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In this article, we present a selection of high-quality companies that are likely to capture the excess returns of quality stocks. These companies have been selected based on their size, liquidity, financial health, stability of their business model, and return on capital. We will focus on: Johnson & Johnson, Coca-Cola, Ulta Beauty, VISA, and Lockheed Martin.
Thanks to a century of experience and a solid history, Johnson & Johnson is positioned as one of the industry leaders with a comprehensive range of services, which persuades creditors and investors that the business model is sound. The company has made a number of acquisitions since its IPO, including Synthes in 2012 and Auris Health in 2020. The business has already been at the forefront of some of the most significant developments of the twenty-first century because of its considerable research and development. Investors can easily grasp the company's outcomes because of its highly robust balance sheet. The corporation provides tremendous visibility on its future earnings due to its substantial capitalization.
Johnson & Johnson's EBITDA increased by 34.96% to $36 634 million between 2020 and 2021 despite the covid-19 epidemic. There is no doubt that the company will be able to use these resources to further position itself, especially given that net cash is anticipated to reach $23,9 billion in 2023. Net debt has decreased by 78.74% from 2020 to 2021 to $2,1 billion but the forecast announced an increase to $7,7 billion (+262%). The epidemic has not affected the company's cash flow or dynamics, which have continued to develop at the same rate. The company's balance sheet policy aims to lower its debt and leverage despite the present macroeconomic unrest and rising interest rates. Johnson & Johnson experienced the best operating margin growth in the pharmaceutical industry between 2012 and 2022, rising by 78,1%. Over the same period, net income increased 65,31%, above Pfizer (50.85%).
Without a doubt, Johnson & Johnson is the industry leader thanks to its market capitalization of approximately $423 billion, which is nearly twice that of its primary rival. In order to maintain growth, the corporation makes significant investments in R&D (16% of net sales). Without hesitation, it has increased dividend payments for decades without interruption, with the goal of reaching $4,79/share in 2023 (forecast)—a 35% increase since 2018. Additionally, the company's yield is around 3%, which is positive. The company, however, has a lot of rivals, and the majority of its expansion has come from outside acquisitions and the creation of new medications, therapies, and other products after up to ten years of study.
The American firm, which sells 1.7 billion products daily worldwide, spreads its goods via media omnipresence, the biggest sporting events in the globe, and more than 200 different countries. With an EBITDA of $13,6 billion, it has been very profitable for years and is comparable to Pepsi, its primary rival. Coca-Cola strives to be a responsible company, and by using non-polluting resources, it is able to regulate its emissions. Additionally to EBITDA, profitability, and analyst coverage, it has a stellar ESG rating of A-. Simply said, the business's namesake beverage outsells other large-group sodas like Pepsi or Dr Pepper. Coca-Cola is the world's largest soda company.
The Coke ecosystem results in a greater selection of items that are consistently more affordable and of higher quality, enhancing the customer experience. The corporation is undertaking ambitious undertakings, such as establishing operations in growing markets and acquiring important companies, in order to maintain its reputation as a major player in its industry. In order to optimize the physical network and cut expenses, the business is concurrently making significant investments in its production and supply chain. With gradually rising net cash and margins, enhancing investor confidence and cementing the current robust balance sheet. The business can gain from a consistent P/E of about 29 and an ROE of around 40,5%.
The largest soda distributor in the U.S. has had its share price climb by 7,400% since 1970, despite having its first initial public offering (IPO) in 1919. This increase is the most in its industry and corresponds to a CAGR of 8.63%. With a more exciting growth possibility, the company can now see its current share price of $63.8, which is comparable to the pricing of its rivals. The business is utilizing its current position as a market leader to grow its operations and increase market share. Nevertheless, despite the group's position in the healthier food industry, changes in consumer behavior may eventually have an impact on the outcomes. Especially because water is a resource that is becoming more and more scarce and whose price might increase dramatically, including the group's product range.
The 1350-location American business distributes goods, manages beauty parlors, and sells its goods online. When compared to one of its main competitors, L Brands, which experienced an increase in EBITDA of 189% between 2021 and 2023, it posted one of the best profitability figures in the industry in recent years. Ulta Beauty strives to employ resources that aren't harmful to the environment and reduce emissions as a result. Despite this, its ESG is a B-, although it performs better in the Business Predictability and the Momentum sections of its business. One of the top brands of beauty goods is Ulta Beauty. The company's signature product is a concealer, which sells more than similar concealers from well-known companies like L'Oréal or Sephora.
