Does MM like DOW & / or JLG?
Some commentary surrounding JLG being a candidate for some rapid growth. What is your take and preference vs DOW? I hold some DOW but considering buying more. Thanks
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Answer
Hi Mark,
Johns Lyng Group (JLG) is a broker favourite and has done very well over the years, it’s an extremely well run business, great alignment with the CEO Scott Didier owning 20% of the company, and it’s hard to fault their execution in a tough sector, however, we think its too expensive for pretty much being a construction company, it doesn’t operate on an island and from what I hear, there are a lot of challenges that don’t seem to be recognized in the share price – although it has been volatile, essentially halving before recovering in recent weeks. Not one for MM.
Downer EDI (DOW) while fairly volatile this global contractor has hardly rallied over the last decade even after announcing they would buy back up to 10% of its stock just over a year ago. Across the globe we are seeing plenty of money being thrown at infrastructure projects but given the operating metrics of these businesses that use a lot of staff and generally operate on slim margins, this has not flowed down to performance by DOW and especially Lend Lease (LLC) which tested multi-year lows last month.
The labour market is very tight at the moment and wage costs are rising, so too is input costs and all this makes it a tough environment for construction related companies. One measure I like to look at on the New Company Pages of the website is Under Ratios – Management Effectiveness – Revenue/employee & Net Income/employee. It essentially measures how much they derive from each staff member. My brother runs as engineering company and we were talking about this a while ago, he mentioned he was around 280k per employee in terms of revenue. I thought this was very low however for that type of business, it’s not bad. DOW for instance sits on around 240k. Comparing that to something like CBA (545k) or Apple ($2.4m) shows the power of different sorts of businesses. i.e. I think there are easier businesses to run (and own as shareholders).
