What does a good company look like from an investor’s point of view? Well, it would have a large market to go after and, most importantly, a competitive advantage in doing so. And the longer it can maintain that competitive advantage (think Microsoft with Windows), the more profits it will make over time. Investors pay up for companies with these qualities.
They will also pay up for management that understands how to create shareholder value and for high standards of corporate governance, in particular of disclosure and transparency. Which brings me neatly on to Johnson Matthey, which reported its results at the end of last week. JM recorded exceptionally good growth across all of its markets, but look also at the way it tells its story and sets it out on the first two pages with complete clarity. Exactly as we teach it, actually – a box containing the key numbers, five bullets each on financial and operational highlights and a good quote from the CEO, part of which comments on the past year and part of which guides to the future. Faultless. And it scores well on one other key issue. Don’t just talk about Earnings per Share (up 29% at JM) – that doesn’t tell you anything about the amount of capital that’s being invested to grow. Talk also about Return on Capital Invested (or Employed), as JM also does so well (ROCI up from 19% to 22%). The only problem for JM might be the expectations treadmill, but the shares are up 17% over the past year compared to a fall in the FTSE of 5%. Investors are more than happy to pay up for a good story well told.