x =>
ROE = 14.6%
FY2014: EBIT Margin = 10.9% ; Asset Turn = 1.46x =>
ROE = 17.0%
FY2015: EBIT Margin = 11.4% ; Asset Turn = 1.46x =>
ROE = 18.8%
FY2016: EBIT Margin = 12.6% ; Asset Turn = 1.45x =>
ROE = 19.7%
FY2017: EBIT Margin = 12.7% ; Asset Turn = 1.49x =>
ROE = 20.0%
PS: Your post made some reference to REH possibly not being able to make further market share gains or not being able to continue to increase Gross Margins. While obviously they can't do so to perpetuity, I am not sure that the assumption that they are maxed out on these two measures are necessarily valid, either. I can remember the day I saw the result in which the GP Margin had crossed 30% and thinking to myself, "well, that must surely be the high water mark, only to see it drift continue inexorably in just about every financial result since then.
(20min delay)
