Why boring companies often make the best investments

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There is an old adage in investing that boring companies often make the best investments. In an age where the headlines are touting companies with AI fuelled this, and innovative, disruptive that, companies that just sell quality products don't get much attention.

A business that grew revenue by 19% last year, profits by 45% and generates a return on equity of 30% is not boring from an investment perspective. And this was not a one-off gain propelled by pandemic induced stimulus or other COVID tailwinds.

Indeed this business faced some significant headwinds during the COVID period. Rather revenue, profits, earnings per share and dividends have all been growing strongly for at least the last five years. (Revenue has grown every year for the last 15 years.)

snl shares investing in boring companies

Chances are you have not heard of Supply Network Limited (ASX: SNL) - even the name is boring, but it is a $325 million market capitalisation company that earned $163 million in revenue last year.

It supplies aftermarket replacement parts for trucks and buses. It operates through its trading business Multispares and have a network of outlets throughout Australia and New Zealand. Its focus is on providing quality parts, having a wide product range, and good customer service.

Clearly, it is working as it is now the largest parts supplier outside of the truck and bus manufacturers.

The business was listed in the mid-1990s and has had a steady leadership team in place with the most recent director to join the board appointed in 2008, and the same managing director since 1999.

The fortunes of the business are linked to economic activity but it has also been benefiting from the long-term macro trend towards increasing vehicle complexity. This is especially true for trucks where there is intense competition in every segment. Over many years, SNL has built up a diverse range of products and knowledge to service this wide range of vehicles which gives them a competitive advantage in the market.

Supplying parts for buses suffered during COVID with bus services reduced, especially for coaches with tours all but non-existent. The bus segment now accounts for 15% of total business. But the truck business continued growing despite the COVID related challenges.

In the last two years, growth has been so strong that it has completed its three-year plan a year ahead of schedule. It is forecasting growth of a further 10% this year.

In order to facilitate ongoing growth, it has recently opened two new branches and relocated two existing branches to larger, more accessible sites. It is also in the process of fitting out two new distribution facilities which will support an annual turnover of $250 million.

Turning to the balance sheet, the business is in a strong position. It has reduced net financial debt from 23% last year to 18% this year. It has invested in building up its inventory, which whilst being a short-term cost, mitigates the well-documented risks around supply chain delays that are being experienced throughout the world at the moment.

It has also held the number of shares on issue steady for the last seven years, which means existing shareholders are not getting diluted and it has funded all of its expansion without the need to raise equity capital while paying out about 60% of earnings as dividends.

Aside from the business risks like a downturn in demand or increased competition, investors also need to be aware of the liquidity risk. Over 70% of shares outstanding are tightly held by strategic investors and the shares are thinly traded. If you need to sell in a hurry it may not be possible without accepting a substantial discount.

The share price has risen about 70% over the last year as this boring business has garnered more attention for its non-boring performance. Consequently, it could no longer be considered cheap given it is trading on a PE to projected earnings of over 21.

However to use another old investing adage generally attributed to famed investor Warren Buffett, "It is better to pay a fair price for a good business, than a good price for a fair business."

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Chris is a senior investment analyst with Spotee Consulting. He is an experienced leader and investment expert having worked in financial markets for over 25 years. This includes co-founding a stock market research business and running it for seven years until it was sold. He is qualified as a Chartered Financial Analyst and holds a Graduate Diploma of Applied Finance and Investment and Bachelor of Commerce Degree. He has been a regular contributor to Money since 2012.