Stockopedia contributor Roland Head, recently wrote an article titled “Screening for Warren Buffett stocks: the ultimate strategy?”, Roland created a screen that he believes would closely mimic the approach Warren Buffett uses to choose stocks that are likely to be great compounders. When that screen is applied to the Australian and New Zealand market today, only 10 stocks make the grade. Universal Store Holdings (ASX:UNI) is one of them and I wrote about them two weeks ago. Another is NZE listed Mainfreight (NZE:MFT) which is the subject of today’s article.
Mainfreight is a global logistics provider with its main office in Auckland, NZ. They have been the definition of a great compounder. The shares have produced a CAGR of over 20% per annum for more than 20 years. Over the past five years, book value has increased at 17%p.a. and EPS at 28%. ROE has averaged 19% and the Greenblatt Return on Capital has averaged 22%. The Greenblatt ROC measure excludes intangible assets, something that Buffett is known to prefer.
Clearly Mainfreight has an enviable track record, but what about the future. Predicting the future is hard (massive understatement). But one thing we can do is try and assess a company’s sustainable growth. To do this we focus on retained earnings and a company’s ability to fund long-term growth from retained earnings. Such a business is more likely to have a competitive advantage.
Stockopedia has an Expected Return metric in the Screener tool which is calculated by looking at the company's 10 year average ROE and its typical dividend payout ratio. It is then possible to calculate an expected sustainable growth rate, based on retained earnings. Roland Head set a minimum threshold of 6% for this metric in his screen. Mainfreight’s expected return is 16.9%.
Companies that are able to fund their growth from retained earnings do not need to raise equity capital thereby diluting existing shareholders. Mainfreight have scarcely issued any new shares over the past 10 years, and none whatsoever in the last five.
The next question is whether they have used debt to fund their expansion. Using debt can boost the return on equity provided those returns exceed the cost of debt, but it introduces a higher element of risk as the debt will need to be serviced, in the good times and the…
