Over the last five years, the FTSE 100 is up 14%, compared to a 92% gain for the S&P 500. Even accounting for dividends, the UK index has underperformed its US counterpart.
Investors could be forgiven for thinking that the FTSE 100 isn’t a good place to look for stocks to buy. But I think that would be a mistake.
A brilliant business
One that stands out to me is Bunzl (LSE:BNZL). At a price-to-earnings (P/E) ratio of 22, the stock isn’t obviously cheap, but I think it compares favourably with some of the best from the US.
Take Google’s parent company Alphabet (NASDAQ:GOOG) as an example. The business generates $79bn in operating income using $127bn in fixed assets.
That’s a 62% return, which is a great result. Who wouldn’t want a business that earns $79bn per year with only a $127bn outlay for property, plant, and equipment?
Bunzl, though, earns an even better return. The company has £669m in fixed assets and generates £790m in operating income – a return of 118%.
In other words, Bunzl’s operating income is enough to replace all of its property, plant, and equipment every year and still have cash left over. I think that’s an incredibly good business.
Resiliency
Earning huge returns is a great thing. But it’s important that the business has the ability to fend off competitors to allow itself to earn that money for a long period of time.
Alphabet’s advantage comes from the amount of data it has on its users based on their search history. This gives the company the upper hand when it comes to targeted advertising.
Bunzl also stands apart from its competitors. The company is a collection of distribution businesses focused on consumables, such as dispoable cutlery, surgical masks, and carrier bags.
The firm’s big advantage is its size and scale. With a wide distribution network, Bunzl is typically able to provide a faster, cheaper, and more reliable distribution service than its competitors.
It’s worth noting that this advantage increases as the company gets bigger. Bunzl’s impressive business therefore becomes more difficult to disrupt as its network expands.
Growth
Growing through acquisitions can be a risky business. If a company like Bunzl overpays in buying another firm, it can be destructive to shareholder value.
It’s fair to say, though, that Bunzl has done an impressive job on this so far. Over the last decade, it has consistently achieved 7% annual revenue growth.
This is the one area – in my view – where the company falls short of Alphabet, which has been blazing along at 16% per year. But there’s an issue with this that investors should keep in mind.
Alphabet’s size means growing at 16% per year will require a $86bn revenue increase five years from now. Generating that much additional revenue will be challenging for any business.
With Bunzl, a 7% annual gain is much more modest – five years from now, that would be an extra £1.1bn. That won’t be straightforward, but it does appear manageable.
A stock to buy?
Alphabet is one of the best businesses in the world, but I think Bunzl has a lot in common with it. Even at a P/E ratio of 22, I’d be happy to buy shares in the FTSE 100 company for my portfolio.
The post At a P/E ratio of 22, this FTSE 100 stock still looks like a brilliant bargain to me appeared first on The Motley Fool UK.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet and Bunzl Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