The ecosystem at Ulta strives to provide goods that are more effective, more affordable, and of higher quality, thereby enhancing the shopping experience. The business is starting ambitious projects in part because of artificial intelligence in order to maintain its position as a prominent player in its industry. Ulta has partnered with Adeptmind to create a new personalized search engine for the company's future locations and with Google to run a virtual trial tool. Operating profits rose significantly between 2021 and 2023, by a factor of +364%, boosting investor confidence and cementing the current excellent balance sheet with rising net cash and margins. Additionally advantageous for the company are a stable P/E of about 20.0 and a ROE of about 70%. With the deployment of a customer-focused supply chain to optimize the physical network, technological advancements, and corporate capabilities to support organizational growth, acquisition projects, and investments are rising. As was already said, skin care is the company's signature product and primary industry. This is particularly intriguing because, according to Statista, this market has been expanding consistently since 2011, and it will account for 46% of the cosmetic industry's total revenues by 2024. Net sales increased by 110% and earnings per share increased by 268% between 2017 and 2023.
The largest cosmetics retailer in the United States has seen its share price improve by 1570% since its IPO in 2007, translating to a CAGR of 18.9%, and represents the highest rise in its industry. Due to this increase, the company can now see that while its present share price of $514 is higher than that of its rivals, the possibility for growth is far stronger. The business is utilizing its current position as a market leader to grow its operations and increase market share. It will be able to increase earnings and margins while decreasing costs thanks to ongoing artificial intelligence research. It will also be able to identify customer preferences more quickly and introduce more new items as a result of increased usage of new technology. The business opened dozens of additional locations (44 new stores in 2021) to help it dramatically grow its customer base and to expand its business
VISA:
In more than 200 countries and territories, Visa provides electronic payment services to customers, businesses, financial institutions, and governments. One of the most powerful networks in the world, its flagship VisaNet network can handle more than 65,000 transactions per second. Due to a rise in online orders, Visa was among the firms whose stock price profited the most during the pandemic. The largest bank card company in the US declined by over 8% since its peak in 2021 which shows its resistance.
The Visa stock is doing well, particularly considering that its market valuation has increased by 93% since 2017. Additionally, when compared to its rivals, such as MasterCard, whose EBITDA in 2022 was $13,4 billion, versus Visa's $19,6 billion, it will be the largest. Its dividend payout climbed by 216% from $0,5 in 2015 to $1,58 in 2022, and its debt was $3,9 billion compared to Mastercard's $6,6 billion. Between 2017 and 2022, Visa's free cash flow expanded significantly by 110%, whereas Mastercard's free cash flow rose by 104% over the same time. The ROA has been between 11% and 17% between 2013 and 2022 but should go over 20% in 2023 and reach 21% in 2024-2025 according to analysts. The ROE has moved differently with 25% in 2017, 40,9% in 2022 and analysts forecast 49% for 2025 (above its competitors). The company's valuation in terms of earnings multiples decreased over the past few years. Indeed, the firm is getting paid 25 times its estimated earnings per share for the ongoing year, against 40x for 2020.
However, the group has promising growth prospects for the upcoming years, particularly in emerging markets. Visa has a chance to grow its clientele since more conventional payment methods like checks and cash are becoming less popular. It is now doing a great job of avoiding rising inflation, and it should also defy the recession. Strong profitability and particularly high net margins are assured for the business. It appears to be in excellent financial shape, and the visibility it offers enables experts to publish reliable future valuation reports.
This is the largest defense contractor in the world, a major supplier to the NATO and American armed forces. The company focuses on four distinct market segments: aeronautical systems sales (40,9% of sales), rotary and mission systems (24,5% of sales), missile sales and fire control systems (17,2% of sales), and lastly space (17,5% of sales), which includes the development of commercial and governmental satellites.
More than 74% of Lockheed Martin's sales are made in the USA; the majority of its clientele is the US Department of Defense. In fact, the American military sector has evolved into an oligopoly, outperforming its four domestic competitors in terms of revenue: General Dynamics, Boeing, Raytheon, and Northrop. Over the past ten years, the company has increased from $45 billion to $65 billion, a CAGR of 3.7%. As a result of operating income that more than doubled and earnings per share that tripled from $9,13 to $21,7, Lockheed likewise enjoys stronger margins than its rivals. The company also generated $6,1 billion in free cash flow, which was distributed equally among shareholders as dividends and buybacks.
Finally, investors may be drawn to the current momentum and configuration of these shares despite a constant EBITDA of about $9,7 billion and an average price/earnings ratio of 22,5 times. The war in Ukraine, and tensions which China and Taiwan are among examples of more than 50 active conflicts throughout the world. The F-35, which competes directly with the Rafale from Dassault and Thales, is also experiencing an increase in orders and major export contracts, which will ensure decades of business for spare parts, upgrades, weapons systems, and maintenance.
These five companies are examples of high-quality companies that have good financial health, low debt, high return on equity and net assets, strong net and operating profitability, and stability in results over time. These criteria are in line with a defensive investment strategy, aiming to capture excess returns from quality stocks. Investors looking to build a portfolio invested in stocks according to this strategy may consider including these companies in their portfolio. However, it is important to remember that investments carry risks and past performance is not necessarily indicative of future performance.
