Today’s full-year results report from Tristel (LSE: TSTL) delivers another set of punchy figures. But some investors are avoiding this top growth share because of its rich valuation.
And I admit, with the share price near 507p, the forward-looking earnings multiple is near 40. Given City analysts’ expectations of single-digit percentage growth in earnings for the trading year to June 2021, that looks high.
Why I’d buy this top growth share now
But high-quality enterprises attract high valuations. One of the people who influenced Warren Buffett’s investing style was Philip A. Fisher, who was known for his long-term investments in the shares of growing companies. Fisher argued in the 1950s that we can view a high valuation as a mark of quality if the underlying business deserves it. He set out his ideas in his book Common Stocks and Uncommon Profits.
And several years ago, I used to shun high valuations. But I found that approach kept me out of almost all the best-performing shares on the stock market. Meanwhile, in the case of Tristel, there are some compelling factors backing up the valuation. And I think the infection prevention and contamination control specialist looks poised for another leg up.
One of the most important factors is Tristel’s economic moat. The company reckons it’s the only company worldwide using chlorine dioxide to disinfect medical instruments. And the firm has used the same chemistry to establish a “bridgehead” in hospital surface disinfection, and the veterinary and contamination control markets.
Tristel’s proprietary formulation gives it a “genuine” point of difference compared to all other infection prevention companies. The directors reckon the company has generated a “significant” body of knowledge because of the length of time it has enjoyed its unique position in the industry.
For example, there’s published scientific data, the testimony of almost two decades of safe use, a significant global footprint of regulatory approvals and a library of proven compatibility with hundreds of medical instruments. Indeed, I reckon Tristel has built up barriers to entry for competitors. And it would take a lot of time and expense for a challenging firm to compete with Tristel.
A vast opportunity in the US market
Meanwhile, the benefits of the set-up show up in the company’s financial and trading record. There’s been robust and consistent growth for several years. And the progress has been well balanced too, with revenue, earnings, cash flow and the dividend all rising at an impressive rate. On top of that, the quality indicators show the operating margin and the return-on-capital figures both running above 18%.
Looking ahead, the company has a vast opportunity to expand. Today’s results reveal to us that around 60% of revenue came from abroad, up from 55% last year. Overseas sales grew by 32% and UK sales grew by 7%. The directors reckon the difference in growth rates reflects the firm’s higher market penetration in the UK. And that suggests plenty of ongoing potential to grow international sales.
Indeed, Tristel is at an advanced stage in securing the necessary approvals for operating in the US. Not a penny of revenue has been generated in the US yet, but the market is vast and sales there could boost Tristel’s growth rate. I’d buy this top growth share now to capture that potential.
The post Some investors are avoiding this stock. But here’s why I’d buy this top growth share now appeared first on The Motley Fool UK.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020