Organic growth versus acquisitions

If company management decides to grow organically or through acquisitions; they need to think carefully about their strategy. Organic growth increases the turnover of the company’s existing business or brings in the profits generated within the company. Organic growth represents real growth for the company’s core. This is a good indicator of how well management has used its internal resources to increase profits. Organic growth also determines whether managers have used their skills to improve business.

Compare this strategy with a company that is growing through the acquisition of other companies. Last year Naspers went to trial for the acquisition, but due to limited opportunities this year decided to grow organically. Naspers management believes that online ratings have become inflated and it is difficult to find a good price. However, growth through acquisitions still has more benefits and is often seen as a faster and cheaper option with less risk.

Reunert operates a number of companies focused on electrical engineering, office systems and services and security electronics. Reunert is once again on a path of acquisition to raise revenues that seem to have stagnated. The company wants to bring the IT business into the field to complete the transformation of its communications division. The share seems inexpensive to trade on historic PE at 11.1 times and 2.3 times its NAV. Accordingly, we recommend investors to buy a stake. The share is supported by a historical dividend yield of 5%. The stock price is trading below the 200-day moving average and slightly above the 10 and 30-day moving averages. The trend is moving sideways with a bearish bias. Wait until the price rolls back and confirm the trend change before buying.

Naspers is a multinational media group with major operations on online platforms, pay-TV and related technology and print media. Based on the current market price, we estimate that the group’s operations excluding investments in Tencent (listed on Hang Seng) and (listed on the London Stock Exchange) are traded on historical exchanges about 3.5 times. These two investments currently account for 93% of the group’s market capitalization and remain key drivers of future growth. We believe the stake is fairly valued and encourage investors to hold their shares. Nasper’s stock price is trading above the moving average, and the trend remains bullish, albeit sideways in the medium term. Wait until the price re-tests the support level on the R351, or for a break above the resistance level on the R406 before buying.

For an investor, rapid growth looks good, but companies can get into trouble if they grow too fast because they can’t sustain that growth rate and their stock prices suffer. When evaluating companies with aggressive growth policies, investors should carefully determine whether these policies have more disadvantages than advantages.