Quality Compounders

Oct 05, 2024

It has been awhile since the last post due to a business travel schedule that has taken me around Sweden, Norway, Finland, Switzerland, and Italy. In the mean time, I have been thinking about what makes companies great over the long-term and will cover that in this post along with the companies I consider to be of the highest quality and that I expect to steadily compound over time. It is a long post, so get your coffee ready. Let´s dive in!

Companies that can consistently reinvest their earnings at returns above their weighted-average cost of capital, generate strong free cash flows, and compound their intrinsic value over time, create lasting value for shareholders. These exceptional businesses are rare, as competitive forces often lead to reversion to the mean.

Such compounders typically possess economic moats and pricing power, often built through years of investment in brand equity or technological innovation that creates significant barriers to entry. A proven track record of disciplined capital allocation, a solid balance sheet, and a focus on sustainable, profitable growth are essential traits of these businesses.

“The first rule of compounding: Never interrupt it unnecessarily.”

- Charlie Munger (1924 - 2023)

While technology stocks have been prominent among top-performing quality companies, quality stocks can be found across various sectors, including healthcare, industrial, and consumer sectors. Quality companies with a strong competitive edge may not be immune to macroeconomic headwinds, but I expect them to generate strong free cash flows, maintain high financial productivity, and deliver superior risk-adjusted returns for shareholders over time.

I believe that quality stocks are likely to outperform lower-quality cyclicals in the coming months, given the weak seasonality, late-cycle economic conditions, and political uncertainty ahead of the upcoming US presidential elections. Key metrics I look for include a gross profit margin above 30%, return on invested capital (ROIC) greater than 12%, return on equity (ROE) above 15%, and debt-to-assets ratio below 50%, and lastly the ability to continuously grow top-line sales.

Thermo Fischer

Thermo Fisher is a global, diversified manufacturer and distributor of life science tools and diagnostics. It provides scientific instruments, equipment, related consumables, and services to pharmaceutical labs, academic and government institutions, diagnostic labs, and industrial and environmental labs. The company operates in four segments:

Analytical Instruments
Life Science Solutions
Specialty Diagnostics
Lab Products & Services.

Based in Waltham, Massachusetts, Thermo Fisher is a leader in the life sciences tools (LST) sector, offering a broad range of products and services to medical research markets.

I see Thermo Fisher as uniquely positioned within healthcare, with highly visible and durable long-term growth prospects, which I believe justifies its premium valuation. Over the past decade, the company has successfully transitioned into higher-growth life sciences markets. Its leading portfolio and extensive distribution platform for entities conducting medical research allow it to accelerate the growth of the products and companies it acquires, further driving overall company growth.

The main risks I consider include a potential reduction in global biopharmaceutical research and development spending. However, Thermo Fisher’s industry-leading breadth, scale, and diversified portfolio provide a strong competitive advantage, contributing to its resilience. With a high gross margin exceeding 45%, Thermo Fisher has demonstrated a strong track record of innovation. I expect the company’s leading positions in the rapidly growing life sciences markets, combined with increasing industry spending on medical research and a focus on thoughtful capital allocation, to continue compounding shareholder returns over time.

Colgate-Palmolive

Colgate-Palmolive is a global leader in consumer products, offering oral, personal, home care, and pet nutrition products in over 200 countries and territories. A significant portion of the company’s sales, around one-third, come from Latin America. Key brands include Colgate, Palmolive, Ajax, Softsoap, and Hill’s. I am particularly drawn to Colgate’s presence in sustainable and growing categories such as oral care and pet nutrition. Additionally, I am encouraged by the company’s ability to drive pricing and organic growth, with a recent emphasis on premiumization and innovation, all while end-market demand remains robust. These efforts have positioned the company as a market leader, and I expect this to continue due to its exposure to rising global consumption, particularly in emerging markets.

