🗞 5 High-Quality Companies Trading Below 15x Earnings

Happy Sunday! 👋 

Today, we’re taking a look at 5 high-quality businesses that are now trading below 15x earnings.

Let’s dive in!

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5 High-Quality Companies Below 15x Earnings

“Quality” is always subjective in investing. There’s no single metric in isolation that can determine a company’s quality.

However, generally speaking, if you have a business that has grown over multiple decades, has a long track record of generating high returns on the capital it deploys, and has ample room to keep reinvesting capital at those high rates, you’ve likely got yourself a pretty high-quality operation.

Add on a rational management team that cares about shareholders, and well… you’ve got yourself a home run.

The unfortunate part is that when you find a business with these characteristics, the cat is typically already out of the bag and investor expectations often reflect that quality.

But every once in a while, a narrative will take hold or the business will experience a rough patch, and Mr. Market gives investors a chance to see through the noise and take advantage of the mispricing.

Here are 5 companies that might fit that mold:

1. Booking Holdings

Booking Holdings is the leading online travel agency globally.

Through a portfolio of well-known consumer-facing brands like Booking.com, Priceline, KAYAK, and others, Booking Holdings connects global travelers with travel suppliers and takes a commission in the process.

As their business has grown, their network effect has become more pronounced. The more travelers that book directly through their sites, the more incentive hosts have to list on Bookings platforms. The more listings available, the better the selection and affordability, therefore the more travelers that go to Booking. This self-reinforcing cycle has powered their growth for multiple decades.

• Market Cap: $127 billion

• EV/EBIT: 14.5x

• 10yr Revenue CAGR: +11%

• 10yr Avg. ROIC: 27%

2. Adobe

Adobe is one of the biggest battleground stocks in the market right now.

Shares of the creative design software giant are now down more than 70% from their latest highs, marking the company’s largest drawdown since the dot-com bubble burst.

Candidly, the bear narrative is pretty compelling. Right now, millions of people are building designs/images/videos inside of ChatGPT, Claude, and Gemini. Converting text directly into social posts or presentation graphics has never been easier. This is where a generation of people are starting their creative work. Not in Adobe’s products.

To add fuel to the fire, Adobe’s CEO and CFO have both decided to step down.

However (and this is why it’s become a battleground stock), so far, this narrative has not shown up in the numbers. Adobe now generates $25 billion in annual revenue, which is $8 billion, or 47%, more than they were generating when ChatGPT first launched.

If Adobe can prove that its ecosystem of professional design and creative tools can be as valuable in an AI first world, then investors will likely look back on this period and be blown away that shares ever got as cheap as they did.

• Market Cap: $82.6 billion

• EV/EBIT: 9.2x

• 10yr Revenue CAGR: +17%

• 10yr Avg. ROIC: 21%

3. Zoetis

After being spun off by Pfizer in 2013, Zoetis is now the world’s largest standalone animal health company. They develops and sell some of the leading pharmaceutical products for both companion animals like dogs and cats, as well as livestock.

Zoetis boasts an estimated 20% market share of the global prescription animal health market. Far more than any other competitor.

As the market share leader, not only is Zoetis able to protect its earnings through patents and R&D investment superiority, but there are also high switching costs in the pharmaceutical world. Once a veterinarian becomes comfortable prescribing a particular medicine, there’s clinical risk to switching elsewhere.

However, shares of Zoetis are now down 68% from its 2022 highs. Despite still maintaining a leadership position in their market, overall spending on companion pets has dropped significantly in recent years in the U.S. This price sensitivity among customers has led to a major slowdown in revenue growth for Zoetis.

• Market Cap: $33.4 billion

• EV/EBIT: 11.6x

• 10yr Revenue CAGR: +7.5%

• 10yr Avg. ROIC: 22%

4. Copart

Copart is one of the best stocks you’ve probably never heard of. If you invested $10,000 in Copart’s 1994 IPO, by 2025, you would have had ~$4 million.

The company operates junkyards.

While that might seem boring, Copart has proven that it can wildly lucrative.

When an insured driver gets into a bad accident or a natural disaster hits, and the insurance company deems the vehicle a “total loss”, the insurance company then pays Copart to pick that vehicle up and bring it to one of its salvage yards. From there, Copart lists the vehicle or its parts on its proprietary digital auction platform for rebuilders, used-car dealers, recyclers, etc. to purchase. Once a purchase has been made, Copart sends the money to the insurance company and takes a fee.

Growth for Copart is naturally lumpy. When there are less crashes or weather is mild, it can mean less salvage vehicles for Copart. But that still doesn’t stop investors from worrying.

After Copart reported slowing revenue growth over their last several quarters, shares dropped by more than 50% marking their largest drawdown in 20+ years.

• Market Cap: $28.5 billion

• EV/EBIT: 14.4x

• 10yr Revenue CAGR: +14.2%

• 10yr Avg. ROIC: 29%

5. Ulta Beauty

Very few retail concepts have proven to be truly e-commerce proof.

Ulta Beauty appears to be one of them.

The brick-and-mortar retailer best known for their wide assortment of cosmetics and fragrances has shown that the “Beauty” category often still requires a physical presence. Whether a customer is purchasing makeup, perfume, lotion, or virtually any other product, they often want to test or experience the product in person. This has kept in-store traffic fairly high, despite Ulta offering robust omni-channel solutions.

Ulta’s model has been so resilient that they have averaged more than 9% annual same store sales growth since 2012. Combined with ~9% store count growth in the U.S., this has driven consistent double-digit sales growth for the beauty giant.

However, last quarter, after Ulta’s management team reported lackluster guidance for the full year, investors seem to have soured on the stock. With Shares down 25% year-to-date, Ulta’s EV/EBIT multiple has been knocked down to just below 15x.

• Market Cap: $20.5 billion

• EV/EBIT: 14x

• 10yr Revenue CAGR: +11%

• 10yr Avg. ROIC: 27%

That’s all for this week. 

If you have any companies that belong on this list or any questions about fiscal.ai, feel free to reply to this email!