As a self-declared ‘new’ investor, congrats on going the route of pre-determining your investment criteria / filters. A consistently applied and disciplined execution of your plan should serve you well over time. You will get to tweak that plan with new learnings spanning both ‘good’ and ‘bad’ outcomes.
Just a general observation though. Only looking at Companies with a track record of 10 + years and then scrutinising annual reports could lead you down a path where a high proportion of your core holdings are all considered ‘mature’ businesses, largely reliant on organic growth and the target for future disruption.
Funny enough, RPM Global should pass your filters. The origins of this Company date back to 1968, so a 52 year history. They have offices in 20 locations across 11 countries and have served customers in over 125 countries. So, they are a true global player.
Your observations on the Company’s historical financial performance are, on the surface, ‘spot-on’. Can I point you to go and research the level of product development spend over the past 6 years, consider that this was all expensed (opposed to capitalising) and then reassess their financial performance. The payback on an annual spend of say, AUD14 m per annum, is the reason the share price has increased by 75% over the last year. Then worth looking at the new product releases over the last two years and the timing thereof. Finally, look at the Company announcements this year in terms of new subscription business signed, considering the momentum.
If, after doing this analysis, you concur that the operating expenses as a % of Revenue are likely to decline, then you should gain a better appreciation of how profitability will improve. A classic case of operational leverage.
You may argue that the tech spend will need to continue. The Company announced in June 2019 that after 6 years of high development spend, they expected this spend to better align with industry norms going forward. For this and other technology companies who embark on very high product development spend, in any future financial forecasts, I work on the number gradually gravitating back to 15% of Revenue. This number has worked quite well for me. The trick is to distinguish the spend associated with a step change in capability versus the spend associated with ongoing maintenance / refinement of the old and new capability.
Good luck with your investing journey. You will accumulate the scars like most of us, but deep research and the ability to manage ‘fear’ and ‘greed’ should make it highly rewarding.
Rokewa
RUL Price at posting:
98.0¢ Sentiment: Buy Disclosure: Held
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