The Focus Portfolio has an overarching bias towards quality, which we define as businesses with durable competitive advantages, strong balance sheets, high returns on capital, and attractive long-term earnings growth outlooks.
Historically, high-quality businesses (companies with top quartile ROEs) on the ASX (and globally) have comfortably outperformed the broader market.
Remaining constructive towards select quality cyclicals
Industrial cyclicals are businesses (outside the resources sector) with earnings that have a degree of sensitivity to changes in interest rates, consumer spending, and the business cycle. This category includes companies from the retail, media, consumer services, construction materials, and capital goods sectors.
Given cyclicals are, to some extent, exposed to the ebb and flow of the economic cycle, quality is a particularly important consideration, which is why the portfolio’s cyclical exposures are principally concentrated among quality cyclicals - that is, cyclicals with quality attributes and attractive bottom-up structural growth stories.
Two hallmark examples of quality cyclicals are James Hardie (JHX) and Aristocrat Leisure (ALL), both of which are key positions in the Focus Portfolio.
Both companies are dominant market leaders with unique intellectual property, high returns on invested capital, a high degree of pricing power, strong balance sheets, demonstrated flexibility in their cost bases, a proven ability to grow through the cycle, and attractive structural growth stories.
These quality attributes underpin a degree of resilience and allows each company to weather tougher economic or industry conditions as they occur.
Last week, Aristocrat and James Hardie released their FY24 and 2Q25 results, respectively, which has reaffirmed why these are two of the highest quality businesses on the ASX, as this report explores.
| Company Name | Ticker | Focus Portfolio weight | Valuation Multiples | EPS CAGR % | Margins | ROIC | Net Debt/EBITDA | EPS revisions | ||||||
| P/E | 5 yr avg | +/- vs avg | PEG* | FY25 | FY26-28 | EBITDA | NPAT | last 30 days | last 90 days | |||||
| Aristocrat Leisure | ALL | 4.5% | 24.9 | 21.3 | 16% | 2.8 | 11% | 9% | 39% | 24% | 40% | 0.2 | 4% | 6% |
| James Hardie | JHX | 4.0% | 21.6 | 20.7 | 4% | 1.2 | -7% | 19% | 28% | 17% | 23% | 0.5 | 0% | 2% |
All figures are based on 12-month forward consensus estimates unless otherwise stated. PEG is based on P/E divided by FY26-28 EPS CAGR. Source: Refinitiv, Wilsons Advisory.
Aristocrat – American Exceptionalism
Aristocrat (ALL) is among the highest quality businesses on the ASX. The company's earnings are closely related to the capex/opex of its customers (i.e. casinos), which can be influenced by the macro environment and changes in consumer spending (on gaming). However, as the leading B2B gaming machine supplier in North America (which represents 80% of its land-based gaming revenues), the business has a long track record of strong earnings growth through the cycle. This growth has been supported by consistent market share gains, a largely recurring revenue profile, its high degree of pricing power, and successful new product development.
Strong momentum into FY25
Aristocrat has continued to strengthen its dominance of the North American land-based gaming operations market. FY24 was a record year of net additions of leased gaming machines for Aristocrat. The company delivered 7,100 net additions, far exceeding its guidance of 6,000, and easily outpacing its competitors – including ASX listed Light & Wonder (LNW). The sequential improvement in net adds in 2H has demonstrated impressive momentum, providing confidence in continued above-system growth in FY25.
Confident in further share gains over the medium-term
North American land-based gaming is a relatively mature, and therefore low-growth, industry, with system growth typically in the ‘low single-digit’ range. However, Aristocrat has demonstrated impressive earnings growth over the last decade, which has been driven by consistent market share gains, price increases and operating leverage.
With Aristocrat having ~40% market share, the runway for growth is large, and we are confident in the company’s ability to drive continued share gains over the medium-term, given its track record of effective product development.
Aristocrat significantly outspends its peers on R&D, which has underpinned a long track record of successful game launches, allowing it to maintain an industry leading games portfolio.
Aristocrat's games portfolio includes 20 of the top 25 premium leased games and the business the largest share of top new premium leased games, at 38%, which is an indicator of R&D success, future share moves, and pricing. The breadth, popularity, and performance (based on revenue generated for casinos) of Aristocrat’s portfolio is unrivalled, which should continue to drive strong demand for its products while supporting market-leading pricing (i.e. fee per day) over the medium-term.
James Hardie – Built on Strong Foundations
James Hardie (JHX) is the world’s top producer of high-performance fibre cement and fibre gypsum building products used in the construction and remodelling of single-family housing and apartments. The company’s largest market is North America (~75% of group sales), followed by the Asia Pacific and Europe. While James Hardie is leveraged to US housing construction activity, the business has a high degree of pricing power, attractive margins, and a track-record of above-system growth. These attributes have historically enabled the business to weather cyclical downturns better than its peers.
Q2 result – quality on show in tough conditions
James Hardie’s Q2 result was solid considering the challenging industry backdrop with housing construction activity depressed at multi-year lows, which has been a headwind to industry volumes since FY22.
The company’s quality attributes were on full display in the result, which included:
- Above-system growth – while industry conditions are soft, James Hardie’s sales volumes in Q2 and its updated full-year guidance were ‘better than feared’ by the market, which was supported by end-market outperformance as its fibre cement products gained market share from vinyl and other alternatives.
- Cost control – despite soft Q2 sales, the company posted a Q2 EBITDA beat with EBITDA margins of 27.4%, well above expectations of 25.9%. This was driven by efficiency gains and cost control. Management also prudently cut back its near-term spending plans, lowering its FY25 capex guidance to $420-440m (previously $500-550m).
Overall, James Hardie’s ability to flex its cost base in a weaker market and increase its average selling prices to support margins, while continuing to grow its volumes above-system, are together providing an offset to the tough macro-environment. This is helping to underpin a degree of earnings resilience in the currently challenging industry backdrop.
A cyclical recovery is on the horizon
While the US repair and remodel market (~65% of James Hardie’s sales) remains soft, we continue to expect a recovery in volumes by FY26. This view is reflected in the Leading Indicator of Remodelling Activity (LIRA), which points to a return to repair and remodelling (R&R) growth in Q2 2025. When the cycle does turn, James Hardie is well-placed for a return to high-teens EPS growth, supported by its ongoing investment in marketing and its superior customer value proposition. Positively, management has guided towards a return to volume growth and margin expansion in FY26.
Structural growth story remains intact
Leaving aside its exposure to the macro-environment, James Hardie is a structural growth business with a strong long-term earnings outlook, supported by the attractive dynamics of the North American housing market.
The business remains committed to its long-term aspirations of increasing its North American EBITDA by 3x (vs FY24), which will be supported by:
- Fibre cement market share gains – at ~20% market share, James Hardie still has a long runway for growth. We are confident the business will achieve continued above-system growth over the next decade given its strong brand reputation and attractive customer value proposition. Its fibre cement products offer superior aesthetics and durability and have a lower lifetime cost compared to the alternatives like vinyl.
- Ageing US housing - the age of the average US house has never been older, which alongside recent natural disasters will necessitate a growing volume of R&R activity over the medium and long-term, as old structures will need to add new amenities or repair/replace old components. Given James Hardie's skew towards R&R markets, this thematic should drive growing demand for its fibre cement products.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
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