So, baking soda?
It may sound boring, even unsexy, but shareholders of the New Jersey-based producer of Arm & Hammer have little complaining to do.
Church & Dwight Co. Inc. (CHD, Financial) has outpaced the Standard & Poor's 500 more than three times over in the last 10 years and delivered a five-year revenue growth rate of 7%.
The baking soda maker has brought good returns to disciples of the core investing principles of the world’s greatest money managers, such as Peter Lynch, Warren Buffett (Trades, Portfolio) and Donald Yacktman (Trades, Portfolio).
Church & Dwight is among more than a dozen stocks that can be identified by subscribers of GuruFocus who use the All-in-One Screener. In this case, the Screener can identify companies, similar to Church & Dwight, which have strong balance sheets and serviceable debt.
But, most importantly, these companies don’t have to spend a lot of money on capital to make a profit. In fact, they can turn a profit on very little capital expense. An asset-light business can generate higher returns on invested capital and shareholder's equity. As a result, profits emerge and stock prices benefit.
Let’s take baking soda, as one example, and then look at a few other companies to drive Buffett, Lynch and Yacktman’s core principles home.
Baking soda
The product is easy to understand.
Consumers use it on a regular basis, in good times and in bad, to address an assortment of needs, from soothing the sting of a bee to baking mom’s birthday cake.
It doesn’t need to be re-engineered to keep up with competitors. It won’t go out of fashion, either. Consumers need it in good times and in bad, so there is little concern that sales will stop or slow.
What’s more, a manufacturer of baking soda doesn’t require a lot of capital to produce the powdery substance.
In five years, Church & Dwight’s stock rose 44%. The S&P 500’s rate of return for the same period was 10.8%. On Thursday afternoon, it was trading for $45.99 a share, up 0.22%.
It has a price-earnings ratio of 15.88 versus an industry median of 20.69, a price-book ratio of 5.13 versus a median of 1.70 and a price-sales ratio of 3.10 versus an industry average of 1.06. It reported a 10-year median return on capital of 15%.
The company with a market cap of $11 billion has seen its earnings per share grow at a rate of 6.4% over 10 years and 10.60% over the last 12 months.
The company posted net income of more than $743 million in December 2017. That compares to net income of $81 million over 15 years ago.
It showed about $2 billion in debt and $637 million in free cash flow at the end of 2017. GuruFocus ranks it 6 out of 10 in financial strength and 8 of 10 in profitability and growth.
Energy drinks
Automakers and companies that incur large costs to manufacture products have more capital expenditure requirements than a company like Monster Beverage Corp. (MNST, Financial).
California-based Monster, with a market cap of $31 billion, doesn’t have to have available, or have a need to borrow, a large amount of money to purchase raw materials to produce its energy drinks. As a result, the business has more cash available to pay dividends to shareholders and buy back shares.
GuruFocus shows Monster has a revenue growth rate per share of 14.9% over the last decade. In the last reporting period, it had $3.4 billion in revenue, $821 million in net profit and $895 million in free cash flow. It has no debt. It reported a 10-year median return on capital of 94%.
Here’s a chart that shows its operating income over the years. In December, it stood at $1.2 billion.
GuruFocus ranks it 9 out of 10 in financial strength, profitability and growth. GuruFocus identified one severe warning sign that investors should consider. The company has been growing assets at a faster rate than it has been drawing revenues.
The company, which sells energy drinks with names like Mutant, Burn, Full Throttle and Relentless, was trading at $55.44 a share on Thursday, up 1.89%. It has seen its stock rise 194% over five years. The S&P 500’s rate of return for the same period was 10.8%.
Pest and termite control
Atlanta-based Rollins Co. (ROL, Financial) will quickly pop up on your screener when you search for “high quality, low capex with ROE minimum of 15%.” Rollins, which has a market cap of $10.77 billion, has posted 18 years of consecutive earning increases. Its 10-year median return on capital is 38%. In five years, the stock has climbed 213%. The S&P 500’s rate of return for the same period was 10.8%.
In revenue growth per share, it has seen a 6.5% jump over the last five years and 6.5% in the last 12 months. In revenue per share, it reported $7.68 per share in December 2017 compared to $2.89 per share 15 years ago. Total revenue, also growing steadily for the last 15 years, was $1.67 billion in December. It has no debt.
The company’s earnings before interest, taxes, depreciation and amortization is at $1.61 per share. Net income was $179 million in December 2017.
GuruFocus ranks it 9 out of 10 in financial strength and 7 of 10 in profitability and growth. GuruFocus identified one severe warning sign that investors should consider. The company has been growing assets at a faster rate than it has been drawing revenues, which can affect its efficiency.Ă‚
