Last year I wrote a piece on how the CSL Limited (ASX: CSL) share price could have turned a $1,000 investment into over $200,000 in 22 years.
Today, CSL Limited is a formidable company. A cash generating machine. But it took time. CSL evolved through decades of research and development (R&D) investment, medical advancement and growing demand. It's important that we recognise that.
By repeatedly capitalising on core competencies, year-in, year-out, the company has compounded returns at rates far above the market average and added billions of dollars to investor's wealth. That's pretty cool.
I use CSL as a benchmark for prospective investments across a range of sectors and it's exciting to see many of the same characteristics emerging in mask and breathing device producer Fisher & Paykel Healthcare Corp Ltd (ASX: FPH).
Here's a quick look at how Fisher & Paykel Healthcare has been growing over the last 10 years:
There's a lot to like in that simple chart. First there's consistent, long-term revenue growth which has more than doubled over the last 10 years.
Fisher & Paykel Healthcare reinvests about 10% of annual revenue on R&D, resulting in new product lines and better quality. This is a similar rate to CSL Limited which invests around 9% of annual revenue in R&D.
The second thing to like is the growing operating margin. The lift has come from lower manufacturing costs as the company shifted some of its production from Mexico and closer to its biggest market of North America.
You don't need me to spell out how valuable that is, but I will for emphasis: the combination of revenue growth and higher operating margins is absolute rocket fuel for profitability and investor returns. Not only is the company earning more, but it's keeping more, and able to reinvest more for the future.
The next CSL Limited?
With a current market capitalisation of just under $6 billion, Fisher & Paykel Healthcare is about one-tenth the size of CSL Limited, but I see similarities in the way the companies operate and a promising future for Fisher & Paykel Healthcare.
I would expect operating margin growth to slow over the coming years as cost efficiencies are reached, but with minimal debt and a strong demand outlook I'm excited for Fisher & Paykel Healthcare's future.
