Buy Hold Sell: 5 long-term compounders for the bottom drawer

Okay, first up today we have TechnologyOne. It has delivered 13 consecutive years of record profits, but it is on a PE of around 54 times. Sean, starting with you, is it a buy, hold, or sell?

TechnologyOne (ASX: TNE)

Probably the downside is that a lot of its growth has been coming out of Australia - where it's getting a little bit more fully penetrated, so it's had to look to the UK and is expanding there. That's a bit of a different market. It's harder to get a feel for how they can tailor their offering as they do with local governments to councils in the UK.

Still, as you say, a very steady grower. Not an unreasonable price for a software business.

The company gives really detailed targets out to FY26, both revenue and profit. If you assume the company hits those targets and runs it through, you're still paying 30 times FY26 on those numbers. For us, good company, going well, but it's just too expensive, so sell.

Sean Roger (HOLD): Breville's a hold for us. I'm a coffee fan and I love the Breville products, and they've got a great history of successful new product development. I think over the past few years you've seen them really increase their advertising and product development spending, which puts the company in good stead for revenue growth over the next few years.

Obviously in the short term, though, it's a challenging, demanding environment. You've seen volumes turn negative in that in the latest result.

Whilst they have pulled back on some advertising more recently to try and sustain the earnings growth, we think that that'll be hard to repeat into a second year. Really good company. It is trading on a reasonably full multiple. We just think given that near-term risk that it's a hold.

They've got a good growth pipeline ahead of them. They do a lot of that through acquisition, and they're a big beneficiary obviously through COVID. They earnt a massive amount of money through PCR COVID testing. That's really helped strengthen their balance sheet.

Those earnings are out of the way now, but it's left their balance sheet in a very strong position to continue to grow. There's still a bit of work to come back as surgeries and GP visits recover from COVID lockdowns as well. We see a bit of growth, a very strong balance sheet, reasonable multiple.

I think, again, to Sean's point, the strength of the balance sheet and the windfall profits that they had from those PCR tests, they haven't gone and spent and deployed at times when valuations have elevated. Now they've got the capacity to go and make acquisitions after the valuations have come back to more reasonable levels.

We think the valuation's fair for the quality of the business and they've got a balance sheet ready to go.

Obviously in recent history, and in the short term, there's some pressure on valuations with rising cap rates, but we think the rental growth in the markets that Goodman's located in will offset most of that valuation pressure.

I think the thing that interests us the most is they're probably one of the only large Australian REITS that's gone into this downturn with balance sheet capacity, both on their balance sheet and in their funds.

We think in an environment where you're starting to see some stress in the industry, they're going to be now competing for assets with a lot fewer competitors. We think that there's the potential for them to buy quality assets at reasonable prices and set the business up for the next five to 10 years for them to deliver similar sorts of earnings growth to what they have over the proceeding years. So, Goodman's a buy.

They've been gradually taking share, acquiring companies, pushing in there with those big contracts to the point where you can't really do business without them, and that gives us them enormous pricing power.

They're also moving into new verticals, so they're moving into customs and moving from sea-based freight into land-based freight in the US. They've got a great growth pipeline ahead of them as they continue to penetrate and expand into those new verticals.

With pricing power and the huge margins that you get in software, we think that justifies the big multiple that you're paying for the stock, so definitely one for the bottom drawer.