Cooper Investors: Reece

Reece is Australia’s largest distributor of plumbing products. We like the stock because it scores well in our VoF investment system, which favours companies with identifiable value latencies, positive operating, industry and strategic trends, and focused management behaviour.

Reece’s value latency (V) is all about the opportunity for long-term compounding. Two years ago Reece acquired US-based Morsco. Although offshore mergers and acquisitions can be risky, Reece has the opportunity to help consolidate the more fragmented US market with potential for years of capital deployment and growth. Over time this should lead to further scaling and improved profitability. The compounding achieved by other US distributors like Watsco, Poolcorp, Fastenal, and W.W. Grainger, are useful references.

We also think the odds of successful execution are further improved by backing a ‘proprietorial’ management team (F). As majority shareholders, the Wilson family has been at the helm of Reece for the last 50 years. The best ‘family-linked’ companies bring with them an enduring mindset. In Reece’s case many seemingly small decisions – owning rather than leasing property, over-investing in inventory to avoid stock-outs and higher levels of IT spend versus peers, collectively explain why Reece takes most of the industry’s profits in Australia.

But even the best management teams can still struggle if operating trends (O) are unfavourable. The elephant in the room for Reece is Australia’s housing cycle – will this soon end? One thing the pandemic demonstrated is plumbing is essential and Reece remains focused on the more resilient segments (maintenance, heating & cooling, civils). However, the positive trends in the US are arguably now more important. Despite the pandemic, new housing demand in the US is strong, underpinned by ultra-low mortgage rates and an underbuild of new houses since 2006.

When the three VoF factors come together, reinforce and support each other, we get excited!

This information has been prepared and provided by Cooper Investors. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.