The biggest company on our sharemarket, Auckland Airport, is proving somewhat of a conundrum to analysts, investors and fund managers.
Almost every indicator for the industry and the company says things are going very well and that it's one to buy.
Then you look at the share price and all of the usual valuation measures, and it starts to look like quite the opposite.
Last week's result was simply outstanding. Revenue was up 11.6 per cent, net profit was 18.6 per cent higher, and the dividend was up 16.4 per cent. That took just about everybody by surprise, hence the big upward move in the share price on the day. The profit share from Queenstown Airport was up 25.8 per cent, while the Novotel hotel contribution grew by a third.
Here you have a company with irreplaceable infrastructure, an extensive property landbank in our biggest city, and a huge leverage to the bright spot of the economy -- the tourism sector.
Auckland Airport is undoubtedly a great place to travel through, streaks ahead of Sydney or Melbourne Airport.
It's been an outstanding performer, having returned 225 per cent in the last five years, well above the NZX50 return of 82 per cent. But that sensational rise has seen its price/earnings ratio rise to 50 per cent above its 10-year average, so it's not cheap by any measure.
Auckland Airport certainly isn't the only company on our exchange that looks expensive.
The combination of some great listed businesses and a lack of depth ensures that we have a few of those, including Port of Tauranga, Ryman Healthcare and Mainfreight.
Aside from the price, a second issue to grapple with is the threat of regulation.
Roughly half of the company's revenue is unregulated, the part that operates retail shops, car parks and property leases. The other half encompasses all of the aeronautical activities and has a pseudo-monopoly nature, meaning things are a little more cloudy.
While airports aren't subject to price regulation in the same way the electricity sector is, the Commerce Commission still takes great interest in the aeronautical part of the business, closely monitoring what airport operators are doing under an information disclosure regime.
For long-term investors, my advice is almost always to hang on to your best-quality assets.
Auckland Airport is an exceptionally good company in just about every way, and on some levels it probably looks like a very sound, low-risk investment proposition. However, it's become higher-risk by virtue of where it's priced these days.
For long-term investors, my advice is almost always to hang on to your best-quality assets. The great companies always seem to surpass expectations and find additional ways to grow their businesses.
Plus, it's always frustrating when you find yourself proven wrong and it's hard to get back in.
However, that doesn't mean we should ignore large moves in shares' prices or positions in portfolios. For someone who bought Auckland Airport a few years ago, it would represent a much bigger piece of the pie today, left unchecked.
That makes it a good candidate for a bit of profit-taking, even if it's just in the name of risk management.