Dear subscribers,
In this article, I’m going to take a somewhat different tact than usual. Rather than reviewing a single company, I’ll be reviewing 3 investments I have guided to, that have done extremely well since I wrote about them. It shouldn’t be a surprise to anyone who follows my work that I’m valuation-oriented. Sometimes it takes time for investments to reach their potential.
Sometimes growth comes faster than we expect.
In this article, I’m going to choose a few companies that I went incredibly long in and really staked out, and that have since outperformed. Sometimes they’ve outperformed too much, and it’s time to look if it’s time to re-evaluate their upsides.
This is something I’ll also address in this article.
Let’s see what we got here and where I guide these businesses.
To be very clear with you, all of these companies are currently up over 25% since I bought my average cost basis, and I’m very satisfied with all of these investments.
Let’s get going.
Since I posted my last article on LGGNY, where I really dug deep when the company dipped in October and I bought at less than £2.1/share, I’m up over 25% including FX and dividends on this investment. At that time, this marks an annualized rate of return as of the 27th of January of more than 114% in total. That’s a superb rate of return, and my yield basis is over 8%, and that yield is well-covered here.
You can find that article here, by the way.
Usually, this would not be much of something to update on. Just 25%? That’s not enough to consider a sale usually, right?
You’re right – usually, it’s not.
However, what you have to realize is that Legal & general has been on an absolute tear that is completely outside the realm of logical results given its current 2023 trends. Because L&G does not provide quarterly reports and even slim half-year reports, it gives us somewhat less data and forecasts to work with for this company.
We do not in fact have 2023A results yet. But let me say that these valuation upsides are not justified by the expected 2023, or even 2024 results necessarily.
The company has moved up to £2.56, and while this is a target I can see myself seeing in 2026 or 2027 when the company’s earnings move this way where this would be a 10-11x P/E, the fact is that at a current normalized basis, this is moving towards 13x P/E.
It’s outside the range where Legal & General typically trades, and where the company has been at least since 2015.
For some investors, this means that it’s time to hold, and maybe add more for the long term. This is respectable. Many reasons say that this could be a good approach. The 7.5%+ yield is decently covered even with the trough 2023E earnings. The A-rating from S&P Global, the low leverage, that expected reversal. The fact that the company, on a short-term basis, has been pretty good at beating estimates.
The half-year results were damn good – this is part of the reason for outperformance, despite the ongoing challenging macro. Very good, near-£1B capital generation with good chances of reaching the goals, and a very good dividend surplus of over £600M, and a stated intention to grow the company dividend.
But that also means less capital available for reinvestment, and a picture that based on valuation at a 5-year average, looks something like this.
Remember, I invested at the other side of that valuation, back when the price was firmly below 10.5x.
So what I will say is that I view this as an overreaction on the positive side. The market does this – and in fact, quite often. I usually don’t react by selling, but in this case, I may go ahead and rotate my substantial Legal & General position for other attractive investments, albeit at a lower RoR, because I believe the market is overreacting. It may be that we’ll see a dip and be able to get in cheaper again, or it may not. There are no hard and fast rules for this sort of scenario.
But in this case, I believe it a fair judgment to say that Legal & General can in fact be rotated profitably here.
I may do so, or I may not – but with a surety, despite my PT of £3/share (that’s for the longer term, not the shorter one), I’m keeping my eye on this one.
KION is another one that’s really “popped” very nicely since my last piece. In fact, this one is up a whopping 32% even without the dividend and over 36% with FX.
You as subscribers get these articles and picks before, and my total RoR on this entire investment is now well over 58% since my cost basis is in fact below this, with my article back in November of 2022 showing a 58% unadjusted RoR.
And KION has only started.
KION is a company I have no thought of rotating at this price, despite a significant surge in pricing. It may drop back down, it may not, but the company is worth a lot more. The native ticker KGX trades at a current average weighted P/E of 13x, with a native average premium of closer to 24x.
And unlike other companies, I believe this premium may be justified, given the 27% EPS growth rate forecasted due to reversal.
In fact, even if you forecast from today’s share price to only a 13.5x P/E, you’re seeing over 25% per year.
That’s essentially the “base” case – and it only goes upward from here. Also remember, my own forecast is over €85/share for the native. Even just at 17-18x P/E, you’re getting more than 43% per year or a total RoR of 186%.
That is the reason my position in KION is over 1.5% of my total portfolio. It’s not because of the meager 1% yield, that is expected to grow. It’s also not because of BBB- credit, despite a less than 35% long-term debt to capital.
It’s because of this company’s superb market position and what I believe to be a realistic recovery potential, for the biggest materials truck handling company in the world.
