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

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Welcome to Firstlinks Edition 464 with weekend update

The 2021 Census reports that Millennials are now the largest generational group in Australia. While we are increasingly secular and culturally diverse, our differences are far more accepted than the way the US is heading. And please take our short retirement survey.

  • 30 June 2022

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

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.