Billionaire investor Warren Buffett manages an investment portfolio worth hundreds of billions of dollars.
It’s hard for him to move the dial by investing in smallish companies. So, he often looks for vast businesses with huge market capitalisations.
Many smaller opportunities pass under his radar. And that’s despite lots of them having the qualities he tends to look for in an investment.
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The FTSE 250’s Rotork (LSE: ROR) could be one of them. With the share price near 309p, the market capitalisation is about £2.67bn – pocket change for an investor like Buffett.
Quality shines through
However, the stock could be a good candidate for a Buffett-style portfolio even if the Oracle of Omaha himself isn’t all over it.
For example, it scores well against traditional quality indicators. The operating margin is running near 20%. And the return on capital is close to 24%.
The business operates in a niche market as a market-leading global provider of mission-critical intelligent flow control and instrumentation solutions.
Sectors served by the firm include oil, gas, water, wastewater, power, chemical process, and industrial applications.
The company’s customers rely on Rotork for high quality and dependable solutions for managing the flow of liquids, gases and powders. And the products offered help customers around the world to improve efficiency, reduce emissions, minimise environmental impacts and assure safety.
In other words, the business operates well up the chain of added value. Its products have a high technical content and strict specifications. And that adds a layer of defence for its market share. It would likely be hard for any other metal-basher business to compete with Rotork.
The situation could add up to being the kind of economic moat that Buffett looks for with his investee businesses.
Good recent trading
Meanwhile, a trading update today (22 November) covers the four-month period to 29 October.
The directors said the performance of the business was in line with expectations. And order intake “showed improvement” compared to the situation a year earlier. For the full 10 months since the start of the year, orders were up by 10%.
There’s been some improvement in the supply chain challenges that held back deliveries earlier in the year. And looking ahead, the directors expect “strong growth” in revenue for the full year with an improvement in adjusted profit margins.
City analysts have pencilled in an earnings uptick of almost 13% for 2023 and nearly 10% for the following year.
Set against those expectations, the forward-looking earnings multiple for next year is running at just over 19. And the anticipated dividend yield is a little under 2.5%.
But that valuation looks quite full and could be considered a mark of quality. However, one of the risks here is that there’s bound to be an element of cyclicality in the business. And that could lead to contracting earnings at times.
I’d seek a margin of safety like Buffett does and research the stock now before considering it for possible purchase on dips, down-days and temporary setbacks.
