Ensemble Capital Quarterly Call Transcript

6 January 2017 | by Sean Stannard-Stockton, CFA®

Yesterday we hosted our quarterly conference call. On the call, we discussed the implications of the U.S. presidential election and our investments in Paychex and DistributionNow. You can read the full transcript here.

Some excerpts:

  • On the election: “Suddenly, it seems quite obvious that the election of Donald Trump will result in lower corporate tax rates, less regulation, lower income taxes, government spending on infrastructure and a wide range of other pro-business policies. Yet if this outcome is indeed obvious, why then did market participants so broadly accept the idea that Trump’s election would lead to a market crash?”
  • On Paychex: “Over the last decade, the company has generated net income of over $6.2 billion while the company has reinvested nothing into working capital and just $100 million into fixed assets. With free cash flow in excess of net income in every year of the past decade, the company has been able to maintain a dividend payout ratio of over 80% even while opportunistically buying back stock, executing on the occasional acquisition, and yet have not had to take on any debt.”
  • On DistributionNow: “While their end market is highly cyclical, their cash flow is counter cyclical with them burning off inventory during down turns and investing to build their inventory when demand is strong. This internal counter-cyclicality was on display during the past two years when free cash flow was an amazing $2.95 a share in 2015 even while EPS fell to a loss of $0.62 a share as revenue collapsed by 27%… If you own DistibutionNOW, the cash generation dynamics provides significant protection against a financial crisis at the company when demand for their products goes through the occasional crash that characterizes the oil patch.”

Ensemble Capital’s clients own shares of Paychex (PAYX) and DistributionNow (DNOW).

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