While I favor this stock, I do recognize the risks associated with foreign exchange (FX), which presents a greater challenge for CL than for other staple companies, and note its underperformance over the past decade. In my view, Colgate-Palmolive is a defensive stock in a challenging macroeconomic environment, with its product categories facing less trade-down risk than competitors. Volume growth in key product segments, greater exposure to high-growth international markets (especially emerging markets, which account for 45% of sales), along with long-term pricing power (supported by a historical five-year average gross margin of 59%) and a track record of financial productivity (historical average ROIC of around 28%), should continue to drive value compounding for Colgate-Palmolive.

UnitedHealth Group

UnitedHealth Group, based in Minneapolis, MN, is the largest managed-care organization in the U.S., offering a wide range of insurance products and health services. The company is the leading provider of commercial and government healthcare insurance plans, including Medicare and Medicaid, and also offers pharmacy benefit management, healthcare IT, and consulting services.

In the near term, I expect UnitedHealth to benefit from solid execution, higher pricing, and the potential for moderating medical cost trends, which could accelerate the company’s earnings growth. Over the medium term, I believe UnitedHealth will see significant growth in its OptumHealth business, which expands its share of overall U.S. healthcare spending by enabling value-based care.

Key risks I consider include rising medical costs, potential slowing and volatility in OptumHealth, especially in its value-based care assets, and the possibility of increased government regulation. UnitedHealth’s dominant market position in U.S. health insurance, achieved through organic growth and strategic acquisitions, provides the company with a significant scale, resource, and network advantage that creates a strong barrier to entry.

I expect medical cost trends to normalize and government rate pressure to stabilize over the next year, offering an opportunity for modest margin expansion and continued earnings growth at a low- to mid-teens rate.

Moncler

Moncler is a luxury outerwear brand established in 1952, with approximately 75% of its revenue coming from outerwear sales. Geographically, as of fiscal year 2022, Europe accounts for 42% of sales, Asia and the rest of the world 43%, and the Americas 16%. It is one of the few luxury companies still expanding its store distribution network. Acquired in 2003 by Remo Ruffini, who serves as CEO and chairman, Moncler is a well-established brand with clear growth potential.

I see Moncler as a resilient brand, thanks to its disciplined approach to distribution and pricing. A key driver of its growth is its store rollout strategy, which expands its presence and increases market penetration. Moncler dominates the premium down jacket market, with a track record of superior performance for over a decade. I expect the brand’s sales to continue growing, supported by strong management strategy and execution.

Looking forward, I anticipate Moncler delivering high-single-digit to low-double-digit sales growth in the medium term, with potential margin improvements. The acquisition of Stone Island should also contribute to growth over time. While valuations (P/E) are currently above the long-term average, I believe this is justified by the company’s robust sales growth.

Key risks I consider include external factors affecting consumer behavior, such as terrorism and epidemics, significant political changes, pricing pressures, brand value challenges, management execution, and leadership succession issues, as well as market perceptions of long-term growth, foreign exchange fluctuations, and trade wars or tariffs.

I expect Moncler’s differentiated brand positioning, which combines luxury and outerwear, along with its focus on high sales density in the down jacket category, selective product diversification, and prudent retail expansion, to continue driving pricing power and sustainable profitability. I also value the significant management ownership in the company. Moncler has achieved a five-year average gross margin of 76% and a return on invested capital (ROIC) of 16.5%.

NVIDIA

NVIDIA designs and manufactures graphics processing units (GPUs), add-in boards, and related low-level software. Its GPU segment includes GeForce for high-end gaming and professional graphics workstations, Quadro for designers, DGX and Tesla accelerator cards for data centers and AI scientists, and GRID for cloud-based visual computing users. The Tegra Processors segment provides processors that power embedded computer vision applications in automotive video surveillance markets, while also delivering multimedia experiences on mobile gaming platforms with minimal power consumption.

