Foolish investing is all about buying companies, not stocks.
In the era of day trading, market “heat mapping,” 24/7 financial news coverage, and penny stock pushing it’s difficult at times to remember that buying a stock means taking ownership in a slice of a company. Keeping that in mind I like to look for companies that I would be proud to own; companies that are committed to social responsibility, sustainability, and a mission beyond making money.
Now don’t get me wrong, I like profiting from my investments, so the companies need to pass the test of solid investment opportunities as well. In this article I will dig into three such companies.
The Female Health Company (NASDAQ:FHCO)
The Female Health Company (NASDAQ:FHCO) has developed the first and only female condom to be approved by the FDA. This product is a potential game changer in the fight against HIV/AIDS in both developed and developing countries.
The majority of these condoms are sold to public health organizations, such as USAID, UNAIDS, the WHO, and to other non-governmental organizations. The female condom is now available in 139 countries, although sales are heavily concentrated in only a few. In the 6 months ending in March 2013, 25% of sales came from South Africa and another 11% from Brazil. It is estimated the global male condom market is valued at $3 billion.
For comparison, in 2012 The Female Health Company (NASDAQ:FHCO)’s total sales were $35 million. Since 2005 the company has achieved a compound annual growth in unit sales of 23%. The stock took a hit recently when they announced a dip in sales for the upcoming quarterly report, but this is a long-term story with phenomenal growth prospects. In 2012 the United Kingdom government and the Bill and Melinda Gates Foundation hosted a summit in London. The Female Health Company (NASDAQ:FHCO) was one of only 14 companies invited to participate. At the end of the summit a plan to commit $4.6 billion was announced to increase contraceptive access to 120 million women in 69 countries by 2020. It’s safe to say The Female Health Company (NASDAQ:FHCO) will likely be a major benefactor of this effort.
The company boasts fantastic gross margins of 60% and net margins of 48%. Even more impressive, in 2012 the company boasted a 63% Return on Equity. That should warm the heart of any investor. Sales are typically lumpy because their largest customers buy in large quantities at irregular intervals based on budgeting and demand. For this reason each quarterly earnings report is usually a volatile time for the stock, but I consider that short term background noise. The growth runway is long and currently free of competition for FHCO. Not that this cake needs any icing, but might I add the company has zero debt and currently yields 2.8%.
Xylem Inc (NYSE:XYL)
Xylem Inc (NYSE:XYL)’s mission statement is “Let’s Solve Water.”
Water is a finite resource and obviously critical to our existence, and Xylem Inc (NYSE:XYL) is committed to finding sustainable solutions to the world’s water problem. The company provides equipment and services for water and waste water applications.
It is estimated that by 2025 up to 30% of the world’s population will live in areas that lack an adequate water supply. Combine that with the incredible need to improve our aging water infrastructure and the company estimates a market opportunity of $280 billion in equipment and services. Xylem Inc (NYSE:XYL) has only been acting independently since 2011 when it was spun off from a parent company so there’s not much of a history to gauge management’s effectiveness. The CEO has been with the company since 2005 as President of the Division that eventually became Xylem.
Since 2007, which is as far back as public data on Xylem Inc (NYSE:XYL)’s financials go, gross margin has improved from 34.5% to 39.6% over five years while growing revenue by 24%. Return on equity has increased from 12.1% in 2010 to 14.3% in 2012. In short, management has my confidence. Sales have been relatively flat year over year, and the company has guided the same for 2013, but again this is a long-term opportunity. One potential issue is the company has pursued a strategy of making acquisitions, and while they have been smart acquisitions I can’t help but notice that 35% of total assets are goodwill. If these acquisitions don’t work out the company could be facing large impairment charges. On the positive side, the company has been improving gross and operating margins since 2008 and yields 1.6%.