As we have noted multiple times in the past, one thing that we at Urbem particularly enjoy is to dig out lesser-known, high-quality gems from every corner of the stock market. As Peter Lynch once put it, those who "turn over the most rocks wins the game" when it comes to investing.
We recently came across Bouvet ASA (OSL:BOUVET, Financial), which intrigued us at first glance. The Norway-based company operates an easy-to-understand, asset-light consulting business model, with a laser concentration on the field of information technology and digital communication in the Scandinavian market. With a mere 5.7 billion Norwegian Kroner ($630 million) market cap, Bouvet is roughly 1/300 the size of Accenture (ACN, Financial) or 1/100 the size of Infosys (INFY, Financial).
When it comes to the consulting business, the scale is crucial to attract and retain clients. However, despite a size disadvantage, the niche focus at Bouvet helps contribute to a stellar track record of financial performance, mainly with regards to compounding returns internally (on reinvestments). For instance, the business earned a 78% return on retained earnings for the last five years and a 72% return over the previous ten years, compared with a less than 20% return on retained earnings at Accenture.
Notably, Bouvet distributes a significant portion (i.e., 70%-90%) of its profits as dividends, while Accenture only pays out less than half of the earnings. This means that Bouvet can reinvest less to grow more rapidly. The company increased its sales and operating income by 13.7% and 15% per year, respectively, for the past decade. At the same time, Accenture just scored 6.4% and 8.1%. The incremental return on equity capital also echoes the above conclusion. The three-year incremental return moved between 80% and 212% at Bouvet for the past five years, compared to a range of 7% and 46% at Accenture.
Per the company's filings, reports and presentations, Bouvet appears to focus a lot on job satisfaction, corporate culture and long-term client relationships – all the necessary factors in building a sustainable competitive advantage in the consulting industry. The market-share gains, as well as consistently super-normal returns on capital in recent years, reflect the existence of an economic moat at the company.
Compared to major multinationals in the space, the Scandinavian boutique should see a much longer runway alongside the megatrend of digitalization in both public and private sectors. The key question lies in whether the management would be able to copy their success in Norway in other markets. As of fiscal 2019, Norway represented more than 90% of the total sales, followed by Sweden with only 7.3% revenue share. Other countries only accounted for 0.4%. The Nordic consulting market is growing at a mid-single-digit annual rate, and it should be no surprise that Bouvet can outperform the average.
The latest annual filing shows that Insiders own a sizeable stake in the company, including 4.51% by CEO Sverre Hurum, 2.33% by Chief Financial Officer Erik Stubo and 1.14% by Chief Investment Officer Anders Volle. Prominent value investors on the shareholder list include Kayne Anderson Rudnick Investment Management and ODIN Fund Management.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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