I was interested in hearing the news of the takeover of Dechra Pharmaceuticals (LON:DPH) today at a 47% premium. I had held the share a long time ago. I don't fancy digging into my records, but as I recall I made a decent profit out of it. It seemed like a nice growing business (veterinary drugs and related products). I think I got spooked out by the high PE ratio and low ROCE.
It is interesting to look back on Stockopedia's records to see what has happened to the company over the last 5 years. Growth has been impressive. The average 5-yr CAGR growth rate of revenues was 13.7%, net profit 20.0%, dividends 15.9%. Well done.
Debt didn't seem particularly excessive. The ROCE was a paltry 5.6%, so it makes you wonder how they achieved such growth. I notice that free cashflow per share actually went down from 71.3p to 41.6p, which is not what I want to see, either.
Over a 5-year period, the shares went from around 2763p to 2690p (before the bid). So despite high growth in dividends, etc., it didn't translate into superior share price performance.
If I turn to Stockopedia's historical records for Apr 2018 we see a 5-yr share price that increased massively, landing it on a PE of 32. That's a high valuation to shake off. Revenues, profits and dividend growth were equally impressive during that period. Free cashflow actually went up, although the average ROCE was still low at 6.2%.
DPH is a cautionary tale about overpaying for growth.I have been interested in the subject of steady compounders lately. My thinking is to aim for something that is flying under most people's radars. Perhaps a company that has increased its dividends by 5% annually over 5 years, or better and revenues likewise. Look for an acceptable ROCE, say over 10%, and free cashflow per share that has increased during that period. Also, net debt to net profit of at most 5. Let's say a PE of at most 20, and a mkt cap of at least 100m. Unfortunately, I couldn't filter on debt to profit, so you'll have to work through a list yourself. Sorry about that.
