MITIE – A Very Impressive Company For a Fair Price

Warren Buffett has a name for companies that are virtually certain to grow consistently for decades into the future. He calls them The Inevitables. Now, I certainly don’t think I have the skills to spot these uber-rare companies, nor do I think I need to. But occasionally I bump into a company whose financial results do a fantastic impression of one.

Relentless growth

MITIE have produced record revenues, earnings and dividends for over 10 years straight. That in itself is fantastic, but this isn’t some utility company growing at a couple of percent a year. Their growth rate has been something like 10% a year and more. As a buyer of above average companies, this is exactly what I like to see.

Aided by a growing sector

Much like Tullett Prebon, a large part of that growth has come from the sector they operate in. As an outsourcing company, they help clients to offload non-core property and facility management tasks. This means they do a bit of almost everything including reception desk, security, cleaning, engineering, maintenance, waste and energy management and much more; basically they cover almost everything to do with looking after buildings and more besides.

The outsourcing market has been a pretty hot place to be over the years as it’s grown from a niche market providing single services like cleaning or repairs into a far larger, more mainstream and mature market where outsourcing companies now look to provide bundled services and more recently, full business process outsourcing.

MITIE have ridden this wave expertly, building a great company and a great reputation in the process.

A good example of the sort of interesting projects they do now was the design, build and operation of a distributed green energy centre for the first Waitrose on the Isle of Wight. This energy centre will help the superstore to its goal of being carbon negative.

So MITIE have a very broad scope, from cleaning services to green power centre construction and operation.

What does the crystal ball say?

One thing I hate to do is prognosticate about the future. That’s the job of most other investors who endlessly seek to gain an edge over each other by trying to work out what the next year will look like for a given company or economy. The gyrations of the FTSE 100 should be evidence enough that this approach is poor at best and a waste of time at worst.

That’s exactly why I look for companies like AstraZeneca which have long histories of success, hopefully in sectors that aren’t likely to die out in the next few years. Other than that I prefer to keep schtum and look 5 years down the line rather than 5 weeks.  However, I will say I can’t find any particular threats ahead, beyond what almost all companies must face, i.e. competition, constant change, etc. I think my future growth calculation below is a reasonable guideline figure.

Versus the FTSE 100

In comparison with the FTSE 100, MITIE’s stats look like this:

Factor
FTSE 100
MITIE
Level/price
5369
238
Historic earnings growth
8%
15%
Return on equity
11%
20%
Future growth estimate
6%
15%
PE
8.5
10.5
dividend yield
3.5%
4%

These figures are calculated from various sources and rounded mostly to whole figures as I don’t believe that looking to multiple decimal places has any effect on investor return in the long run.

Overall you can see that MITIE have grown faster, returned more for each pound of earnings retained (via return on equity) and using simple assumptions may be able to grow faster than the market as a whole in the medium and perhaps longer term.

Those results are good enough for me and so I have added the company to the model portfolio (a 5% weighting, i.e. £2,500 of £50,000) and my own pension at 238p.

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Comments

  1. says

    I seem to recall MITIE have a very interesting business model, too, that runs teams as independent entrepreneurial units, like Halma on steroids. Been a while since I looked at them though.

  2. Matthew says

    I think you need to spend some time digging into MITIE’s accounting practices – revenue recognition and mobilisation cost accounting might lead you to reappraise what the company is “earning”.

    Look at Connaught (and Erinaceous) as case studies if you want to see what can happen to outsourcing companies with dubious accounting practices – they unwind pretty quickly.

  3. John Kingham says

    @Monevator – Yes, MITIE stands for Management Incentive Through Investment Equity. They do a lot of 50/50 MITIE/management ownership acquisitions and start-ups with buy-out options if management perform. Seems to have worked so far.

    @Matthew – Thanks for the heads up. Unfortunately I tend not to dig into the accounts to deeply as I think there’s a pretty steep cliff of return on effort. If you’re right and they go bust on my watch then I might have to change that, but if they don’t and I make a fair profit then I guess I won’t.

    Either way I’ll review your comments when I sell (or when I’m closed out if they go under) and mention them in the exit analysis.

    Thanks

  4. Anonymous says

    “Unfortunately I tend not to dig into the accounts to deeply as I think there’s a pretty steep cliff of return on effort”

    That is a pretty worrying comment on a value investment blog? Maybe I have a mis conception of value investment??

  5. John Kingham says

    Hi Anon. Sorry if my comment has you worried, it wasn’t meant to convey some kind of cowboy attitude to company accounts.

    However, it does reflect my belief that it is just not necessary to look into every detail of the accounts to make a reasonable judgement about the quality of a company or its soundness as an investment.

    For example, Ben Graham made about 20% a year for decades mostly using the net-net method, which is just the subtraction of all liabilities from current assets and buying at a discount to that number. No earnings calculations at all and certainly no checks on the reliability of stated earnings.

    Walter Schloss also used the same approach for similar returns for many more decades.

    The Magic Formula approach from Greenblatt also doesn’t look into the accounts in any great detail and in detailed back testing has returned around 30% a year for almost two decades.

    By not digging into the accounts too deeply, I meant that it is my opinion that a forensic analysis of every detail of the accounts is just not required to beat the market. Instead, what is needed is a sound, repeatable strategy that forces you to buy earnings, assets or some other factor when it’s cheap and to sell it when it’s less cheap.

    Of course if you want to dig into every detail then you can and if you have the expertise it may help you. But Neil Woodford and the many other fund managers who own sizable chunks of MITIE haven’t said anything about the accounting worries raised in Matthew’s comment, so I’m not overly worried either. That of course is not to say that Matthew isn’t right!

    When I write I try to be transparent, especially about the inability of anybody to really know how things are going to turn out, and how no amount of research into a company can give you perfect foresight.

    As for a mis-conception of value investing, it’s a pretty wide field so you may just have read a different approach that did rely more upon detailed accounting analysis. It’s a valid strategy and is used by many who have the skills to do it, but I just have serious doubts about the return on time and effort.

    Basically I agree with Ben Graham when in 1976 he said, ” I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities”.

  6. says

    I was reading the book about Peter Cundill, who was described as taking a “forensic” approach to accounts analysis. Although his track record is pretty good over 30 years, if you look at the graph of his fund, you can see that after about 20 years, he had only just matched the benchmark. It was only in the last 10 years that his record was more convincing. During that time, it was likely a good time for value investors anyway. So it’s difficult to say how much of his painstaking analysis actually netted him.

  7. John Kingham says

    Hi Mark. I managed to read that book, but didn’t really click with his investment style. Very old-school Graham hidden/undervalued asset sort of situations. Not my thing (any more). I think the answer is like anything in investing – it’s probably maybe helpful to some people some of the time.

    If you like doing deep analysis then do it. If not don’t. repeat that for 10 or 20 years and review your results and you still probably won’t know if you’d have done better or worse by doing it the other way around, but at least you’d have invested in a way that you enjoyed.