Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 462

Two companies with clear competitive advantages

After the turmoil of recent years, many had hoped that 2022 would see a return to a more normal environment. However, the year has been punctuated by macro events such as the crisis in Ukraine, and the Fed’s tightening cycle in the US is impacting equity markets globally.

As this uncertainty continues, it is more important than ever that investors have a sound investment process. It is vital not to get caught up in the hype and noise of the daily market movements, and instead invest with a long-term approach. To help with this, it may be useful to have some guidelines to fall back on when the market noise gets too loud.

Companies that have a sustainable competitive advantage will be better placed to withstand short-term headwinds, maintain market share, and ultimately find new ways to grow.

It can however be difficult to recognise this potential in companies, particularly those that are in the growth stage of their life cycle. And while challenging, it is also important to balance both the narrative and the numbers.

By drilling down into a company’s financials and growth plans, it is possible to identify the quality growth stocks that will prosper over the long-term. The best way to explain how this process works is through a couple of examples.

CSL’s M&A activity

CSL is a multinational biotechnology company that operates in both plasma and influenza markets. It was founded in 1916 and listed on the ASX in 1994.

Throughout its history, it has been able to create a competitive advantage in the areas it operates in through acquisition and combining product portfolios, manufacturing, and distribution to boost the value of the acquired companies.

It has a good historical track record of efficiently deploying capital in attractive growth areas. For example, its acquisition of Aventis Behring, the second largest plasma player, in 2004 has proved to be transformative over the past 18 years. This acquisition enabled CSL to more than double the products produced per litre of plasma from two to five, as it added haemophilia and speciality products. This is now a key source of CSL’s competitive advantage in this area.

For an acquisition cost of $US925 million in 2004, the Behring division now generates US$8.5 billion in sales and US$3.1 billion in earnings before interest, taxes, depreciation, and amortisation (EBITDA).

CSL clearly has what we call a Dynamic Capability - a change-oriented capability that helps a firm redeploy and reconfigure their resource base to meet evolving customer demands and competitor strategies.

CSL has recently entered the renal and iron deficiency market with the acquisition of Vifor Pharma. The market is focussing on the delayed recovery in plasma collections, donation inflation and a US$5 billion capital raising, and has sold down CSL accordingly. However, we believe that CSL will be able to apply the earlier lessons learned via its acquisitions in the plasma and influenza markets to the Vifor acquisition and potentially dominate the renal market as well.


Source: Morningstar

Lovisa’s growth path

Lovisa Holdings is a fast fashion vertically integrated affordable fashion jewellery retailer. It aspires to be a global player and already has more than 70% of its stores operating overseas.

A combination of a clear specialisation in affordable jewellery, vertical integration which enables frequent inventory turnover and speed to market, and negotiating leverage due to scale and capable leadership, makes for a competitive business model.

In addition, Lovisa has a clear top-down focus on data. Stock placement is based on a design created by head office each week, using the prior week’s sales data. This universal approach to product placement generates maximum sales from Lovisa’s wall space.

Because of this focussed approach, Lovisa also has a short payback period for domestic stores of approximately eight months, with new store fitouts taking only 14 days on average.

While Lovisa’s founding CEO Shane Fallscheer retired last year, Inditex Group veteran Victor Herrero became CEO in December. Herrero’s experience managing global expansion at Inditex Group, which owns Zara, Pull & Bear and Massimo Dutti, will be advantageous to Lovisa’s global growth plans.

Lovisa’s proven and astute business strategy, combined with superior management, make it a Quality Franchise that presents a long-term opportunity for investors.


Source: Morningstar

Common ground

While CSL and Lovisa seem, at face value, to be very different companies, they have key characteristics in common. Both have the ability to assess market needs quickly and adjust their offering rapidly to meet changing demand or requirements. They have also successfully expanded into global markets with little impact on the effective management of the business.

The ability to be flexible, to move quickly to take advantage of opportunities as they arise, and capitalise on market trends and demand, will continue to support the ongoing success of such businesses, and provide significant long-term opportunities for their investors.

 

Dr Manny Pohl is Founder and Chairman of ECP Asset Management. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for financial advice.

 


 

Leave a Comment:

     

RELATED ARTICLES

Reece Birtles on selecting stocks for income in retirement

Single-period measures do not work for great growth companies

Invest in Australian value stocks before it is too late

banner

Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.