Revenue is Key, it must rise
- Does management have the will to keep producing new products, test when sales begin to stall
- Repeat sales (same store sales)
- Look at IBM and Dow Chemical’s sales team, they train their guys for up to a year
- Have best operating margins
- If margins of whole industry rise, not good, it is mostly due to price rising (commodity prices) and will attack new supply eventually
- Focus on companies making an effort to increase margins organically
- Employee morale – check turnover
- Does management have a good grasp on all cost (should have a breakdown).
- In comparison to competitor, does it have 35% lower insurance cost? Gives picture of management’s ability to effectively use its people, fixed property, etc.
- If its sole business is profit protection, it’s a weak business. Patents eventually die
- Does management have a long or short view on its earnings … Paying more for relationships will help during bad times
- Trust management – confine investment to stocks with trusted management, stock options are a key way to abuse its rights as CEO
- Low Cost producer – when things are bad, high cost producers are under break even, the losses from high cost producers go to low cost producer which increases their income. Also, higher margins are a way to generate self-financing internally (don’t need debt or equity offering)
- Management changes on their own for the future, not because of crisis
- High margins protect stocks when unexpected cost inflation hits
- Choose industry leader: should be able to stay ahead of competition
- Campbell’s Soup can place new plants closer to markets to reduce shipping cost, they can backward integrate by producing their own cans, smaller companies are not able to do this thus Campbell Soup holds a relative advantage. Campbell’s shelf space is discouraging to potential competitors.
- When food inflation hits Campbell’s, it cannot raise its prices more than average food raises or customers will be discouraged to buy it
- Cost of product is a small portion of their budget. Sell to many small buyers rather than a few large ones
- Profit Margins 2-3% over next competitor is better than 10% cause competition won’t come for a 2-3% margin
- “Theory of Investment Value” – John Burr Williams (1938) – discount
- Discount at 10 year rate – when rates are falling don’t use as much.
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