A "Royalty on the Growth of Others" at 27% FCF Yield
Durable assets, high ROIC royalty model, 29% insider ownership, 15 years of sizable annual FCF in good and bad economies, at a 27% FCF yield
Warren Buffett has famously said “the best business is one that is a royalty on the growth of others”.
He talks about three groups of companies:
Needs lots of capital, but little to no growth: low ROIC businesses that don't create much value (avoid these: little dividends and low growth)
Need lots of capital, but nice earnings/share growth: high ROIC businesses that reinvest most or all earnings, leading to high growth and value creation. e.g. WMT didn't earn positive FCF until 1998, reinvesting 100%+ of its earnings (result: no current dividends but lots of growth)
Need no capital, but still can grow earnings/share: very best businesses have the best of both worlds; they don't need to retain earnings to grow. Result: Owners get cash now (dividends/buybacks) and cash later (growth): e.g. Microsoft, Moody's, NVR, Sees Candies, Domino's Pizza, etc…
The company for today's post falls into this treasured 3rd category. It's an exceptionally high quality business and management team. Some highlights:
High ROIC business model — gets a cut of sales volume produced by others, taking no risk, needing no capital, and protected against inflation (should it rear its head again in the future)
90% core FCF margins (even Visa is jealous)
20 years of consistent FCF without any down years and minimal variability
Very cheap: 22% FCF yield on 15-year average annual FCF and 27% yield on 2023 FCF (at $90 current share price)
Margin of safety: valuable reserves, untapped acreage, a non-core but valuable passive asset worth nearly half the market cap
Some interesting “call options” on growth — all funded by others
Insiders own 30% of the company and are exhibiting sound capital allocation decisions in both their communication and their actions.
Very low amount of debt — FCF being devoted to paying it off completely, at which point the FCF will be available for dividends; mgmt indicates dividend should ramp “dramatically”
I think the fact the FCF hasn't been paid out is disguising this value, but this should correct itself in due course. Regardless, our returns in this stock will likely come not from the valuation the market gives us, but the internal cash flow the business produces, which I believe could be sizable.
Let's discuss this company: