The most expensive buy in a long time

I don't normally participate in IPOs, but this one (RWC) is different.

1. The company has a proven track record of acquiring other companies and incorporating them into the main company.

2. The top level management has been with the company for decades and will continue to do so after the IPO.

3. The Munz family will continue to hold 30% of the company after the IPO.

4. Proven track record of entering a new market (US) and establishing themselves.

5. Extensive product offering of behind-the-wall plumbing products.

6. RWC estimates that Push-to-Connect (PTC) fittings represented 10% of the total plumbing fittings for residential application in the USA, with its SharkBite branded PTC fittings holding 80% share of the brass PTC plumbing fittings in the USA residential end-market. In the near and medium term, PTC fittings is likely to continue grabbing market share from other types of traditional fittings. This trend will intensify as older generations of plumbers who are used to traditional types of fittings, retire and are replaced by younger plumbers who are more likely to be attracted by PTC's ease of use, convenience and time saving benefit.

7. RWC has 11 manufacturing facilities in USA, Australia, NZ and Spain. This geographic spread of plants not only gives them natural protection against currency fluctuations, labour dispute, etc. but also enables them to take advantage of opportunities that might arise in the future, such as ramping up production in Spain (if Euro falls) or in Australia (if AUD continues to fall), etc.

8. RWC has a proven track record in growing its sales consistently. In the past 10 years, RWC achieved a 13.3% CAGR in Net Sales.

There are other positives that I could list here, but it's also important to highlight the risks.

1. Reliance on Home Depot. If Home Depot one day decides to stop stocking SharkBite, RWC's sales will take big drop immediately. Home Depot can do what Bunnings does in Australia, which is stocking their own home-brand. I'm not sure how likely this is, as RWC had recently been awarded a supplier of the year award by Home Depot.

2. Product failure. Sharkbite has been around for a number of years now, so its reliability can be depended on. But if somehow, a production defect causes failures in customers' premises. The immediate cost of recall and repair and the long term damage to reputation is massive.

3. RWC is currently priced for perfection. With its 2016 PE above 30, it simply can not afford to make a mistake. Any kind of disappointment will be met with a massive chop to the share price.

Having considered all of the above, I'm still going to bet that RWC will continue its history of steady growth and that the current demanding valuation will one day look reasonable.

I participated in the float and bought more on the first day. In my portfolio, RWC's proportion is still not what I want it to be, but unfortunately, I will have to wait for the earnings to catch up to the valuation and for the market to quieten down and lose interest on the stock, before I can increase my shareholding in RWC.

As I said in the title of the post, this is the most expensive purchase in my portfolio for a long time. But, I'm buying it with the intention of holding it for 3 decades, not 3 years, let alone 3 months or 3 days or 3 hours. If my analysis and conclusion are correct, that PE of 30, in time, will be irrelevant.

As an aside, with Masters closing down soon, I wonder if Bunnings will start stocking Sharkbites. I hope they do. As a customer, I don't feel comfortable putting in home-brand products for such a critical function in the house. I'd rather spend the extra dollars and be rest-assured that my fittings behind the wall will not fail out of the blue.