I recently looked at a few qualities that helped Monster Beverage grow its earnings per share seventeen-fold since 2015 and deliver an incredible total return to shareholders.

My task today was to hunt for ASX companies that share some of those traits. Some of the points I touched on in the Monster article included:

  • Company value usually follows earning power in long term
  • Industry tailwinds and an ability to find new markets and sources of growth can often help earnings increase
  • Moats are important (for example, Monster had built a strong brand and then benefited from access to Coke’s distribution system)
  • Owner operators can bring a long-term mindset that benefits shareholders

The two ASX companies I’ll focus on for the rest of this article meet most or all of these criteria. One of them has already experienced fantastic revenue and share price growth, while the other is still a far smaller company in the grand scheme of things.

Let’s start with a household name amongst Australian growth investors.

ResMed RMD

Economic moat: Narrow
Fair Value estimate: $40.50
Share price December 12: $38
Star rating: ★★★★

ResMed sells devices that treat sleep apnea, as well as consumables related to its devices and home health software.

It has been a huge success – essentially winning the market in sleep apnea devices along with Philips.

In the process, ResMed has grown towards being a US $5 billion revenue company with a market value of over US $35 billion.

When a growing company has reached this size, it is easy to think “I’ve missed it” and start looking elsewhere. This can often be a mistake.

Take Apple AAPL for example. By 2015, iPhones were already everywhere and growth in device growth looked tapped out. The value of Apple’s business and its shares had already risen exponentially since the iPhone’s launch, and you might have thought that Apple’s days of share price growth were done.

Since then, Apple’s EPS is up three times thanks to bulging services income and big buybacks that have reduced Apple’s shares count by a third. Apple shares are up six or seven times since, having also benefited from a big re-rating measured by its P/E ratio. But I digress – let’s go back to ResMed and check it against our criteria.

Earnings growth and industry tailwinds

The first thing we were looking for was potential growth in earnings per share. The past record is helpful in this regard, but you also need to look at the prospects for those trends to continue or even accelerate.

ResMed has grown its revenue at an average of 11.6% for the past decade and its net profits have grown at a similar rate. Earnings growth has actually outpaced sales growth in recent years as the firm has managed to turn scale benefits into higher margins.
Looking forward, more growth looks likely given that ResMed meets our next criteria – it looks likely to benefit from industry tailwinds. Our ResMed analyst Shane Ponraj estimates that only 20% of sleep apnea cases go treated in developed economies, with essentially no treatment in EMs.

This leaves plenty of room for ResMed to sell more devices and consumables from the strong market position it has carved out.

Overall, Ponraj thinks the company can grow its EPS by an average of 12% per year over the next five years, which is a very healthy rate.

Ability to find the next leg of growth?

Given that ResMed’s core market category is still underpenetrated, there might not be a massive need for it to find the “next leg of growth” yet.

However, ResMed has still shown an ability to adapt and benefit to advances and changes in its market, especially regarding the use of big data and software in medical devices.

Moat protecting investments in business?

Without something protecting your profits from new competitors, even the most attractive and growing market category can become a lot less profitable.

This will impact the ability of a company to keep reinvesting its profits into growth initiatives and get attractive returns from these investments.

Shane has awarded ResMed a Narrow Moat rating, which means he thinks it has a sustainable competitive advantage that can support excess returns on capital for at least ten years.

This rating is underpinned by switching costs for medical professionals (who are trained to administer the devices and interpret patient data generated by them), as well as intangible assets.

The latter include ResMed’s strong brand and a patent portfolio that stops competitors from replicating aspects of ResMed’s sleep masks or consumables to the same level of quality.
Owner operator at the wheel?

ResMed was founded by Peter Farrell in 1989 and is led today by his son, Michael J. Farrell. As a result, I had expected there to be quite large inside ownership here in percentage terms. But that doesn’t appear to be the case, unlike with our next candidate.

PWR Holdings PWH

Economic moat: Narrow
Fair Value estimate: $9
Share price December 12: $8
Star rating: ★★★

I’ve been wanting to write about PWR Holdings for a while. Why? Because it is cool. PWR made its name by supplying elite engine cooling systems (think radiators) to high performance cars.

