Rational AG: A tantalising reminder

Rational make the best commercial ovens in the world; 54% of all combi-steamers sold are made by Rational. They’re a picture of a solid German business; still owned 70% by insiders, paying a substantial dividend, and growing profitably year-on-year. You might think a company like this has a relentless focus on margins or returns, but that isn’t the case; Rational say their primary corporate objective is to ‘offer the greatest possible benefit to the people preparing hot food in the professional kitchens around the world’.

A lofty goal – ‘maximising customer benefit’ as the focus of the business – has flow-through effects to shareholder returns. There are benefits to hosting free training for all your customers, rolling out software updates for the ovens you provide, offering 24/7 technical support and providing the services of 300 trained chefs (who are also, unsurprisingly, also salesmen) to your clients, as well as offering them direct contact to the CEO if they’re not satisfied with the service provided.

Check out the 10 year performance graph:

Rational_HeadlineRational operate with the conviction that they will provide the best possible service for their customers, and they do it shrewdly – in Japan they sell their ovens through an OEM, Fujimak. Japan is a notoriously insular and difficult market to penetrate – and partnering with a local player neatly turns a competitor into a domestic, entrenched and valuable sales force.

They also don’t buy into the synergistic or conglomeratorial logic so many chief execs seem beset by – they’re no empire builders. From the annual report:

We only do things ourselves if we can manufacture them better or more cheaply than others, or if we possess system-critical expertise. Everything else we buy in from specialist, highly-skilled suppliers… As a company with minimal vertical integration, we essentially handle the final assembly of the appliances… an employee assembles ‘his’ unit from the first to the last screw and puts his name on the identification plate as a guarantee of quality.

They just put together better ovens, better than everyone else. They spent €16.7m last year on research & development – hardly a trivial amount for a company in physical goods, but hardly a US tech start-up, either.

All of this makes for a return on capital as high as you’ll ever see:

Rational_RoCE

You’ll find hardly any companies in the world able to compound capital at 30% per year; you’ll find fewer still in the actual physical world, and you’ll find yet fewer that are able to compound their capital employed by over 10% over any meaningful timeframe and still maintain superb returns. I should note that I don’t back out any cash from the capital employed calculations, despite Rational maintaining a large and very conservative cash pile. There’s a good reason for that – it’s a conscious decision to never have to rely on banks or flighty finance.

And if you’re thinking this is decidedly backwards-looking, you might enjoy Rational’s rhetoric from their 2013 annual report:

We focus on a basic human requirement, namely food away from home… Only around 30% of the 2.5 million professional kitchens in which our technology can be installed are already using combi-steamer technology. The remaining 70% are still relying on conventional cooking technologies. So far, only around 10% of all kitchens have installed a SelfCookingCenter… [which] replaces both conventional cooking technology and standard combi-steamers, so the potential market still avaiable is about 90% of all the 2.5 million professional kitchens worldwide

It’s a blindingly brazen display of management confidence; people will always need to eat out, and we are only in 10% of kitchens. We provide the best ovens in the world, and hence there are 90% of kitchens that we can still target. They go on to note that one of their newer products has low penetration, and hence ‘the available customer potential is almost 100% of the 2.5 million professional kitchens‘.

There’s far more that can be said about Rational – have a read of the annual report if you want to get a feel for a truly interesting company – but I’ll pull my misty eyes back to the title of the post – ‘a tantalising reminder’.

Rational, alas, has a price which reflects its excellence. It trades on 29 times earnings, which pencils in a large dose of faith in the company’s track record and exceptional pedigree. Which isn’t to say it won’t make a good investment; you could whip up a DCF which makes any company this good look cheap if you believe management that the addressable market really is everywhere and you believe that investors at the end of it will be equally appreciative of the company’s characteristics.

No – the tantalising reminder is this:

Rational_SP

In the depth of the financial crisis in 2009, Rational traded on a P/E of about 10. They went on to growth their earnings by nearly 10% in the next year, and almost 20% in the year after.

Hindsight is easy, and I’m sure it would have been difficult to pull the buy trigger on a company which made – of all things – commercial ovens when the world is going to hell in a handbasket and it looks like all sorts of businesses (including their clients!) would get blown out of the water.

It would have been a great buy, though, and it would have a been a buy that isn’t just using information I have now. If you did the analysis I’d just done in 2009, you still would’ve seen a company compounding its earnings at an incredible rate and earning – actually, even more on its capital than it is now.

So the real reminder for me is the simple maxim; don’t blow up. You want to be alive and in the right frame of mind that in the next 2009, you have a list ready of fantastic businesses which will – for all sorts of ridiculous and over-correlated reasons – get battered along with the mediocre businesses which comprise most of the stock market. You need the cash, you need the mindset, and you need the process.

Rational has 4-bagged since then. Just think how many years of steady-eddy returns you can live with if you’ve the conviction to put up with them for the fat pitch, and the balls to put the bet down when the casino’s falling down around you.

5 Replies to “Rational AG: A tantalising reminder”

  1. Richard Havelka

    Well put. I bought a few shares during the crisis as a start to build up a significant position. For some reason (which I cannot remember) I waited for the price to go even lower, which of course never happend. Now I have these few shares, which became a reminder of my lack of courage and conviction. I learned that one can become overgreedy in a fearful environment (while at the same time stubbornly sticking with not so great companies, because…. I don’t know why)

  2. Patent Sparky

    The quality of the Rational kitchens is great and I am convinced that the company is not only a good, but a great company. As Warren Buffett would have said, all you need now is a fair price and buy the stocks.

    At a p/e of 29 there is already a great deal of positive expectations priced in. As long as I can find outstanding companies at much lower price levels, I probably would not buy Rational – at least at this time point.

  3. Rick

    It’s interesting to (re)-read this article today and look at the share price now compared to where it was in late 2014. It really is better to buy wonderful companies, even at an expensive price…

    I really enjoy your blog – very thought provoking!

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