I am particularly drawn to NVIDIA because of its strong long-term growth opportunities in AI, gaming, and data centers. I believe the company’s competitive positioning remains far ahead of its rivals from a software, systems, and ecosystem perspective. I expect hyperscale customer spending to stay robust over the next few years, driving steady demand for NVIDIA’s GPUs and accelerators. Additionally, I see NVIDIA well-positioned to extend its leadership beyond the AI training market into AI inference, while competitors struggle to catch up.

In the longer term, I anticipate more diversified opportunities in edge markets like autonomous vehicles, robotics, and smart cities, and even frontier markets like synthetic biology. However, key risks I’m mindful of include the potential for increased competition from emerging companies and the risk of excess inventories. NVIDIA’s economic moat and market dominance are reinforced by its leading GPU architectures and technologies, along with its growing ecosystem of system developers, content creators, and software vendors.

With a gross margin consistently above 55% over the last decade, NVIDIA’s pricing power remains strong. I expect its data center business to be the main growth driver in the coming years. Risks to my outlook include supply chain disruptions, export restrictions, and increased competition.

Alphabet

Alphabet the holding company consisting of its Google Services segment (which primarily includes advertising through search, YouTube ads, and the Google Network, along with subscription services, Google Play, and hardware) and Google Cloud, as well as Other Bets (focusing on healthcare and internet services). Advertising makes up approximately 78% of its revenue, while Cloud accounts for 11%. Founded in 1998, Alphabet employs over 182,000 people and is headquartered in Mountain View, CA. I believe Google remains the leading franchise in internet search and advertising. I anticipate longer-term growth to stay in the double digits, driven by higher monetization, YouTube, and continued share gains in cloud computing, along with ongoing cost discipline.

Additionally, I see potential in Alphabet’s exploration of areas such as healthcare and artificial intelligence, particularly Generative AI. Alphabet’s 3Q23 results were mixed, with solid top-line growth but weaker-than-expected margins. I think cost discipline needs to progress more rapidly, and it should soon become evident that Google can achieve mid-single-digit operating expense growth and improve its margins. The valuation multiple looks attractive, but it might be somewhat capped until there is more clarity on GenAI’s cost and revenue implications.

Economic slowdown, regulatory challenges, competition, and operating expense management are among the key risks that needs to be observed. I expect Alphabet to continue benefiting from its dominance in search and its efforts to enhance search monetization. Despite recent investor concerns, the company has demonstrated its ability to compete and grow successfully in mobile. I also believe YouTube (which I still believe is early) monetization will continue to advance, while GenAI represents a significant growth opportunity in the future.

Apple

Apple is the renowned maker of the iPhone, iPad, Mac PCs, wearables, and various other products and services within the iOS and Mac OS ecosystem. The company dominates the smartphone industry, capturing roughly 80% of industry profits despite representing only about 20% of units sold. The iPhone, an iconic product, accounts for approximately 50% of Apple’s revenue and likely an even higher percentage of its operating profit. Services contribute around 20%, while other hardware makes up the remaining 30%. Founded in 1977, Apple is headquartered in Cupertino, California, and employs about 161,000 people globally.

I see a favorable risk-reward scenario for Apple, driven by several factors:

The most sticky product and ecosystem ever conceived, the power in this is just a phenomenal value driver
Steady growth in its core iPhone units, as stable replacement cycles should reduce volatility in unit growth
Strong growth in services, fueled by increased user spending, alongside global demand for wearables like AirPods, which has the potential to become a new platform of its own including a developer
Improving margins due to a more favorable service mix and Apple’s pricing power
Robust cash distribution, with the expectation that Apple will return most of its net cash to shareholders over time through dividends and share buybacks.

The key risk I’m aware of is potential supply chain disruptions and exposure to China. However, Apple remains a reliable compounder with a return on invested capital (ROIC) rising from the low-mid 20% range to the high-40% range and gross margins consistently above 38% over the last five years. With steady growth in iPhone units, services, and wearables, I believe Apple offers an attractive risk-reward opportunity, supported by its strong cash distribution strategy.

