Reece Australia Limited (ASX:REH) is a leading supplier of bathroom and plumbing products, with over 400 stores throughout Australia and New Zealand.
The Reece business began in 1919 when Harold Joseph Reece commenced selling hardware products from the back of his truck. Today, Reece employ over 3500 staff and sell thousands of products.
Is this business easy to understand?
For over 85 years Reece have provided products and a dedicated service to plumbers. Reece have earned a reputation over that time for "having what you need, when you need it, where you need it."
Reece have over 260 showrooms where retail customers can enjoy a huge range of bathroom products including Australian and international brands. Most showrooms also display a range of laundry and kitchen products.
As the plumbing industry has become more specialised, Reece has expanded into the allied areas of HVAC-R, Irrigation and Civil, as well as Onsite, which services commercial plumbers and volume home builders. Reece have quickly built a successful presence in these areas through commitment to quality products and exceptional service.
Reece's approach is focused on being the best by constantly improving the service they provide their customers.
Does this business have a sustainable competitive advantage?
Reece have pioneered many of the services and initiatives in the industries in which they operate.
Reece understands their responsibility as the market leader and support their customers in their businesses.
In 1994, in a first for the industry, Reece established a National Training Centre to help plumbers improve their technical and business skills. This has served to help Reece grow their position as the benchmark for plumbers' education and helped create ongoing supply relationships with plumbers around the country.
Reece have also influenced trends in bathroom products and design in Australia. Its advertising has helped elevate the bathroom to one of the most important rooms in the house. This has changed Reece's business model to appeal to women, as DIY renovating and decorating become increasingly accessible.
Reece have a large showroom presence around Australia and their showrooms continue to set the industry standard.
What are the risks facing this business?
One of the risks to this business comes mainly from outside influences. The impact of global economic volatility and local economic issues weighing on consumer confidence can slow the bottom line performance of Reece.
The company also faces growing competition from home improvement stores like Bunnings and Masters, as the growing penchant for DIY work in the home seemingly shows no sign of slowing. Reece has acted on this threat in the past by developing a campaign titled "Don't risk it, use a licensed plumber ". From all reports, this campaign worked well in the past and could be used again to stave off the threat from competitors.
Is it run by able and trustworthy management?
Reece is a public company that has enjoyed a long history of exceptional financial performance. A major factor contributing to this success has been the leadership provided by a strong, decisive and stable management team. Reece is committed to good corporate governance and to the continued creation of shareholder value.
Reece have developed a code of conduct for their directors and senior executives. It sets out an explicitly clear direction for the expected behavior of the directors and senior executive. This 'behavioural leadership' no doubt develops a wonderful corporate culture and has a flow on effect throughout the business.
Reece also present a very simple set of accounts for their half yearly and annual reports which make it very easy to read and decipher. They are one of just a handful of companies that report extremely simple accounts with few moving parts.
Is it trading at a bargain price?
Reece is a little expensive at the moment based on my metrics.2010 Actual Valuation = $11.99
2011 Actual Valuation = $15.79
Today's Share Price = $18.60
2012 Forecast Valuation = $14.48>
*Please note that this estimate of intrinsic value is subject to change on a daily/weekly basis.
In summary, Reece is a fantastic business with good profitability, excellent cash flow, no net debt and trustworthy management. The business has all the right 'plumbing' in place, apart from the opportunity to buy it currently at a bargain price. I do hope to be a share holder in Reece one day as it is a consistently performing business. However, paying a high price for a great stock on the ASX does not necessarily make a good investment.
This article is published by Dean Mico.
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