The Service Stream Limited (ASX: SSM) share price dropped 1.43% on Monday, closing trade at $2.75.
Service Stream began operations in 2004, providing network construction, maintenance and operational services to the telecommunications industry.
The company grew initially through a solid focus on sales and delivery and a very disciplined approach to acquisitions, gradually expanding into water, electricity and gas networks. It showed clear strategic clarity early in its life with the purchase of Milcom Communications, a registered training organisation (RTO) for the Australian telecommunications industry.
Starting in 2011, the company has been consistently providing design, construction and field services to the NBN. In December 2018, Service Stream purchased Comdain Infrastructure for $161.7 million, a company that provides asset lifecycle services to Australian utilities. Comdain will enhance the company's move into gas, water and electricity while helping to drive a more predictable, annuity style revenue model.
This is a strategic masterstroke in growth by acquisition, which was validated in December 2019 by the company winning a 10-year contract valued at approximately $200 million a year with Sydney Water as a 30% participant of the D4C consortium.
Since appointing Leigh MacKender as the managing director in 2014, Service Stream has gone from strength to strength. For this period, the Service Stream share price has enjoyed a compound annual growth rate of 33.4% compared with a rate of 8.2% for the S&P/ASX 200 (INDEXASX: XJO) over the same period.
During that time, Service Stream has also achieved a compound annual growth rate of 62% in earnings per share and an average return on capital employed of 60%, with a very impressive FY19 earnings yield of 21.7%.
This shows a company that is earning very well and is adept at extracting earnings from expended capital. Positioning itself in essential industries like water, gas and telecoms provides Service Stream with a hedge against recession and downturns in the broader economy.
Foolish takeaway
Service Stream has shown itself to be a well managed company with a disciplined approach to acquisitions and an ability to obtain a good return on capital. Its future earnings are becoming more predictable as it transitions to ongoing maintenance and operational contracts, further evidenced through the +23% increase in NBN maintenance tickets.
For me, Service Stream is an example of a good company the market has overlooked. It is selling at a good price, can withstand economic volatility and, I believe, will continue to generate strong revenues well into the future.
