Fairly to undervalued companies making their own luck

The best management teams do not wait for the world to serve up opportunities for growth. Instead they actively seek out ways to expand beyond their industry’s natural rhythms and ensure that they are on the right side of any wholesale or structural changes that flow through in their chosen end markets. In other words, they look to ‘make their own luck’.

Our stocks this week are all actively engaged in executing strategies that appear capable of augmenting the underlying industry and, importantly in more strained times, able to sustain growth even against a negative macroeconomic backdrop. All three trade in less popular sectors so investors need to be mindful that the high rates of growth here can make the shares appear cheaper than they actually are. 

CRH (CRH) – this Irish based, US dominated building materials business has long been an investors’ favourite: since 1970 it has provided an average annual total shareholder return (TSR) of 15 per cent, way ahead of the market. Construction markets globally look to be stable (housing less so but this is small for CRH) and in the US major new infrastructure funding has just been approved that should help sustain momentum. However, CRH is not waiting around for markets to carry it ahead and has a solid and bold four-point strategy (including selling highly profitable businesses in order to recycle capital) that should allow it to continue to drive growth faster than its underlying markets. After a hefty derating year-to-date this stalwart stock looks oversold. 

T Clarke (CTO) – this is a micro-cap stock (£70mn) listed in the perpetually unloved domestic construction sector but is another business that is driving itself forwards at a much faster pace than its industry undertow. Management has oriented this electrical engineering specialist towards the fastest growing end markets, it is looking to infill weaknesses in regional representation, is looking to capture more of the value chain in the wider mechanical and electrical (M&E) sector and is tentatively dipping its toe into continental Europe. In a sector that only really tracks GDP, T Clarke is on track to deliver doubled revenues between 2020 and 2023, entirely organically. There are good historical and sector reasons for a below market rating here but the valuation does look to be 10-15 per cent too low. 

Inchcape (INCH) – a leading automotive distributor (that eschews most of the world’s larger national markets) appears well set to play a role in on-going consolidation in its markets. A recent transformative acquisition in South America,  downstream rationalisation of channel by vehicle original equipment manufacturers (OEMs), a drive for industry digitisation likely to preclude smaller players and a strategy to capture more of the life cycle incomes generated by vehicles should all help Inchcape sustain growth in what continues to be a tough market at the macro level. Investors generally have no great love for the auto trade but a likely sub-10x PE on EPS growth above 20 per cent, driven mostly but its own efforts, should merit a higher valuation, eventually.