Growth and value are joined at the hip — that’s what Warren Buffett and his business partner Charlie Munger agree on.
And it makes sense to me. I want to buy the shares of businesses at a reasonable valuation, yes. But I also want those enterprises to work hard to increase their inherent value while I’m holding. And one of the best ways for them to do that is by growing their earnings annually.
Growth at a reasonable price
But I’m not the only one who wants that. One investment strategy is dedicated to finding growth at a reasonable price, or GARP for short.
And with that strategy in mind, Somero Enterprises (LSE: SOM) attracts me. The company provides concrete-levelling equipment, training, education and support to customers in over 90 countries. And with the share price near 590p, Somero’s market capitalisation is around £328m.
Since 2015, earnings have been generally rising. But they were weaker in 2020 when the pandemic hit. And I think that demonstrates there is a cyclical element to the company’s business. Although the enterprise appears to be expanding, macro-economic events can cause a setback for shareholders.
And I’m not expecting an easy ride with this stock. Over the past five years, the share price has risen by around 130%. But along the way, it declined by about 60% between September 2018 and March 2020. Such volatility reveals some of the risks involved with holding this stock.
A bullish outlook
In December 2021, the company released a bullish outlook statement on the heels of trading that had exceeded the directors’ expectations. Strong trading in North America drove operational momentum in the second half of 2021. Previously, in 2020, the business generated around 80% of its revenue from the region.
The directors said market conditions in North America are “healthy and positive”. And demand for new warehousing is driving part of the demand, “with customer workloads at high levels and reported project backlogs extending well into 2022“.
So it looks like Somero has high visibility for its earnings through 2022. And City analysts have pencilled in an uplift in excess of 70% for 2021 and expect a further high-single-digit gain this year.
Meanwhile, measured against those expected earnings, the valuation looks undemanding. With the share price at 590p, the forward-looking earnings multiple for 2022 is running around 13. And the anticipated dividend yield is a healthy 5.7%.
There’s some volatility in the multi-year record of earnings and dividend payments. And the share price has been a bit wild over the past few years. But there’s a steady record of annual growth in revenues. And the firm’s strong balance sheet showing a net cash position encourages me.
In fact, I became sufficiently enthused by the opportunity to add a few of the shares to my diversified portfolio recently. And I’m aiming to hold them for the long haul as the underlying growth story continues to unfold.
Kevin Godbold owns shares in Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
