Qualiport

[ May 8, 2000 ]

Uncertain Growth of Static Certainty?

By Maynard Paton (TMFMayn)

Carburton Street, London -- It may be slightly old news now, but it was very refreshing to read the comments from Warren Buffett and Charlie Munger after the recent Berkshire Hathaway (NYSE: BRK.A) AGM. Catching up on the reports from Whitney Tilson and Selena Maranjian, it was quite invigorating to read such straightforward and common sense investment thoughts.

Competitive advantage

One paragraph that caught my eye concerned the investing attribute of a "sustainable competitive advantage".

Buffett: "I've never read (Harvard Business School Professor) Michael Porter, but know enough about him to know we think alike. He's written that durable, sustainable competitive advantages are the core of any business, and that's exactly the way we think. That is the key to investing. The best way to understand this is to study businesses that have achieved it. Ask yourself why there are no new entrants in the razor blade business. Or study Mrs. B. [the founder of the Nebraska Furniture Mart, which Berkshire Hathaway now owns]."

"We like to own castles with large moats filled with sharks and crocodiles that can fend off marauders -- the millions of people with capital that want to take our capital. We think in terms of moats that are impossible to cross, and tell our managers to widen their moat every year, even if profits do not increase every year. We think almost all of our businesses have big and widening moats."

And it's this sustainable competitive advantage characteristic that is a necessity for any long-term buy and hold equity purchase. Combine that feature with substantial avenues for further sales growth, and you have the Holy Grail of long-term investment. But as I alluded to in this Fool's Eye View, the vast majority of companies don't fit this bill. And thus on its own, the long-term buy and hold, say over a holding period of ten years, isn't always a guaranteed method of investment success.

Substantial avenues for further sales growth usually, but not always, means looking towards a "technological industry of tomorrow". And when you're considering industries of the future, that brings in another business and investment trait -- predictability. The exact future is of course, always uncertain.

A typical example. Although I know that there is a huge potential market for any new breed of safety syringe, it would be a pure gamble as to which of the many contenders could take the spoils. Medisys (LSE: MDY), NMT Group (LSE: NMT), Powderject Pharmaceutical (LSE: PJP) and Weston Medical (LSE: WMG) all have different products under development at the moment in this field. Anyone care to pick a long-term winner?

A soft spot for predictability

Although much maligned on these pages for its pedestrian sales growth, I do have a soft spot for Qualiport stalwart Unilever (LSE: ULVR). It's all to do with this predictability factor. You see, unlike the market for revolutionary syringes, nothing much changes in the world of washing powder, a market in which Unilever has a substantial presence. I guess the greatest industry innovation of late has been the introduction of washing powder in tablet form. That may have caused a few shoppers to change their allegiance to a different brand, but with most powders now available in tablet form, it's back to the predictable status quo.

Apart from the emergence of tablets, what else has changed in the world of washing powder? Shane Ritchie replacing Danny Baker to do the doorstep challenge? I'm not aware of any new competitors jumping into the marketplace either. It's the same old handful of "whiter than white" brands that are always on the television. Unilever, with its string of branded products, could be said to have a "moat" surrounding its operations. It's quite difficult to get a global foothold into the branded consumer products market. It's quite difficult to generate significant revenue growth as well, but that's a different story. Unilever reveal their first quarter results on Wednesday and I'll be reviewing the undoubtedly miniscule sales growth later this week.

To me, you can't have a sustainable competitive advantage without the "lack of industry change" predictability factor alongside. Bruce, in this post has outlined his thoughts on the Qualiport 8 concerning their respective competitive advantages. I'm in general agreement, but I tend to side with odysseus2000 when it comes to Dell Computer Corporation (Nasdaq: DELL).

Odysseus2000 comments: "The past for Dell is encouraging but the future relies on the management reacting to changes as successfully as they did before, not on an inevitable revenue stream."

I agree. I'm quite sure that my clothes will be washed with Persil for many years to come. Call it brand familiarity and the lack of any great future product improvements. But can the same be said of Dell? What will happen to Dell if or when PCs and digital televisions merge? Or will PCs be replaced by dumb terminals connected to the Internet? Can Michael Dell keep up with the rapid pace of change, change that is virtually absent from the washing powder industry?

All of this leads to a bit of a quandary. Given that companies with sustainable long-term competitive advantages, with significant avenues for future sales growth and whose products are not under threat from overnight obsolescence are very rare, then a compromise has to be found in our company selection. In other words, should the Qualiport lean towards companies with sales growth potential but perhaps don't have real certainty surrounding their future, or instead concentrate on the much slower growing predictable business certainties? Dell or Unilever?

MMT Computing

This Wednesday could be an eventful day for the Qualiport. Alongside Unilever's first quarter numbers, recent Qualiport addition MMT Computing (LSE: MMT) publish their interim results on the same day.

I wouldn't go as far to say that the results from MMT are "make or break", but certainly their announcement could herald a turning point for the company. The IT services and software provider endured flat earnings last year through the Y2K-inspired slowdown. The results, covering the six months to February 2000, will inevitably be poor compared to the corresponding period from the prior year. But more important than the figures, I think, will be the outlook comments from MMT's management. I'm expecting (or hoping) there to be a "back to business as normal" type statement, with previously Y2K-delayed work now streaming through into the order books. We'll see how things turn out.

Related Links

• Whitney Tilson at the Woodstock for Capitalists
• Selena Maranjian listens to the answers from Omaha
• Querying the Long-term Buy and Hold
• The Predictability of Washing Powder