Finding really good businesses that grow their operations (and share prices) consistently over time is actually very difficult. Whether it’s the current state of the business cycle, interest rates, capital spending, or the weather, a business that can consistently grow through all the risks is golden.
One such company that I’ve looked at before in these pages is AAON, Inc. (AAON), a seemingly boring heating, ventilation, and air conditioning (HVAC) enterprise out of Tulsa, Oklahoma.
The company just announced record first-quarter sales and earnings—again. This isn’t a highflying technology business; it makes heating and cooling equipment, and the stock continues to be an excellent wealth creator for stockholders. (See “Why This Company Should Be a Case Study in Business Schools.”)
If you scan the equity universe for consistent stock market performers, the list gets small very quickly as your time horizon lengthens. I think stability of performance, both in terms of operational growth and share price performance, is one of the most important attributes in an equity market investment. It’s very difficult to find both. Traders might thrive on volatility, but I suspect most long-term investors do not.
AAON’s 2014 first-quarter sales grew 14% to $76.4 million, up from $66.8 million. According to management, the comparable quarterly gain was due to growth in market share, overall volume, and pricing.
Net income came to $9.8 million, representing a comparable gain of 38% (with the aid of differing tax rates). Earnings per share grew 37% to $0.26 from $0.19, helped by a reduction in the cost of raw materials. The stock split three-for-two on July 2, 2013.
As a stock market investment, this company has proven to be a consistent wealth creator. Now, this doesn’t mean that the trend will continue, but a solid track record of wealth creation is just one more feature encompassing the overall story.
I attribute considerable weight to what a business has accomplished in the past. Good businesses have a tendency to remain that way. The company’s 15-year stock chart is featured below:
Because the equity market is a system of relative values susceptible to pricing manias, the appropriate value for a company like AAON is the price another corporation would pay to acquire it.
With a market capitalization now at more than a billion dollars, this is a potential outcome. Insider ownership is substantial, however, which in itself is a positive attribute for passive investors.
The company’s strengthening balance sheet recently led management to boost its semi-annual cash dividend by 30% to $0.13 per share to shareholders of record on June 12.
AAON is one of a few companies that files its form 10-Q commensurate with its financial press releases. This timely disclosure is useful, and you learn a great deal more about the company and its business conditions at the earliest time.
Compared to the first quarter of 2013, the company’s metal prices fell materially. Copper was down 4.3% and galvanized steel prices fell 4.2%, while stainless steel dropped 12.3% and aluminum fell 6.2%.
Last month, AAON donated air handling units as well as cash to the Tulsa Library Trust for a combined total value of $1.0 million.
By all accounts, this is a very successful company with a strong track record of operational growth and stock market success. These days, consistent metrics like these are tough to come by.