Simple arguments can be seductive but they can also be misleading. Johnson Services Group is a small business that, if you believe a number of simple arguments that are popular today – 'don't buy UK exposure', for example, or 'avoid consumer dependant stocks' - just should not be surviving. It is almost as if it has set out to specialise in businesses that are ideally unsuited to the macro economic environment of 2013.
It is, for example, the UK’s biggest drycleaner, which is an area where one might reasonably expect people to be spending less money these days, and it also launders linen and towels, which is a fairly price-sensitive and capital-intensive business. Most strikingly, perhaps, it does a lot of building and facilities management, which means it is heavily exposed to property and to high-street retailers.
Not one that need trouble my portfolio, you might think, and yet Johnson Services Group is a great example of how, even when things are tough, a company that gets its head down and grinds away can do some good things. It has not shown dramatic growth, for example, but it has grown – increasing its earnings by some 15% over the last four years. In that time it has also grown its sales, paid down its debt and its dividend is up over 30%.
While Johnson Services Group operates business that should in theory be disastrous in the current environment, the reality is it has been so lowly rated its shares have more than quadrupled in price in the last four years – and it still only trades on a price/earnings ratio of 8x.
Yes, simple arguments can be seductive but they are often also superficial. Good investors always dig deeper. Johnson Services Group is great little example of why we are happy to put our faith in valuation and in businesses just grinding out results. Next time you are passing your local Jeeves of Belgravia or Green Earth drycleaner, you may see it in a different light.