We close the first quarter of the year with volatility on the main stock markets and excellent earnings reports. In the current inflationary environment, the selection of quality companies with the ability to pass on costs and management teams with proven track records form the basis of our convictions. Moreover, in many cases, share price volatility generates opportunities to buy top quality businesses at discounted rates due to market irrationality and overreaction.
This is something we always recommend. But at this particular moment of uncertainty, stepping away from the noise and focusing on the reality of the companies in which we invest is the best recipe.
The practice reveals successful cases, such as Fluidra. This Spanish company, present in EDM Inversión, is a global leader in the pool and wellness sector where it holds a 13% share in a highly fragmented EUR 11.5B market with M&A opportunities. The company published very good annual results, increasing sales by +36% relative to the previous year, expanding EBITDA margin (+350bp to 25.1%), and generating Operating Cash Flow (+50% to EUR 342.6M), exceeding its own guidances and consensus estimations. One major advantage of the company is the high recurrence of revenues (75% maintenance and updates), giving it the financial muscle not only to withstand periods of lower growth, but to thrive through M&A.
Another example of strength in our Spanish portfolio is CAF. The electric bus, tram, and light rail manufacturer could strongly benefit from the ESG megatrend. The company’s 2021 results were outstanding, reaching a record high in quarterly EBITDA of €80M, while its order book also hit record levels of €9.6Bn. Operationally, the company has emerged from the pandemic with a lighter structure, with spending reduction and financial optimisation programmes, allowing recurrent net profit to grow 47%.
For EDM Strategy, though the investment sphere is broader, the principles of stock picking are the same: well managed, quality companies with competitive advantages. One portfolio company is EssilorLuxottica, a global leader in the design, manufacture, and distribution of optical lenses, frames, and sunglasses. It holds a 15% share in a highly fragmented market, and is 13x larger than the industry’s no. 2. Some of its major growth levers include the management of infant myopia; an estimated 50% of the world’s population will suffer from myopia in 2050 (34% at present). The company’s results at the 2021 close were very strong, despite the complicated environment, with sales up +37%, including the acquisition of GranVision (up +7% excluding it). The company has not issued guidances for 2022 but provides medium-term visibility with half-digit revenue growth expected in the next five years and operating margin around 20%. It currently trades at a 2023 P/E ratio of 22.6x with 12% discount vs. its historical average.
Another example is Accenture. The consulting firm has become an indispensible partner to companies looking to compete in the 21st century marketplace. Accenture offers consulting, outsourcing, and technological transformation services to help companies remain competitive and take advantage of the latest tools available. The Q2 2022 results released this March were very positive, accompanied by a further rise in guidances. Sales grew +28% and are expected to increase 24-26% next year. The company has 36 new contracts, each of which accounts for more than $100M. It currently trades at a 2023 P/E ratio of 25x and we expect five-year CAGR growth of 13.5%.
The recent sector rotation and excessive punishment of quality companies is an excellent opportunity to invest in EDM funds, where we maintain well-balanced portfolios, comprised of quality companies, leaders in sectors that are attractive in the long-term with interesting valuations.
