Hi Rocko, I think ROIC is volatile for Hermle mainly because of the cyclical nature of the business. The good 2019 ROIC is due to the great earnings in 2019 which more than halved in 2020 and slowly improved in 2021. Invested capital is more stable than EBIT, which leads to volatile ROIC-ratios. LTM shows an improvement to the 30s again.
A good example in the past was the GFC, when ROIC for Hermle dropped from 45% in 2008 to 7.5% in 2009 because earnings fell sharply.
So my takeaway is: It's a great business in a cyclical market, we should not extrapolate good ROIC to eternity, but normalize it. Nevertheless, a normalized ROIC over the cycle will more likely be in the 30s than the 10s or 20s.
Great piece, thank you for this. I pretty much agree that this has been a compounder over the years of years which however is somewhat cyclical and currently trading at cyclical low - a setup I generally like and have invested in.
We have a number of these boring family-owned hidden champions in Germany, many of which are not public, but still there are enough to build a portfolio from. These tend to execute well, do not care about financial markets much, are conservatively financed, have no imminent catalysts and normally let me sleep well. The thing is that nothing ever happens, but I agree that normally, over a 3-5 year time horizon, a (low) double-digit return (say 12% p.a.) is in the cards. But you have to be patient and just hold.
Hermle is in that bucket, I would also suggest Nordwest Handel and Funkwerk (I own both) and maybe Eurokai (written up on Valueandopportunity) is also a candidate.
I totally agree with you, reasonable expectations and patience will be rewarded in this setup and I plan to just hold, collect some dividends and maybe sell when the stock is in favor again, for whatever reasons we have no control over. Might even go to the AGM, just for fun :)
P.S. Enjoyed your writeup on Funkwerk, Nordwest and the Eurokai piece on Valueandopportunity as well.
Like the write-up - thanks. Why is the ROIC down from the 40s to now around 20%?
Hi Rocko, I think ROIC is volatile for Hermle mainly because of the cyclical nature of the business. The good 2019 ROIC is due to the great earnings in 2019 which more than halved in 2020 and slowly improved in 2021. Invested capital is more stable than EBIT, which leads to volatile ROIC-ratios. LTM shows an improvement to the 30s again.
A good example in the past was the GFC, when ROIC for Hermle dropped from 45% in 2008 to 7.5% in 2009 because earnings fell sharply.
So my takeaway is: It's a great business in a cyclical market, we should not extrapolate good ROIC to eternity, but normalize it. Nevertheless, a normalized ROIC over the cycle will more likely be in the 30s than the 10s or 20s.
Great piece, thank you for this. I pretty much agree that this has been a compounder over the years of years which however is somewhat cyclical and currently trading at cyclical low - a setup I generally like and have invested in.
We have a number of these boring family-owned hidden champions in Germany, many of which are not public, but still there are enough to build a portfolio from. These tend to execute well, do not care about financial markets much, are conservatively financed, have no imminent catalysts and normally let me sleep well. The thing is that nothing ever happens, but I agree that normally, over a 3-5 year time horizon, a (low) double-digit return (say 12% p.a.) is in the cards. But you have to be patient and just hold.
Hermle is in that bucket, I would also suggest Nordwest Handel and Funkwerk (I own both) and maybe Eurokai (written up on Valueandopportunity) is also a candidate.
I totally agree with you, reasonable expectations and patience will be rewarded in this setup and I plan to just hold, collect some dividends and maybe sell when the stock is in favor again, for whatever reasons we have no control over. Might even go to the AGM, just for fun :)
P.S. Enjoyed your writeup on Funkwerk, Nordwest and the Eurokai piece on Valueandopportunity as well.
"This is the opposite of a hot stock and I do not expect spectacular returns." Awesome! :-)
Thanks for the write-up; didn't know the company.