Remember where this company stands. If you bet against it, you’re saying the world leader in Industrial trucks does not deserve 14-15x P/E. I disagree with that. And the company has proven, over the past few quarters, that recovery has indeed begun, and the worst seems likely behind the company.
You won’t be able to harvest the fruits of this investment for a few years yet. I knew this when investing here. I believe that as a valuation investor you need to have a timeframe of at least 3-6 years. If you don’t have that, there’s very little point, because this is the time the market often “needs”, even if it can go faster, or slower.
The company has already adjusted its 2023E expectations twice. The ITS segment is back to double-digit adjusted EBIT margins, and 3Q was the fourth consecutive quarter of improvements. 2024E is expected to be a very good year with double-digit EPS improvements, the first in a growing earnings improvement over a longer timeframe.
Anyone wishing to realize a 35-50% profit may of course do so. I believe this company has the potential for much more. A 100-200% RoR is definitely in the books here if these rates of return are realized and these forecasts hold. When I size a position, that’s the assumption I go in with – to have to hold it for at least 3, but more likely 4-5 years.
KION has a lot left to give, and despite firmly outperforming the market with this investment, I’m far from ready to let it go.
KION remains a “BUY” here.
We really have 3 very different companies here – the largest likeness they have is that they’re European and big.
My return on Enel is big. My position is also big. I bought heavily both during 2022 and 2023, which means that right now, over 4% of my personal and corporate portfolio is sitting on a 60%+ RoR on this utility, where I have a yield on cost of over 8% and where the dividend has tracked exactly what the company forecasted.
You may believe that Enel’s trip upward is done here – that’s not an opinion that I share. I believe Enel is far from over. You may recall one of my first article on the exposure of this company.
A pretty nice return and valuation timing, right? And all it takes is knowing your targets and following the “right” businesses. That particular article was published to iREIT on Alpha a week before it went public, allowing readers to take advantage of the opportunity. Even some of my free readers took advantage, and are sitting, assumedly, on good returns if they held on.
Is the trip over?
I say no.
Enel’s latest numbers show 29% performance growth, nearly double-digit FFO improvement, and a net income revised to over €6.5B for the year, with a proforma EBITDA on a net debt basis of below 2.51x. That makes Enel one of the lowest-leveraged utilities in Europe on the public market. Performance was superb, despite significant CapEx deployment.
In short, Enel performed as expected or even outperformed, with proforma net debt below €58B. The company also continues executing on the M&A plan, with exits from Romania, sales of stakes in Australia, Chile, Peru, EGP Hellas, solar sales, and Argentina generation – all either finished or pending closing. Enel is likely to end up a very solid and far more resilient cash flow generating machine – and that’s exactly what I signed up for.
The upside here remains clear to me. The company is a diversified utility with leadership in renewables and legacy, which offers solid earnings growth where other companies fail. The company’s M&A deals and continued confirmed sales were done at sales prices that some analysts expressed doubts the company would be able to get. If the company manages to continue this multiple of sales, the remaining sales will be clearly accretive to value. What risks there were, specifically power prices, are fading as power prices fade, and this will reduce what risk exposures we had in Italy and Spain. Cautions are raised regarding management and governance with the appointment of someone not as crystal-clear about the company strategy. There’s also a point that rising interest rate-related net interest expenses have not fully materialized to the bottom line yet.
I view these as small – over half the company’s EBITDA comes from its regulated operations in core geographies. Even at a conservative 11x P/E, this company manages over 13% annualized – and this is well below par for Enel on any perspective. More likely is a 14-15x P/E over the long term, and that would result in the following RoR.
For me, Enel is primarily an income and RoR play – so I’m keeping my shares here, and I wouldn’t sell a single one below €7.5, or €8/share.
I’m very happy with this investment, and it’s even possible to add more at a relatively attractive price and upside here.
Wrapping up
This is a somewhat unusual article for me, but I believe also important to showcase that my strategy actually does work – and not necessarily just for me. I see it as my “job” here to provide avenues of entry to companies that most of you, being US-based, might not be that exposed to otherwise. All of these companies are very large, and massive players in their own right. Very few utilities are larger than Enel, and very few insurance companies are larger than Legal & General. KION is a market leader. However, many of you might not know about them.
Well, these are the sorts of companies I track and highlight for your viewing. And I will continue to do so. They come with somewhat more complex withholding considerations for dividends and do require some FX calculations. But if you manage 50%+ RoR, is that a problem even without dividends is that a problem.
The concept of valuation is global. I’m no expert on some geographies, but I do consider myself knowledgeable enough on these.
And these are 3 investments that have done extremely well for me.
Questions?
Let me know!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.