Warren Buffett and his long-time friend and investment partner Charlie Munger are known to be fond of a good quote and when it comes to quotes they are also very fond of drawing upon those of author Mark Twain.
One quote attributed to Twain that is certainly useful in an investment context is:
History doesn't repeat itself but it does rhyme
The saying is worth remembering by those seeking guidance for how to put the past performance of a company into perspective.
For investors who prefer to own large, dependable and defensive companies, identifying stocks that have performed well in the past can be a good guide to expected future cash flows too.
Of course structural changes to a business can throw a huge curve ball for a company and dramatically change the long-term outlook for a business, so just focusing your analysis on what you see in the rear view mirror is dangerous – you need to assess the road ahead too.
In the case of Wesfarmers Ltd (ASX: WES) and Origin Energy Ltd (ASX: ORG), for now at least, the long-term business outlook appears sound.
Wesfarmers with its major exposure to retailing – particularly non-discretionary – has grown earnings per share (EPS) from 153.4 cents per share (cps) in financial year (FY) 2006 to 196.2 cps in FY 2014. That's not an amazing level of growth achievement, however considering the size of the group and that the period included the GFC and resource bust it's reasonable. Likewise, an average annual total shareholder return (TSR) of 7.9% has been achieved.
Origin Energy meanwhile provides Australian and increasingly overseas customers with their energy needs. EPS has practically doubled over the last decade from 34.9 cps in FY 2006 to 64.3 cps in FY 2014. The ten-year average annual TSR has been 10.2%.
With demand for energy unlikely to fall due to rising living standards and population growth, demand for Origin's output is likely to remain solid although the potential for solar to disrupt shouldn't be dismissed.
The decline in the oil price is causing some investors to question the outlook for Origin's LNG assets, however, the oil price is cyclical and any investor analysing and valuing the company should of course be taking into account expectations for the long-term average oil price. The current price weakness could be a buying opportunity.
Wesfarmers also has its hurdles, however, once again a rising living standard and population growth should help the company grow revenues and profits into the future. The stock has underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the past 12 months which could make for an appealing entry point.
