Guest: Doug Butler, Rockland Trust, Portfolio Manager (AUM: $3.3B)
Topic: Market Monitor
With the solid news from today’s jobs report and the US economy still chugging along at a quite comfortable pace, I’m highlight three stocks that have been exceptionally good performers this year and which we believe will continue to be over the next twelve months.
We think these three stocks will deliver excellent returns regardless of what happens with electoral, trade, or other geo-political issues in the coming months.
O’Reilly Automotive (ORLY):
O’Reilly is one of the leading auto parts aftermarket retailers with roughly half their sales coming from the Commercial (e.g. selling auto parts to repair and service shops who fix the vehicle for you) and half from the do-it-yourself retail customer (e.g. those that fix the car themselves).
Because most sales come from failure related parts, meaning that a customer needs XYZ part to get their vehicle up and running again, the most important element of success in ORLY’s business is having the specific part a customer needs when they need it. This is why online-only competition has been very limited in the space because next day delivery in most cases is too slow. [Commercial customer require a part in 30 minutes in order to keep their service bays as full as possible to maximize revenue.] ORLY has the best distribution system and parts availability in the business and ships parts to its stores multiple times a day whereas its competitors replenish stores a few times a week. This gives ORLY a distinct advantage in meeting customers’ needs and its availability to have the needed part in stock (or very close by) when a customer needs it.
We believe ORLY will continue to grow through a combination of expanding its store base (it is currently has limited exposure to big markets in the Northeast and in Florida and can expand its store base by one-third longer term), MSD same store sales growth (the industry is grow in the LSD and ORLY has a history of gaining share from the smaller, regional mom and pops), and heavily buying back shares. In short, we believe with ORLY you are able buy a great business, that is growing earnings faster than the broader market will grow earnings, all at a valuation that is about in-line with the current market valuation.
Idexx Labs (IDXX):
Idexx Labs is a leading provider of point of care diagnostics, equipment, and lab services for veterinary practices. The majority of its sales (~90%) come from the Companion Animal group which is experiencing positive secular growth (10% CAGR over the past 10 years) through both the increased rates of companion pet ownership and through increased spending per pet by pet owners.
Companion ownership rates in the US have grown from around 50% 25 years ago to the high 60s% range today while the spending per pet year has nearly tripled during the same timeframe.
We believe this trend of increased ownership and increased spending per pet is likely to continue and believe it will continue to be a tailwind for IDXX’s business.
IDXX is a very sticky business, with the vast majority of clinics and veterinary offices not switching who and how they source diagnostic and lab equipment. IDXX also has an integrated practice management software that it proves its clients, thereby making it harder to switch away from IDXX. This has led to IDXX’s market share being 6 or 7 times larger than the next closest competitor.
Mastercard is the #2 global card network worldwide and benefits from the ongoing global secular shift toward card-based and electronic payments.
We are still in the middle of the global transition of cash-to-digital. The C2B (consumer to business) payment is a ~$30T (which will continue to grow with global economy) market globally (excluding China), and is only 42% penetrated by cards. MA will continue to benefit from this secular trend. The industry also has plenty of opportunities in B2B and B2C market.
Very healthy volume and dollar growth.
With robust technology and leading market position, MA established strong competitive advantages. 1) It is the one-stop solution by offering all the payment solutions including card, account, mobile, QR code, B2B and etc. and 2) it bundles the services including payment, data consulting, security (fraud protection), loyalty and rewards and etc.
MA continues to win businesses from key partnership: Anthem, LL Bean, Hawaiian Air and Standard Chartered Bank – a few names reported in Q2 2018. The company is also believed to be better positioned in international market. For example India posted 30% growth in the past quarter thanks to the accelerated adoption of digital payments
Disclosures: We own all of these names in client portfolios.