ASML

ASML is the leading supplier of lithography equipment essential for semiconductor manufacturing. Established in 1984 as a spin-off from Philips and ASMI, ASML has steadily gained market share and now dominates the lithography equipment market, particularly at the cutting edge, where few competitors can keep up. The company’s products play a critical role in the ongoing advancements in semiconductor technology, supplying major manufacturers like Samsung, TSMC, Intel, and Hynix. ASML’s primary competition comes from Nikon and Canon, but its leadership in lithography has been central to driving transistor miniaturization. The company is sometimes referred to as the most important company in the world given its near monopoly and its role in keeping Moore´s Law going.

I believe capital expenditure on lithography will continue to rise in the coming years, positioning ASML to outgrow the semiconductor industry as a whole. I see ASML offering a compelling valuation for such a defensively positioned business. Thanks to significant industry barriers, a leadership position, and excellent execution, ASML benefits from strong pricing power, which should translate into margin growth.

ASML’s core advantage lies in its technological differentiation, which has resulted in a near-monopoly in its field. However, what’s often overlooked is ASML’s strength as a systems integrator, with strong supply chain partnerships that add to its defensiveness. Many of its key suppliers are monopoly businesses themselves or have exclusive agreements with ASML, making disruption extremely challenging.

The key risks I see include a potential structural decline in lithography spending or major execution issues among ASML’s largest customers, which could delay capital spending plans. Another growing risk is that alternative technologies, such as advanced packaging, might begin to challenge lithography as the main driver of Moore’s Law, which could impact ASML’s pricing power. Nevertheless, I believe ASML is well-positioned to benefit from the extreme ultraviolet lithography cycle in the long term, given its dominant role in the sector.

Coca-Cola

The Coca-Cola Company manufactures, markets, and distributes non-alcoholic beverages globally in over 200 countries through a network of company-controlled and independent bottling and distribution partners. While Coca-Cola primarily produces soft drink concentrates and syrups for carbonated beverages, it selectively produces finished products as well. Its portfolio includes a variety of products such as juices, ready-to-drink teas and coffees, and sports drinks. Notable brands include Coca-Cola, Diet Coke, Coca-Cola Zero, Fanta, Sprite, Georgia, Powerade, Minute Maid, and Simply.

I appreciate Coca-Cola’s clear strategy to become a total beverage company while maintaining disciplined portfolio growth. I expect the company to continue reinvesting in the business to sustain its top-line growth strategy. What stands out to me is Coca-Cola’s strong international revenue exposure, with more than 60% of sales coming from outside the U.S., as well as its capital-light model, where it primarily sells concentrate to bottlers rather than handling bottling in-house, and note that over time capital light business outperform capital intensive companies when it comes to shareholder returns. Additionally, the low penetration of private-label brands in its categories is encouraging.

I find Coca-Cola attractively valued and consider it a strong choice. However, I am mindful of potential risks, such as unfavorable foreign exchange fluctuations given its global presence and its ongoing tax dispute with the IRS. I view Coca-Cola as a defensive stock in a challenging macroeconomic environment due to its sustainable pricing power (with a historical gross margin of around 60%), supported by significant marketing reinvestment and strong brand equity. The low demand elasticity and limited trade-down risk, thanks to low private-label penetration, further enhance its defensive appeal.

Coca-Cola’s volume growth, which outpaces its peers, reflects strong execution and market share gains, particularly in international markets (which account for 64% of sales) where organic sales growth remains robust compared to North America. Sustained organic sales growth and a proven track record of financial productivity (with a historical ROIC of over 12%) should continue to support value compounding for Coca-Cola.