On the back of its success in Australian super cars and America’s NASCAR racing competition, PWR eventually broke into Formula One racing. As we speak, every single Formula One car on the grid uses PWR to cool their engines. By achieving this, PWR has become the cooling supplier of choice in elite motorsport.

As well as helping PWR win share in other racing competitions, this has led them to win contracts to provide the cooling for high-performance, small production road cars. PWR has also been able to charge premium pricing for radiators in the aftermarket. For example, if somebody owns a Porsche and fancies upgrading it with some F1-calibre kit.

Can PWR grow its earnings?

Our analyst Angus Hewitt is bullish on PWR’s ability to grow its earnings over the next few years.

He thinks that PWR’s strong position at the top level of motorsport can continue to attract more orders from high performance road car manufacturers, as well as continued pricing power in the aftermarket.

Taken alongside improved profitability in PWR’s North American operations and its growing aerospace and defence business, Hewitt thinks PWR can grow its operating profits at an average of 14% per year over the next five years. PWR clearly passes the earnings test.

Industry tailwinds?

In PWR’s core automotive segment, Hewitt sees the firm’s potential to maintain its top position in Formula One as the primary earnings driver, given the ability of this to support earnings in other automotive segments. As such, it is more of an internal tailwind rather than a secular one.

PWR’s growing aerospace and defence business potentially has strong secular tailwinds, as global tensions have led to increases in defence spending across Europe and North America.
Ability to find the next legs of growth?

PWR realised that its expertise and IP in automotive cooling might also be required by other industries, and its dominance within Formula One – the pinnacle of motorsports engineering – provided a big tick of approval.

PWR has focused on aerospace and defence, where it has gone from having essentially no presence in 2016 to $21m in sales in fiscal 2024. And even though motorsport still represents the core of PWR’s business, aerospace and defence is definitely the biggest growth driver.

Hewitt expects revenue in this segment to roughly triple to $57m by 2026, and it could become a $100m revenue business by 2030.

While the potential here is exciting, Hewitt doubts that PWR will enjoy the privileged competitive position that is has in motorsport for some time. As a result, it will probably have to work harder to win contracts and may not enjoy the same pricing power.

Nonetheless, I think management’s ability to identify this potential new market for PWR’s expertise and win significant contracts, like the one to supply cooling for BAE Systems’ Strix military drones, gives it a clear tick in this box.

Owner operator with long-term mindset

PWR Holdings is led by its founder and CEO Kees Weel, who’s race car driver son Paul spotted an opportunity to provide lightweight aluminium radiators. Weel (and investment vehicles connected to him) still own more than 16% of the company’s common stock.
While almost every manager will stress that they are a long-term thinker, I think Weel’s actions back it up – most notably through its unrelenting commitment to research and development. PWR has consistently spent around 10% of its revenue on R&D to maintain its leading position in automotive cooling.

Of course, these efforts are helped by PWR’s opportunity to take learnings from the performance of its products in Formula One – motorsport’s most demanding and complex arena.

Moat to protect returns on capital?

PWR holds a strong position as the cooling supplier of choice in elite motorsport, and Hewitt feels that this reputation for quality and proven ability to perform at the top level has given PWR a distinct advantage over its peers in motorsport.

PWR has leveraged this into winning more than its fair share of work on supercar and hypercar production runs, and into aftermarket customers happily paying a premium to have Formula One endorsed cooling in their vehicle.

As I touched on before, Hewitt does not yet see any evidence that PWR enjoys the same advantages in aerospace and defence. However, he does see some potential for the company to build its reputation and entrenched customer base over time.

At a recent price of around $8 per share, PWR Holdings traded roughly 10% below Angus Hewitt’s Fair Value estimate and had a three star Morningstar rating out of five.

What are your investing criteria?

What we have done here is measure two companies against a list of criteria that we’d like to see in a business we are considering investing in. This is an important step in any investing strategy, especially if you have decided to invest in individual shares.

The criteria I used today – which included growth potential, an aligned management team and a competitive advantage – are not the only things I would look at. For example, I would also look at the company’s financial health (i.e. is it too indebted), its valuation and how easily I understand its moat.

For a four-step guide to defining your strategy and investing criteria, take a look at this article by my colleague Mark LaMonica.

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