You don't have to buy glamorous stocks in order to make money on the stock market, and you don't have to find the next hot industry either. In fact, buying stock in relatively boring companies like Roper Technologies (ROP 0.15%), Danaher Corporation (DHR -1.27%), and Illinois Tool Works (ITW -0.28%) would have doubled your money in the last five years.
What the three have in common is an excellent track record of management executing on their business plans. Let's take a closer look at how and why.
ROP Total Return Price data by YCharts.
Roper Technologies
The company's business model involves buying high-margin and asset-light businesses within niche markets. On the one hand, this strategy means Roper generates a lot of free cash flow (FCF) from its businesses, which in turn is used to buy more businesses. On the other hand, if the strategy is strictly adhered to, then management could find itself holding a disparate collection of businesses with few relationships between them.
In fact, both things have happened -- and both have been beneficial to the company. Roper's diverse portfolio of businesses now ranges from RF technology (toll roads), through legal and construction-company software, to medical and scientific imaging, metering equipment, pumps, and energy systems and controls.
However, management hasn't lost focus, and each of the four business segments currently has an operating margin above 25%. And Roper continues to generate prodigious amounts of FCF thanks to its asset-light business model:
ROP Free Cash Flow (TTM) data by YCharts.
In a nutshell, Roper has doubled investors' money in the last five years mainly thanks to continued excellent execution from its management. And with Roper continually on the acquisition trail, the next five years could see similar results.
Danaher Corporation
It's easy to scorn a management team's claims to have redefined how a company should be run, but Danaher can walk the talk. The stock has doubled in the last five years and is up 246% in the last decade, and the company's leadership is so highly regarded that former CEO Larry Culp is now a key part of General Electric Company's plans to turn around its ailing business.
The company's "Danaher Business System" (DBS) is a set of continuous improvement principles based on engaging with customers' needs and requirements, and planning processes which are measured in terms of performance -- then the cycle begins again. The company's success has been built on acquiring businesses in complementary areas, then applying DBS to improve operating performance.
It's a strategy that's worked over time. But just as Roper's strategy shaped the type of businesses it bought, Danaher found itself holding a collection of businesses that fell into two broad camps, with differing investment profiles. The first, a group of highly cash-generative cyclical industrial businesses, was spun off and named Fortive Corporation (FTV -0.03%); the second, a collection of healthcare-focused businesses, was left in the remaining company. Rather amusingly, the new company claims to be run using the Fortive Business System (FBS).
Whether they're called DBS or FBS, the companies' operating principles will shape their futures, as those principles have their past.
Illinois Tool Works
It's hard to argue that any multi-industry industrial company won't be exposed to the cyclicality of the economy. As such an industrial, Illinois Tool Works suffered a slowdown in revenue growth during the U.S. industrial recession of 2015 to mid-2016.
However, as you can see below, the company kept growing profits, largely due to ongoing increases in operating margin:
ITW Operating Margin (TTM) data by YCharts.
To understand how and why, you have to go back to the end of 2012, when the company launched its enterprise strategy, aimed at refocusing the company and improving margin and productivity. The starting point of the strategy is the 80-20 rule (also known as the Pareto principle), which implies that 80% of the company's business comes from 20% of its customers.
Recognizing this principle, Illinois Tool Works set about simplifying its business structure and shedding unprofitable product lines to focus on its most profitable operations. The chart below shows just how important the enterprise strategy initiatives have been in the company's margin-expansion story:
Data source: Illinois Tool Works presentations. Chart by author. "bp" = basis points; 100 bp equal 1%.
Looking ahead, management is confident it can still continue to expand margin through its strategy -- something that should stand the company in good stead, as some of its end markets (automotive and food equipment) appear to be weakening in 2018.
Image source: Getty Images.
Investor takeaway
End markets obviously help, but the key to how all three companies doubled investors' money in the last five years is the execution of their business plans. It's a salutary reminder that buying great businesses can tide you over through all phases of the economic cycle.
