Follow the lead set by CRH with bolt-on acquisitions is the message from a detailed new report on the European building materials industry by stock brokers ABN-Amro. In a report which goes near to eulogising CRH's management, the ABN report describes the Irish group as the "role model" for the sector and uses CRH as a barometer for the rest of the sector.
According to ABN analysts, the building materials sector has been consistently ????derated after the boom-to-slump period of the late 1980s and early 1990s, reflecting a view among investors that the sector is low quality and has little control over its own profits profile.
But this and other misconceptions means that the ability of the vast majority of companies in the sector to generate cash and invest this cash at good returns has been largely ignored. The 130-page review concludes that bolt-on acquisitions (a CRH speciality) are the best way to expand, both in terms of improved profitability and cashflow.
"In terms of both sources of, and return on, investment, CRH stands out as the best player, justifying the outperformance to date and the usefulness of acquisition analysis. We believe that CRH can maintain this performance and is therefore a core buy," says the ABN report.
Since 1994, CRH has outperformed the British building materials sector by 276 per cent and the European sector by 300 per cent, with CRH's operating returns rising over the period from less than 8 per cent to just short of 10 per cent. And ABN estimates that in that period, CRH has generated a 13 per cent return of the €2.7 billion it has spent on acquisitions.
"CRH has been a growth stock over this period because it has invested and produced a good return on those investments that have created value. Bolt-on acquisitions are at the heart of this investment and this in turn is at the heart of CRH's premium valuation," drools ABN.
Building materials is an industry dogged by cyclical highs and lows and in this sort of environment, the ability to grow through investment is key. But not growth for growth's sake - the key to successful acquisition-led growth is based on improving both returns and cashflow.
ABN warns, however, that given the current shift between old and new economy stocks, companies in CRH's sector will have to use their resources to grow rather than depend on the cycle for growth - otherwise they will face an inevitable derating.
