I keep thinking about the billionaire investor who once interviewed me for a stock-picking job and asked me “what would be the best business you would invest in? and the price/ valuation is not an issue?” Reach out to me and I’ll tell you what my pick was. This was 2006. The investor wasn’t a billionaire (yet).
How much does valuation matter? A huge deal, but what I find interesting are companies that are “optically” expensive.
Take Schindler for example. It’ s trading on next year’s earnings (2026) on a PE of 28x and a price to book of 6.2x. Just those two metrics alone would be a conversation stopper or a block to do more work.
However, digging deeper by doing my “back-of-the envelope” analysis reveals:
Market Cap: CHF 31 billion
Net Cash: CHF 2.7bn (stop press: the fact that ca.10% of the market cap is in cash warrants further work, are you sure this stock is really expensive?)
Enterprise Value: CHF 28 billion
If one assumes that the company can earn CHF 2bn in Free-Cash Flow in 2025 (up from CHF 1.5bn) in 2024, this is only a 7% Free cash flow yield on the EV of 28 billion
The company has a ROIC of north of 60%! As shown by this useful calculation from the 2024 numbers:
2024
ROIC CHFm
Accounts receivable 2'013
Income tax receivable 150
Inventories 1'157
Contract assets 785
Prepaid expenses 103
Property, plant & equipment 861
Right-of-use assets 507
Other intangible assets 352
Goodwill 1'064
Accounts payable -1'392
Income tax payable -184
Contract liabilities -2'555
Accrued expenses -1'079
Invested capital 1'782
EBIT adjusted 1'344
Taxes 262
Profit before taxes 1'272
Tax rate 20.6%
NOPAT 1'067
ROIC 60%
This is exactly the type of business that Warren Buffett would buy!
The characteristics of the business are also very strong:
1) Large installed based, providing:
2) Recurring Revenues (Services account for 60% of sales)
3) Negative Working Capital and low capital intensity as shown by the ROIC!
Schindler is a key buy in Europe and in Switzerland! The chart is breaking-out, investors are realizing the cash flow potential of this business