Edwards Lifesciences

Edwards Lifesciences Corporation is the global leader in patient-centered medical innovations for structural heart disease and critical care monitoring. The company operates through four business segments: Transcatheter Aortic Valve Replacement (TAVR), which accounts for 65% of sales, Surgical Structural Heart (17%), Critical Care (16%), and Transcatheter Mitral and Tricuspid Therapies (TMTT), contributing 2%. Headquartered in Irvine, CA, Edwards Lifesciences is the established leader in TAVR and is in the early stages of creating a similar market for mitral and tricuspid valves. With its dominant position in TAVR and the recent approval of the first U.S. replacement tricuspid valve, I believe Edwards is well-positioned to capitalize on this emerging market.

In my view, the market may be underestimating the potential scale of the opportunity, given the historical challenges with mitral and tricuspid valve development, despite these conditions affecting more patients than the TAVR market. I believe stable high-single-digit to low-double-digit growth is achievable as Edwards expands its addressable market through new indications and products. The stock’s premium price-to-earnings ratio compared to peers reflects its durable growth prospects.

Key risks I’m mindful of include potential failures in pipeline products, new competition, legal threats such as product liability cases, challenges related to access, reimbursement, and pricing, as well as political, regulatory, foreign exchange, and interest rate risks. Acceptance of Edwards’ new products and the potential for competition to challenge both these and its legacy TAVR valves represent risks to medium-term earnings forecasts.

However, with a strong portfolio and pipeline across TAVR and TMTT, I believe Edwards is well-positioned to benefit from the recovery of elective procedures and the start of a new product cycle in TMTT, supported by clinical data presentations and FDA approvals. Its solid track record in delivering margins and return on invested capital underscores its leadership in cardiovascular medical technology and strong research and development outcomes.

Eli Lilly

Eli Lilly and Co. discovers, develops, manufactures, and sells pharmaceutical products for both humans and animals. It operates manufacturing and distribution facilities in the U.S., Puerto Rico, and 15 other countries. Notably, Eli Lilly is a major leader in the growing GLP-1 market, with Mounjaro and Trulicity among its key offerings. The company’s pharmaceutical products are categorized into five areas: Diabetes & Metabolic (58% of 2023 sales), Immunology (11%), Neuroscience (9%), and Oncology (20%). Eli Lilly is headquartered in Indianapolis, IN.

I see Eli Lilly as a leading biopharma company, with strong positions in diabetes/obesity, oncology, neurology, and immunology. I expect Eli Lilly to achieve robust revenue and earnings growth over the medium term, driven by the strength of its current products, limited near-term exclusivity lapses, and its promising late-stage drug pipeline, which offers opportunities in large therapeutic markets. While Eli Lilly’s premium price-to-earnings (P/E) valuation reflects this strong growth outlook, it may limit further valuation upside.

Eli Lilly benefits from a strong competitive moat, thanks to its diversified and patent-protected product portfolio, which has contributed to a five-year historical average gross margin of over 77% and a return on invested capital (ROIC) of 23%. Looking ahead, I see significant upside potential for Eli Lilly’s key diabetes and obesity drugs, Mounjaro and Zepbound (tirzepatide), as well as its novel pipeline in these areas. Positive health outcome data for Zepbound and improvements in manufacturing capacity are near-term catalysts for growth.

Key risks I am aware of include potential adverse events related to Mounjaro or Zepbound that could affect their adoption, along with regulatory and legal risks, such as product approval challenges and liability lawsuits

KLA Corporation

KLA-Tencor Corporation, based in Milpitas, CA, designs and develops process control and yield management solutions for the semiconductor and related nano-electronics industries. Its major products include wafer inspection (45-50% of sales), patterning equipment (25-30%), and associated services and support (20-25%). The company’s end customers are primarily foundries (45-55% of sales), memory manufacturers (30-50%), and logic and others (~10%). With around half of the market share, KLA is the global leader in the semiconductor process control equipment industry, a highly specialized segment where it maintains a strong technological edge, backed by an extensive IP portfolio.

