Profits Up, Stock Flat: A Classic Setup for Outsized Returns (16.9% forward IRR, German small cap quick pitch)
The market has lost interest, but the fundamentals keep improving—here’s why that’s a great setup.
Hey there,
Today, I’m looking at a high-quality German small-cap software company that has quietly delivered 900% returns over the last decade—a 25% IRR. But here’s the kicker: Despite rapidly growing profits and a rock-solid balance sheet, the stock has been stuck for years. Why?
Why is it interesting now? - One of my favorite setups
While shares have traded sideways, earnings almost doubled as the multiple, blown up by the Covid bubble, deflated to a cheap level. This is one of my favorite setups: As shares go sideways, Investors get bored and move on. It’s not exciting. It’s not going up! Who cares about the growing profits, the rising cash and the declining debt on the balance sheet? Who cares about the dividend? This is the time to look at strong companies growing their business.
Strong fundamental development
Over the last decade, the company has grown very profitably and has grown mostly organically. The median ROIC of 18% has increased consistently to 29% in 2024. Margins have increased because of the strong focus on local cost management within its decentralized profit centers. As a result, costs grow at 2/3 of gross profit, leading to disproportionate cash flow and earnings growth.
The company has the following characteristics:
EBIT margin: 14.4%
10-year revenue CAGR: 10%
5-year revenue CAGR: 9.2%
10-year operating cash flow CAGR: 21%
5-year operating cash flow CAGR: 16.4%
10-year dividend per share CAGR: 23.5%
5-year dividend per share CAGR: 20.5%
net cash balance sheet
~50% insider ownership (founder on the board)
The company will likely continue to grow profits by around 15-19% annually and trades at just 22 times forward earnings. Let’s dive into this pitch!
What’s next?
There’s more to this story—how does the company make money, what are the key risks and how can they achieve a 16.9% IRR? I break it all down in the full pitch.
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