Bloom Energy’s “Time-to-Power” Moat
Motley Fool Hidden Gems Investing
In this mailbag episode of Motley Fool Hidden Gems Investing, hosts Jon Quast, Matt Frankel, and Rachel Warren tackle listener questions on key investment
Key takeaways
- ROIC is a valuable metric but must be evaluated alongside reinvestment opportunities and free cash flow conversion.
- Companies with limited growth avenues—like Coca-Cola—often return capital to shareholders via dividends, while those with expansion potential (e.g., Waste Management, S&P Global) reinvest profits for compounding returns.
Main topics
- Return on Invested Capital (ROIC) as an investment metric
- Reinvestment opportunities in mature vs. growing businesses
Notable quotes
"ROIC is only one piece of the puzzle. It depends whether the company can reinvest those high returns on capital in efficient ways to grow its business." – Matt Frankel
Conclusion
Investors should use ROIC as part of a broader toolkit, focusing on businesses with both strong capital
Transcript preview
Speaker 2 (0:01) Does Bloom Energy have a competitive advantage? Motley Fool Hidden Gems investing starts now. Speaker 2 (0:09) Welcome to Motley Fool Hidden Gems Investing. I'm your host today, Jon Quast, and today is Labor Day, which means that we're not covering a lot of news. We're actually going to triple dip into our mailbag today with our guests, Matt Frankel and Rachel Warren. And I'm just going to go right into it. Here is the first mailbag question that we have for you today. And this comes from Sabir. He says that he lives in Austin and is a regular listener of the podcast. And this question is for anyone. While comparing company stocks, are there metrics that speak to the underlying structure of a business, which potentially might suggest how much they would return to their investors over time? For example, Coca-Cola has higher return on invested capital than S &P Global and WM, but it hasn't returned nearly as much historically with dividends reinvested. So I don't know if ROIC is the right metric to monitor or if I should compare these businesses at all since they are in separate sectors. But to include one in my portfolio, I need to make assumptions about how much my money would grow if I had invested in each of them. Thanks for the amazing content. Please keep doing the same forever. Okay, Matt, this is essentially a question about ROIC or return on invested capital and... Is this the magic bullet that we need to screen for to find the stocks that are going to make us money over the long term? Speaker 1 (1:41) I mean, first of all, I don't think you'll go wrong with any of these capital efficient businesses that you mentioned. But, you know, ROIC, it's only one piece of the puzzle. It depends whether the company can reinvest those high returns on capital in efficient ways to grow its business. This is the big limiting factor for Coca-Cola, just to name one of the examples you just did. So it doesn't have as many places to reinvest into its business. It's a massive company. It already has its distribution network. It's already everywhere. And that's why it distributes so much money, so much of its returns as dividends instead of reinvesting into the business. Speaker 2 (2:16) Yeah, it reminds me of Warren Buffett talking about his See's Candy business. The returns are great, but there's not a lot of places to reinvest that money into See's. So it winds up just kind of taking that money and reinvesting it elsewhere. But Rachel, are Sabir's instincts right here? Because he's wondering if he should even compare these businesses since they're in different sectors. I mean, Coca-Cola, S &P. global. This is the stock exchange, waste management. This is trash. They're not in the same place of doing business. So is he right to say maybe I shouldn't be comparing these? Speaker 3 (2:48) I mean, yeah, these are businesses that are operating in very different landscapes. And I do think there are certain growth factors and you can compare them in the context of what you're looking at for your specific portfolio. And ROIC is one, I think, very important metric when you're evaluating businesses that you want to buy and hold for the long run. But I think that it's just one of many tools that you should have in your toolkit when you're trying to look at how a business protects and handles its cash. And, you know, free cash flow conversion is another very important one. I mean, this tells you really how much of every dollar in revenue turns into cash after a company, you know, addresses its liabilities and continues to maintain its operations. And it's important. to look at a wide range of factors like this, because for example, a company can have a very high return on capital on paper, but if that profit doesn't convert into actual free cash flow, it can't be returned to you, the shareholder. So ROIC is great, but it should just be one of many tools you use when you're evaluating businesses, in my view. Speaker 2 (3:52) And Matt, you mentioned that the limiting factor here with Coca-Cola is just not really having too many places to put that money to reinvest for good returns. But what about the other two here that you mentioned, SPGI and waste management? Speaker 1 (4:05) Yeah, they both have had far more opportunities to reinvest. Even waste management, which a lot of people think of as a boring, mature business. I mean, they're not everywhere. They've been investing in growing out their footprint. They've been investing in the latest recycling technologies. There's a lot, there have been a lot of investment opportunities. SPG Global, I mean, they reinvest in building out their data assets and new indices. And that ROIC helps compound the business's intrinsic value over time. That's the big difference here. Speaker 2 (4:34) And of course, then that is actually then supported by the actual returns of the stock over the long term. Speaker 1 (4:40) Yeah. And I mean, if you look at the returns, I mean, over the past 15 years, Coca-Cola generated about a 327 % total return as we're we're recording this, that's about 10.2 % annualized. I don't think anyone would call that a bad investment, which is why I said, I don't think you'll go wrong with any of these. But if you look at waste management, 779 % over the past 15 years, SPG Global, a little over 1800%. And the difference has been not just that one's more capital efficient than the other, but that the latter two have more reinvestment opportunities. And that's been a big percentage of those returns. Speaker 2 (5:15) So Rachel, I want to circle back to you here because you did say that you kind of start by looking at this free cash flow conversion. How much free cash flow is the company able to generate compared to its revenue? But okay, so we generate free cash flow. Now we have some cash sitting there. What is the next thing on your so-called checklist or the next thing that you're going to look for after we have cash in hand? Speaker 3 (5:37) Yeah, I mean, once a business has that cash, another thing I would look at as well is share count reduction. You know, when you have a company that's consistently buying back its own stock, your ownership slice grows automatically. And, you know, you can go back to examples of waste management, S &P Global. I mean, waste management specifically, they had authorized a $3 billion authorization late last year. They've repurchased about a billion dollars. and its own shares in the first half of this year. So these are companies that tend to use buybacks fairly aggressively. That can create a nice tailwind for your long-term compounding, even if the top line growth looks modest. Speaker 2 (6:13) Yeah, I mean, I push back on the aggressive framing just a little bit. I mean, $3 billion is big, but in comparison to its size, I mean, only reducing that share count by about one a year for waste management. But still, point taken, reinvesting buybacks. So that is a long-term compounding. it can have a long-term compounding effect. But Rachel, you mentioned a moment ago about reinvestment. How do you actually measure whether reinvested dollars are being put to good use? Speaker 3 (6:41)