I believe KLA is well-positioned to benefit from the structural rise in semiconductor wafer fab equipment spending, driven by increasing capital intensity amid technical challenges related to Moore’s Law. The company’s acquisition of Orbotech provides diversification and growth opportunities, particularly in specialty semiconductor processing, as well as in the display, component, and PCB inspection businesses. KLA consistently delivers above-industry margins and stable sales growth, supported by its superior product portfolio and continued focus on research and development.

The key risks I’m aware of include potential market share losses to emerging Chinese competitors in the process control equipment industry, as well as potential reductions in industry spending. However, KLA’s commanding position in this highly specialized segment, along with its in-depth IP portfolio, gives it a favorable position to capitalize on the growing demand in the semiconductor wafer fab equipment market. Over the past seven years, KLA has delivered a return on invested capital (ROIC) of more than 20% and a gross margin exceeding 57%.

Microsoft

Founded in 1975, Microsoft is the world’s largest software company, generating over $200 billion in annual revenue in fiscal year 2023. Operating in over 190 countries, Microsoft is a market leader in various software categories, with core solutions spanning cloud computing infrastructure (Azure), productivity applications (Office and Office 365), operating systems (Windows), business applications (Dynamics), internet services (LinkedIn, Bing), database software (SQL Server), gaming (Xbox), devices (Surface), and other enterprise and consumer technology markets.

Microsoft has successfully navigated its transition to a cloud- and subscription-based model, outperforming many of its peers. I believe the company is well-positioned to gain market share as cloud adoption continues to accelerate, which will allow it to capture a larger share of IT budgets while expanding margins. It has an established customer relationship that no other company can match; Microsoft 365 is used by over a million companies worldwide, with over one million customers in the United States alone using the office suite software. While I consider the valuation fair relative to its growth prospects, peers, and historical performance, I find Microsoft shares to offer an attractive combination of growth and defensive characteristics.

Key risks I consider include fluctuations in PC demand, the company’s ability to sustain margin expansion, tough year-over-year comparisons, and the potential for large M&A activity. Microsoft has established a strong leadership position in AI, integrating these capabilities across its diversified product portfolio. As a leading enterprise digital subscription platform, Microsoft offers a compelling mix of growth through its cloud business, paired with defensive qualities like recurring revenue, high cash flow, and anticipated capital returns.

Looking ahead, I expect Microsoft’s growth to accelerate over the next few years as both a disruptor and enabler in the tech space, making its valuation still attractive compared to large-cap peers on a free cash flow basis. Microsoft has delivered a gross margin of over 66% and a return on invested capital (ROIC) of more than 21% in the past five years.

Novo Nordisk

Novo Nordisk is a Danish pharmaceutical company specializing in diabetes and obesity treatments, which make up 93% of its 2023 sales, with a focus on insulins and proteins like GLP-1 analogues. Other key therapeutic areas include haemophilia and growth disorders. Novo’s sales are primarily concentrated in the US (55% of 2023 sales), EMEA (22%), and China (7%).

In December 2017, the FDA approved Ozempic, a once-weekly GLP-1 analogue for treating type 2 diabetes, sparking a new phase of growth for the company. Wegovy, another once-weekly GLP-1 injectable approved in June 2021 for obesity and weight loss, has further accelerated Novo’s growth. I see Novo Nordisk as the current leader in injectable GLP-1 treatments for diabetes and obesity, with the best growth outlook among major European pharmaceutical companies.

I expect near-term growth to be driven by Wegovy (Semaglutide for obesity), which has faced supply constraints due to strong consumer demand, but supply is expected to improve in 2024-25. Mid-term earnings should benefit from next-generation obesity treatments like Cagrisema, a combination of Semaglutide with an amylin receptor, which Novo believes can offer greater weight loss than current therapies. While competition in the obesity space will likely intensify, I believe Novo’s expertise in peptide development and its manufacturing scale provide a strong competitive moat.

