Seeking Compounders 2

Taking a look at my watchlist

In this little post, I’ll quickly introduce three Compounders from my current watchlist. These are companies that I already researched a decent bit and would love to either own or would research further (do the last 20%) if they dropped a good bit. Compounders are companies that can generate high capital returns for a long time and generally have a high-quality business and deep moats. Most of my portfolio is invested in compounders and I go into more detail about it in this article.

PerkinElmer PKI 0.00%↑

PerkinElmer is a life sciences company that recently announced the sale of its Analytical, Food and Enterprise Services business. This would make it a pure play life sciences company with focus on its life sciences and diagnostics division. The company also generates 80% of its revenue with recurring or consumable revenues. After the sale of the business unit the company will be very similar to Danaher DHR 0.00%↑ and ThermoFisher TMO 0.00%↑, but trading at a lower valuation.

As a Danaher shareholder, this makes PerkinElmer a very interesting opportunity that I’ll be looking to watch from the sideline for a bit. I covered the story in more detail here.

ServiceNow NOW 0.00%↑

ServiceNow is a SaaS company that offers an enterprise software suite with a broad portfolio of services around IT Management and Workflow automation & optimization. The company has best-in-class gross retention rates of 98%. If we invert that we get an average customer relationship of 50 years. The business is of a high quality, but the valuation is still very rich at 45 forward earnings and the company dilutes shareholders heavily, like most SaaS companies. I covered ServiceNow in this article, but I am personally instead invested in Veeva Systems $VEEV. If the company either starts to slow down the dilution or comes down further in valuation, I’d seriously consider adding them to my portfolio.

Service Corp International SCI 0.00%↑

SCI is America’s largest deathcare company (funeral homes and cemeteries). Cemeteries are especially interesting real estate properties because much like Scrapyards CPRT 0.00%↑ , Stripclubs RICK 0.00%↑ and landfills WM 0.00%↑ they require regulatory approval to build a new one in a municipal. SCI has the largest network of funeral homes and Cemeteries with a 15% market share, while 80% is owned by independent companies, leaving a massive opportunity to consolidate market share by acquisition. I dislike SCI's big use of leverage, which has been at an average net debt/EBITDA of 3.8x in the last decade. If SCI would trade down meaningfully to a normalized FCF yield above 5%, I’d like to revisit this company. I will also publish a piece about the company on Seeking Alpha in the next few days.

I hope you found some value in this small piece, let me know if you like these kinds of posts. I have a couple more companies in my close watch list that I could send out like this.