When a company’s management decides to grow organically or through acquisition; they need to consider their strategy carefully. Organic growth increases the turnover of a company’s existing business or brings about profits that are generated within the company. Organic growth represents the true growth for the core of the company. It is a good indicator of how well management has used its internal resources to expand profits. Organic growth also identifies whether managers have used their skills to improve the business.
Compare this strategy to a company that grows by acquiring other companies. Naspers went on the acquisition trial last year, but due to limited opportunities this year, decided to grow organically. Naspers management believes that internet valuations have become inflated and good value is difficult to find. Growth by acquisition, however, still has more advantages and is often regarded as a quicker and cheaper option with less risk attached to it.
Reunert manages a number of businesses focused on electrical engineering, office systems and services and defence electronics. Reunert is on the acquisition trail again, to lift revenue, which seems to have stagnated. The company wants to bring an IT business into the fold as a way of completing the transformation of its communications unit. The share seems inexpensive trading on a historical PE of 11.1 times and at 2.3 times its NAV. Accordingly we recommend investors to buy the share. The share is underpinned by a historic dividend yield of 5%. The share price is trading below its 200-day moving average and just above its 10&30-day moving averages. The trend is moving sideways with a bearish bias. Wait for the price to pullback and confirm a change in trend before buying in.
Naspers is a multinational media group with its principal operations in internet platforms, pay-television and the provision of related technologies and print media. Based on the current market price we estimate that the group’s operations excluding its investment in Tencent (listed on the Hang Seng) and Mail.ru (listed on the London Stock Exchange) is trading on a historical PE of approximately 3.5 times. These two investments currently comprise 93% of the group’s market cap and remain the key drivers of future growth. We feel the share is fairly valued and recommend investors to hold their shares. Nasper’s share price is trading above its moving averages and the trend remains bullish, although sideways in the medium term. Wait for the either the price to retest the support level at R351, or for a breakout above the resistance level at R406, before buying in.
For an investor, fast growth looks good, but companies can get into trouble when they grow too fast because they cannot maintain those growth rates and their share prices suffer. When evaluating companies with aggressive growth policies, investors need to determine carefully whether these policies have higher drawbacks than benefits.