Invest With Your Conscience
Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Foolish investing is all about buying companies, not stocks.
In the era of day trading, market "heat mapping," 24/7 financial news coverage, and penny stock pushing it's difficult at times to remember that buying a stock means taking ownership in a slice of a company. Keeping that in mind I like to look for companies that I would be proud to own; companies that are committed to social responsibility, sustainability, and a mission beyond making money.
Now don't get me wrong, I like profiting from my investments, so the companies need to pass the test of solid investment opportunities as well. In this article I will dig into three such companies.
The Female Health Company (NASDAQ: FHCO)
The Female Health Company has developed the first and only female condom to be approved by the FDA. This product is a potential game changer in the fight against HIV/AIDS in both developed and developing countries.
The majority of these condoms are sold to public health organizations, such as USAID, UNAIDS, the WHO, and to other non-governmental organizations. The female condom is now available in 139 countries, although sales are heavily concentrated in only a few. In the 6 months ending in March 2013, 25% of sales came from South Africa and another 11% from Brazil. It is estimated the global male condom market is valued at $3 billion.
For comparison, in 2012 Female Health's total sales were $35 million. Since 2005 the company has achieved a compound annual growth in unit sales of 23%. The stock took a hit recently when they announced a dip in sales for the upcoming quarterly report, but this is a long-term story with phenomenal growth prospects. In 2012 the United Kingdom government and the Bill and Melinda Gates Foundation hosted a summit in London. The Female Health Company was one of only 14 companies invited to participate. At the end of the summit a plan to commit $4.6 billion was announced to increase contraceptive access to 120 million women in 69 countries by 2020. It's safe to say FCHO will likely be a major benefactor of this effort.
The company boasts fantastic gross margins of 60% and net margins of 48%. Even more impressive, in 2012 the company boasted a 63% Return on Equity. That should warm the heart of any investor. Sales are typically lumpy because their largest customers buy in large quantities at irregular intervals based on budgeting and demand. For this reason each quarterly earnings report is usually a volatile time for the stock, but I consider that short term background noise. The growth runway is long and currently free of competition for FHCO. Not that this cake needs any icing, but might I add the company has zero debt and currently yields 2.8%.
Xylem (NYSE: XYL)
Xylem's mission statement is "Let's Solve Water."
Water is a finite resource and obviously critical to our existence, and Xylem is committed to finding sustainable solutions to the world's water problem. The company provides equipment and services for water and waste water applications.
It is estimated that by 2025 up to 30% of the world's population will live in areas that lack an adequate water supply. Combine that with the incredible need to improve our aging water infrastructure and the company estimates a market opportunity of $280 billion in equipment and services. Xylem has only been acting independently since 2011 when it was spun off from a parent company so there's not much of a history to gauge management's effectiveness. The CEO has been with the company since 2005 as President of the Division that eventually became Xylem.
Since 2007, which is as far back as public data on Xylem's financials go, gross margin has improved from 34.5% to 39.6% over five years while growing revenue by 24%. Return on equity has increased from 12.1% in 2010 to 14.3% in 2012. In short, management has my confidence. Sales have been relatively flat year over year, and the company has guided the same for 2013, but again this is a long-term opportunity. One potential issue is the company has pursued a strategy of making acquisitions, and while they have been smart acquisitions I can't help but notice that 35% of total assets are goodwill. If these acquisitions don't work out the company could be facing large impairment charges. On the positive side, the company has been improving gross and operating margins since 2008 and yields 1.6%.
Sealed Air Corp. (NYSE: SEE)
Sealed Air produces food safety products like the plastic wrap that protects meat you buy at the grocery as well as packaging products like bubble wrap.
While the company's product portfolio may not attract investors looking to invest with a conscience spelled it right here, their values and corporate culture certainly will. The company's vision is "to create a better way for life" and it pursues this mission through its "Smart Life" initiative for achieving sustainability.
In 2012 Forbes ranked Sealed Air in the top 10 of "World's Most Admired Companies" and it was #2 in its industry in Newsweek's 2012 Green Rankings. Obviously it's an admirable company, but how is the actual business doing?
Back in 2012 things were looking pretty nasty. In the third quarter the company announced a $1.2 billion impairment against its acquisition of Diversey, a producer of cleaning and sanitation products. The total impairment charges for the acquisition totaled $1.8 billion by year end. Since then the stock has rebounded nicely, doubling in value since late 2012. Despite the run, the stock still trades at 0.7x sales. Management estimates Fiscal Year (FY) 2013 earnings to be within $1.10 to $1.20 giving the stock a forward Price/Earnings (P/E) multiple in the low to mid 20's.
That's pricey for a company that is barely growing sales, although the company is undertaking a major cost cutting initiative to "improve the quality of earnings". So in the end even though sales may not be growing at a healthy rate in the short term the net income may still be propped up by cutting expenses. Another major concern for me is the debt picture. The company has $5 billion in debt, over 3.5x the $1.4 billion in shareholder equity. In the first quarter of 2013 the company reported $130 million in operating profit and $91 million in interest expenses. That's a very heavy debt burden. I would want to see the company get a better control over their finances before I considered investing.
Investing with soul
Of the three companies discussed in this article I would add The Female Health Company and Xylem to my watch list. Sealed Air's debt situation and questionable acquisition strategy have scared me away for now.
All three have phenomenal growth opportunities in emerging markets. Whether it's female condoms, improved water systems, or food sanitation and hygiene, the growth is going to come from developing countries. With this opportunity comes great risk, though. I believe it will be a rocky road over the next few years as global markets slowly recover, but I the long term major investments in the infrastructure and quality of life in emerging markets will reward these companies handsomely.
Stephen Benz has no position in any stocks mentioned. The Motley Fool owns shares of Sealed Air.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!