Key risks I consider include the potential failure of pipeline products, new competition (including generics), legal challenges such as product liability cases, access and pricing difficulties, and shifting political and regulatory environments. Given Novo’s heavy reliance on GLP-1 drugs for growth, any slowdown in prescriptions, significant price cuts, or extended supply challenges could pose a risk to earnings. Additionally, adverse clinical data for follow-on obesity treatments like Cagrisema is another risk.

I expect the GLP-1 “diabesity” theme to continue driving earnings momentum while Novo Nordisk strengthens its competitive position through R&D and supply chain improvements. The company has consistently reported a gross margin of over 78% and a return on invested capital (ROIC) exceeding 54% over the past seven years.

TSMC

Taiwan Semiconductor Manufacturing (TSMC) is the world’s leading dedicated foundry service provider, with an annual capacity of about 36 million 8-inch equivalent wafers as of the end of 2023. It operates four 12-inch wafer fabs, four 8-inch wafer fabs, and one 6-inch wafer fab in Taiwan. Additionally, TSMC manages two 8-inch fabs and one 12-inch fab overseas through its subsidiaries WaferTech in the US and TSMC China and TSMC Nanjing in China.

I believe TSMC is well-positioned to outgrow the semiconductor foundry industry due to:

TSMC holds a significant lead over its peers in technology readiness, and its move to advanced nodes like 2nm and 3nm should accelerate market share gains even during industry slowdowns
Increasing contributions from new segments like high-performance computing (HPC) and the Internet of Things (IoT).

However, I remain aware of key risks, such as lower-than-expected outsourcing from key clients as they develop more in-house capacity, a weak macroeconomic environment impacting end-demand markets, and tighter-than-expected competition. Despite these risks, I favor TSMC due to its world-leading dominance in the semiconductor foundry industry. The company is well-positioned to capitalize on the secular rise in IoT and artificial intelligence (AI).

TSMC’s continued growth in HPC, its strong gross margin expansion, and its leadership in AI chip production reaffirm its technological superiority over core competitors. I see TSMC’s main opportunities stemming from its strong performance in products and services, as well as its governance.

Visa

Visa Inc. (Visa), incorporated in May 2007, is a global payment technology company that connects consumers, businesses, banks, and governments across more than 200 countries and territories, enabling them to use digital currency instead of cash and checks. While Visa’s core business focuses on consumer-to-business (C2B) payments, the company also has exposure to business-to-business (B2B) transactions and other non-personal consumption expenditure (PCE) payment flows, alongside its fast-growing value-added services segment.

I believe Visa is well-positioned to capitalize on the secular shift from cash and checks to plastic and digital payments. I expect Visa’s volume growth to benefit from expanding merchant adoption, increased mobile usage, and greater prepaid and commercial activity. The expanding addressable market supports Visa’s long-term volume and earnings per share (EPS) growth. Despite the near-term negative effects of the pandemic on global payment volumes, I anticipate Visa will generate double-digit growth, stable yields, and high-teens EPS growth in 2024 and beyond.

However, I remain mindful of risks, including the potential for a prolonged pandemic-related slowdown in global economic growth and cross-border payments. Visa’s scale and entrenched position in the global payments system give it a significant competitive advantage to capitalize on the ongoing shift from checks and cash to digital and plastic payments. With global payments penetration currently around 40%, I expect this to rise in the coming years, likely approaching the U.S. penetration rate of over 50%, providing Visa with a strong foundation for continued growth.

Looking ahead, I expect Visa’s volume growth to benefit from expanding merchant adoption, growing mobile usage, and increased prepaid and commercial activity. Visa has consistently delivered a return on invested capital (ROIC) of more than 18% and a return on equity (ROE) of over 36% in the last five years, reflecting its strong capital productivity.

Two companies, that I also watch but didn’t include above are Tokyo Elektron and Investor AB. Worth looking into, but that is for another time. I also didn’t include Amazon here as I cover the company in more details from time to time on the blog.

That is it for now, as always thanks for reading along, much appreciated.

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