GrowthSpotting: The Art of Global Investing

This series cuts through market noise to explore a handful of what we believe are the most relevant and inevitable global trends for investors seeking growth.

These powerful subthemes take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA” (Mass Affluence, New Technology, Restructuring and Aging).

Today’s post focuses on The Justifiable Middleman: Bring on the Plumber!

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If you have been living in the Northeast United States in the wake of Storm Sandy, as I have, you have probably experienced a new appreciation for hot running water, flushable toilets, dishwashers, showers, baths and sewage pipes. Indeed, just about anything that, since the time of the Romans, we have connected with clean, civilized life and that we tend to take for granted until we are deprived of it. And when we are, how desperate are we to find a plumber to fix it! Money is suddenly no object; a cost-benefit analysis becomes a visceral, instant calculation; the money is relatively small in the grand scheme of our expenses, while the benefit is enormous and critical. Bring on the plumber!

What we have experienced is an object lesson in the value of the specialized service provider, a.k.a. the justifiable middleman. There are companies that fill this role in the industrial world and we often find them to be good investments. Let’s look at one we own in our portfolio that happens to be… a plumber.

Aalberts Industries is based in the Netherlands. It produces, sources, installs and maintains flow control systems. Think pipes, pipe joints, valves, meters, regulators, filters… all of the flow-system components that are critical to makers of products ranging from chemicals to beer. For each of those producers, relying on Aalberts as a one-stop shop is far easier than trying to find, install, service and maintain all of these parts and systems separately. Ironically, it’s also cheaper, given Aalberts’ economy of scale, even though you’re paying enough to provide Aalberts with a healthy margin.

And Aalberts’ margins have been healthy, steadily 15% at the EBITDA level, in all but one of the last five years (2009) since 2007. The company has benefited from being the leading consolidator among its competitors in a very fragmented market. With every rollup acquisition, which it funds from internal cash flow, its reach, scale and cost efficiencies increase and the value proposition it offers to clients improves. This is a European company whose revenue has grown right though the Euro currency crisis and, given its strong operating leverage, so have profits, at the rate of 24% in 2011 with a further 12% growth for 2012 expected by the analyst community. Aalberts returned 11.5% on the capital it employs, well ahead of the cost of that capital.

So unless you fancy taking a wrench to something that looks like this

you, like Aalberts’ clients, will likely continue to be more than willing to pay up and bring on the plumber, for whom the future looks bright.

Sources: Bloomberg, Aalberts

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