A differing opinion:
Buy: Core Laboratories NV (CLB)
from The Complete Investor
Before Warren Buffett, the word “franchise” referred to sports teams or perhaps to utilities that controlled a particular market by virtue of legal rights or regulatory authority. Buffett’s genius was to extend the concept to companies that controlled markets because of their strong brand name, unique expertise, or exceptional balance sheet strength.
Unlike legal or regulated franchises, such companies tend to have greater pricing power and, if they’re in an expanding market, greater opportunities for growth. Buffett’s extraordinary record as a stock picker is proof of the pudding.
Of course, even the strongest franchise can be vulnerable to changing technologies or mismanagement—Eastman Kodak and Xerox, for instance. Smaller franchises are more vulnerable than bigger ones but also have greater upside if they can maintain or enlarge their share of a growing market. Franchises in small but fast-growing markets have the greatest potential.
This month we ferreted out seven companies with leading positions (first or second in market share) in markets, some in critical global industries, poised for strong growth. All seven have demonstrated the ability to gain market share as their markets have grown. While their multiples are high, their PEG ratios—P/E relative to growth—are modest thanks to the strong growth prospects. The balance sheets are all excellent, reflecting outstanding management.
Core Laboratories (CLB), added last issue, is a compelling way to play the urgent need to find hydrocarbons. Core is a leader in the production enhancement of oil and gas reservoirs, meaning it helps drillers extract the greatest possible amounts of hydrocarbons from their holdings. It has amassed an enormous and unrivaled collection of rocks and materials from virtually every kind of reservoir around the globe, which with its proprietary software technology lets the company map strategies for increasing hydrocarbon production from just about any type of reservoir.
The company spends heavily on R&D, ensuring steady upgrades of its offerings. The growing prominence of shale and other tight formations makes Core’s services ever more essential. We expect profit growth to accelerate in the coming five years to as much as 20% a year, up from the mid to high teens. This shareholder-friendly company generates a great deal of free cash and has repurchased about 30% of its shares since the century’s start.
Stephen Leeb, PhD., The Complete Investor, www.completeinvestor.com, 866-833-2070, July 2014