Precia SA -- Measuring instruments

Precia Molen ("Precia") is a supplier of instruments that measure, weigh, count, and dose in contexts where exactitude matters a great deal – pharmaceuticals, chemicals, agro-industry, mining, construction, railroads, and many others. Its instruments “weigh anything from a grain of wheat to a sea-going vessel”.  

In support of the design, manufacture, and marketing of these instruments, Precia provides a number of pre- and post-sales services: instrument selection advice, application engineering, pre-installation visits, calibration and commissioning, on-site training, repairs, spare parts, and so on.

Industrial weighing is important, and in some circumstances mission critical: imperfect weighing of pig iron will cost someone a lot of money; imperfect measurement in flavors and fragrances will lead to the manufacture of unusable batches; imperfect measurement of pharma dosages may cost lives. 

What matters most, therefore, is not going to be price, but service and reputational quality. 

This means that measurement instrumentation is a business suited to specialists – in established markets, one can’t easily buy in to the business: one has to wait a long while before a reputation is built, distributor relationships forged, service personnel reach appropriate levels of excellence and reliability. 

For incumbents, therefore, gross margins should be very high, and corporate financial health – operating margins, return on capital, cash conversion -- should follow from that. As the incumbent's business grows, overhead should constitute a smaller share of costs, replacement parts and services should constitute a larger share of revenues, and the return on incremental investment should therefore outstrip ROIC.

Like so:

Precia is currently yielding 18% and is worth approximately €135 – without growth, just doing maintenance business and servicing its current client base.

In recent years, however, Precia has sought to expand internationally, i.e. beyond the European Union. International sales now account for 34% of sales and 31% of profit.

While the company has identified Brazil, Australia, Indonesia, and Eastern Europe as promising markets for its products, its activities in these markets is still embryonic. 

Those international markets in which it has already established a presence, however – India and Morocco, in particular – are growing at 14%, helping to drive overall revenue growth by 4.5%. The client list of Precia's India subsidiary is illustrative of the potential:

It's not out of the question that international sales (and profits) will constitute 50% of both revenue and profit within three years. In fact, it seems unlikely that it won't: India alone contributed 2.8 million to revenue in 2010, 3.65 million in 2011, and is on track for something like 4.55 million in 2012. Brazil is a similar opportunity to India, in terms of both size and market characteristics. 

Barring exceptional events, therefore, one can peer into Precia's future:

If one assumes that an ex-cash P/E ratio of 1.77x is unreasonable for a quality business, one can envisage two paths to share price appreciation by 2015 -- via multiple expansion and via growth in earnings power:

Precia, then, has all the characteristics of the kind of investment that I have had success with: a solid competitive position, a clear pathway to growth, increasing economies of scale, a clean balance sheet,  free cash flow generation, significant insider ownership, and a history of increasing payouts. It is the safest way that I can think of to earn annual returns of 25% or more.

I am in debt to Nate at Oddball Stocks for the lead. His recent post on every stock he's ever written about is a treasure chest.

Disclosure: I have a partial position in Precia and intend to accumulate more shares in the near future.