When I was still living in southern Africa earlier this year, two related themes showed up in the business press over and over. First, before South Africa can host the World Cup soccer championship in 2010, huge improvements to the country's infrastructure are necessary. Second, the government made it clear that several billion dollars will go into a high-speed train connecting Pretoria and Johannesburg -- the "Gautrain," named after the Gauteng province -- as well as into many other infrastructure improvement projects before the hordes descend on South Africa for the most popular sporting event in the world.
If you've ever sat in the daily traffic jam between Johannesburg and Pretoria, you would know that the World Cup spectators are doomed unless they can use high-speed public transport to get to the matches.
So who will benefit from all of that spending?
One company leapt out to me right away -- Barloworld (OTC BB: BRRAY.PK). Why? Because of what you use the most in big infrastructure projects: equipment and cement.
Retiring Barloworld CEO Tony Phillips summed up his company in its 2006 annual report:
"We are a company that sells and services equipment and vehicles and provides short- and long-term rental and leasing solutions to customers. We also market and distribute our own industrial brands and services. We structure our businesses to be able to profitably endure business cycles while growing at a pace that creates sustainable shareholder value."
Barloworld is big in selling construction equipment, and it's also the majority holder of South Africa's biggest cement company, PPC, which is soon to be spun off to Barloworld shareholders. The company also owns rental-car franchises, truck dealerships, and several other businesses in more than 30 countries around the globe. Barloworld even benefits from the commodity bull market. It recently opened a Caterpillar (NYSE:CAT) dealership in Siberia to serve the mining industry there.
Investing in Barloworld took patience. My initial purchase in April dropped more than 20% in the May emerging-markets meltdown. But I knew the fundamentals were sound. I also had a chance encounter with a South African in-law who had done some work with Barloworld. Her verdict -- it's a fabulous company with top-notch management. I bought more Barloworld for myself and started picking up shares for clients in the high teens. Today, Barloworld's American depositary receipts trade at around $23.
Unlike popular cement stocks such as Cemex (NYSE:CX) or Lafarge (NYSE:LR), Barloworld is largely unknown outside South Africa, despite a sustained growth rate of more than 20% for several years. In 1999, management set a goal of doubling shareholder value by 2002 and succeeded. It did the same in 2002 and came in ahead of the September 2006 deadline.
What is the new goal for this multibillion-dollar company? Double the value of every division again by 2012, of course. Phillips wasn't kidding about Barloworld's philosophy that its divisions will grow and remain profitable in good times and bad. Divisions that don't measure up or don't fit in with Barloworld's core focus are sold without hesitation. The steel-tube division and the U.S./U.K. leasing operations went up for sale in 2006.
The margin story is equally juicy. From 2000 to 2006, Barloworld grew revenues from 22.45 billion rands (approximately $3.2 billion in U.S. money) to 42.7 billion rands (just a little more than U.S. $6 billion). Along the way, the company increased operating margins from 5% to 9.7%. Barloworld not only doesn't struggle to cope with growth; it thrives on growth.
Using the "Rule of 72," we know that Barloworld has to continue to grow at least 18% every year to meet its new goal. I think the company will do it again. And by the way, Barloworld's stock is up ninefold since 1999.
Even without its enviable growth record, Barloworld is a cheap value stock today. Its annual report for the period ended Sept. 30 showed revenue growth at 13%, headline earnings up 32%, cash flow from operations up 38%, and a 32% boost to the dividend, which now sits at 3.75%. Management remains optimistic about its ability to keep delivering great results, both inside South Africa and around the globe.
Barloworld shareholders will become direct shareholders in cement giant PPC this year after the spinoff is complete. They will also get a special cash dividend of just less than 5 rands (about 70 U.S. cents) as part of the deal. As for the longtime CEO's departure, his replacement is the former Barloworld CFO and current head of the equipment division. No transition worries there.
I look for several key factors in my "long-term value franchise" investments -- proven management, quality products in high demand in growing markets, strong cash flow from operations, and, of course, great profits. Barloworld fits the bill on every count. I may still be writing about the company here several years from now.
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Fool contributor Dale Baker , a private-client portfolio manager and former U.S. diplomat with extensive experience in Europe and Africa, owns shares in Barloworld for himself and his clients. After driving down most of the major roads in South Africa over the past two years, he hopes Barloworld gets a lot of road upgrade business there soon. He welcomes your questions and comments at [email protected] . The Fool has a disclosure policy .
