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Welcome to the 11th edition of Quality-Growth Quarterly.
In this issue we feature an article from James Bullock at Lindsell Train titled ‘A Very Long Hill’, the Fireside Chat and Audience Q&A with Jonathan Mills from Metropolis Capital interviewing Henry Engelhgardt at the London Value Investor Conference, an article on EBIT”CAC”, Why Pret A Manger called time on free coffee, an article featuring Chris Rossbach from J. Stern & Co., Vontobel on why investigative journalism can help equity research, Nike vs Adidas at the Olympics – plus articles from Steve Clapham, Andrew Hollingworth, Barron’s and 4 more articles of interest to investors.
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1st October 2024
“Compounding only really works if uninterrupted. An effective way to illustrate the impact and importance of time here is to compare compounding or geometric growth, with an alternative, more common form, such as linear or arithmetic growth. So, growing by a fixed percentage each time vs. growing by a fixed amount each time. The best-known example here is paper folding vs. paper stacking. This is illustrated on the three charts on the prior page (Figure 1), giving the resultant height of a paper pile from either folding it (which doubles or geometrically compounds on the previous growth) or stacking it (linearly adding a fixed number of sheets – say 200 at a time) after 5, 12 or 27 iterations.”
“I know that you’re an admirer of Warren Buffett and I understand he offered to buy the business from you at some point and years later he told you you were ‘the one that got away’? … Yes I penned a latter to Buffett to see if he’d be interested because of his ownership and love for GEICO – and he did come back and say ‘I didn’t know about you, I probably should have and yes we’d be interested to talk’. …I took this back to the VC partners and they said ‘we suspect we’d get rogered if we tried to do a deal with Buffett, so no we’ll park that one for now.’”
The irony of technology companies using EBITDA is that more than half of the letters in the acronym have zero effect for them: tech companies typically have almost no debt (so no interest), make ongoing losses (so no tax), and have no real assets (so no D&A). The point of EBITDA is not to blindly repeat the metric, but to strip back costs that show up in the income statement that do not reflect the core ability of the business to generate cash.
This is what using EBITCAC, not EBITDA, captures for any company that generates customer lifetime value. CAC represents the discretionary investment in Customer Acquisition Cost (often comprising sales headcount, marketing, and go-to-market initiatives) today for ROI in the future.
“Clive Schlee, who turned Pret A Manger into a household name during his 16-year reign to 2019, had a simple rule on promotions and price cuts: never discount anything. If you drop your prices, you sell short the value of your product.
Current Pret chief executive, Pano Christou, took little time riding roughshod over his predecessor’s mantra when he launched Pret’s subscription service in September 2020. For a £30-a-month fee, “Club Pret” customers could enjoy up to five coffees a day and 20 per cent off food purchases.”
“Yet he [Christopher Rossbach] believes investors should also look outside the mega stocks and invest in other companies which are providing solutions to some of the acute problems the world faces – climate change and sustainability. Top of his like list are US power management company Eaton and US water technology company Xylem.”
“This article outlines why Vontobel Quality Growth decided fifteen years ago to hire journalists as investigative analysts, and how they work alongside our fundamental analysts to improve the investment research process. Four case studies are used to highlight how this approach has been shown to help identify trends ahead of the market, avoid potentially costly investment mistakes, and use new perspectives to test investment rationales.”
“The International Olympic Committee (IOC) along with Adidas enforces stringent regulations regarding sponsorship during the London Olympic Games so that no other brand could steal their thunder…In a survey conducted during the 2012 London Olympics, more people (37%) recognized Nike as an Olympic sponsor compared to Adidas (24%) who was the Official Sponsor. Among those who identified brands as sponsors, 54% felt more positive about Nike. On social media, Nike dominated with over 16,020 tweets linking “Nike” and “Olympics,” while Adidas had nearly 9,300 similar tweets.”
“I remain of the view that allocators have over-allocated to private equity; that forward returns won’t match the last decade; and that we shall see more stresses appearing as allocators have to sell public market assets to honour commitments and as private equity do more deals to boost fee income.”
“DHR is set to transform into a pure healthcare player consisting of its diagnostics, life science, and biotechnology businesses. The Spinoff of the Environmental & Applied Solutions (EAS) division (Veralto) will pave the way for DHR to become a fully integrated vertical healthcare chain provider. “
“The business of investment like life is sometimes messy. It does not glide its way neatly across a spreadsheet. The business of understanding owner managed companies is even more messy. Cleary it is easier if a proven owner manager stays at the head of a company and stays in their lane of proven past success. Indeed, that exact scenario is why we’ve been so attracted to Ryanair as it approaches its industry endgame. But in truth this is a rarity.”
“It is a 250-year-old company that is all about the shoe and the footbed. Birkenstock is known for sandals. There is a huge opportunity to go into closed-toe-shoes. People know the brand and love the brand, and are willing to pay a premium price. The products sells itself. Birkenstock’s Ebitda margins are 30%. Other footwear companies’ are in the mid-to-high-teens. (Private Equity Firm) L Catterton currently owns 73% of Birkenstock and LVMH, Moët, Hennessy, Louis Vuitton and LVMH CEO Bernard Arnault own 40% of L Catterton. I want to invest with guys like that.”
“After turning Formula 1 into one of the world’s fastest-growing sports leagues, Liberty Media is now looking to run the same playbook with MotoGP, announcing a deal this week to acquire the top motorcycle racing series for $4.5 billion.”
“Some Wall Street analysts estimate that GLP-1 drugs could reduce calorie intake by as much as 20 percent per person and, depending on the number of people on it, that could mean a reduction in calories of up to 2-3 percent in the United States. This creates a worry for food companies, especially ones that make candy, salty snacks, or sugary cereals.”
“It is easy to see this as just the volatility of a single company’s value, but far more is revealed we think. The stability of the company’s core trading vs. how thousands of observers and share owners behaved is remarkable (the whole company changed hands c.7x in an 18m period!). The level of herd behaviour/groupthink now sometimes occurring in markets we think is notable. An army of people with very high IQ’s set about assessing companies daily. Oftentimes this collective effort leads to mostly efficient pricing. That said when a herd of confident, high IQ participants all start to agree with each other, in either direction, powerful re-enforcement biases can come into play:”
“A short list of asset managers account for more than a fifth of the $2.62 trillion of capital committed. The mountain of dry powder — money that investors have committed to private equity and venture capital funds — has set a new record high, as firms anticipate that deal markets will continue improving. Since December 2023, private equity and venture capital funds have added $49.44 billion to their cash reserves, nearly twice as much as they did during the previous 12-month period, bringing the total to more than $2.62 trillion, according to S&P Global Market Intelligence.”
“Well I can’t give you a formulaic approach because I don’t use one. If you want a formula you should go back to graduate school – they’ll give you lots of formulas that won’t work.”
© Quality Growth 2021