After I recently discussed a college friend that is currently focusing on making large share purchases in the four major credit card companies each month, a reader asked me why I wouldn’t do that considering my awareness of the superior returns generated by credit companies. In short, I think there is a tendency to underestimate the technology disruption that can exist in the payment industry.
Generally speaking, there are two types of companies that make good candidates for investment. One is companies with specific products—Nestle chocolate bars, Colgate toothbrushes, Procter & Gamble’s Gillette razors immediately come to mind. People desire those things specifically, pay money to acquire them, and shareholders tend to grow wealthy with each passing decade. The other category, of course, refers to companies that act as hosts to facilitate people getting to the product they want. Wal-Mart is the classic example of this. No one goes specifically … Read the rest of this article!
As a small fish in the publishing industry, I understand why it can be difficult to develop a business model that is sustainable for the long term, especially when you use the old profit expectations of the 1870s through early 1990ss as a reference point. Even as someone aware of the hardship that faces the industry, I am still amazed at the deterioration in the industry over the past two decades. To get a feel for it, remember that the Taylor sold The Boston Globe (technically a publicly traded stock known as Affiliated Publications) to the New York Times for $1.1 billion in 1993. In 2013, John Henry (of Boston Red Sox ownership fame) bought The Boston Globe for $73 million. Talk about the tyranny of reverse compounding—over 90% of the newspaper’s value was lost over a recent twenty-year period.
The issue with newspapers isn’t really circulation—although dwindling circulation numbers … Read the rest of this article!
I saw the recent news release that Wal-Mart is shaking up its top management positions in an effort to spur growth, with the latest strategy involving small neighborhood stores and more organic, healthy grocery items lining the front area of the store. With back-to-back dividend increases in the 2% range, people have been wondering what issues currently exist at Wal-Mart that are worthy of an investor’s examination. The deep issue is this: It is difficult for a company that generates $487 billion in annual sales to grow at a fast rate. Shareholder wealth creation largely consists of buybacks, dividends, and efficiencies at that point rather than robust top-line revenue growth.
My take on Wal-Mart’s problems are as follows:
One. The company achieved 10.5% annual earnings per share growth over the past ten years not because the company’s profits were growing at a furious rate but because the company was repurchasing … Read the rest of this article!
Funny how things can change so fast, isn’t it? This time last year, BP was making $3.96 per share in profits and paying out $2.34 in dividends for a payout ratio of 59%. When I first started writing about BP, I mentioned that the principal risk for shareholders involved the following conditions occurring at the same time (or near in time to each other): adverse legal judgments from the Gulf oil spill, a substantial decline in oil prices, and trouble securing income from the Rosneft project that accounts for nearly 20% of BP’s income. I mentioned those two last risks in passing—as almost a throwaway line—and unfortunately for BP shareholders, that trifecta of events occurred simultaneously to cause profits to fall substantially.
Profits of $4 and $5 per share in 2011 and 2012 have given way to expected profits of $2.25 per share in 2015. That assumes oil prices around … Read the rest of this article!
Donald Yacktman once said that investors make serious money when there is a mismatch between an investor’s assumptions about the future of the company and the expectations of the general investor community at large. A lot of times, this shows up in the P/E ratio of the stock. Take Hershey for example. It is aggressively raising prices by 8% in a typical market, and volumes are still growing 3%, 4%, or 5%, depending on whether you use trailing, current, or short-term future expectations to make your projections. All in all, it is working its way through a high point of a cycle where profits could be growing around 12% per year during the 2016, 2017, 2018, and 2019 period.
The problem? The current P/E ratio of the stock already reflects this better-than-usual business performance because Hershey usually trades at 20x earnings but now trades at 27x earnings. That jump of … Read the rest of this article!