How do you define what a company is? That should seem like an easy question, and while I doubt you’re still scratching your head, here’s a dictionary definition, anyway: “a business organization that makes, buys, or sells goods or provides services in exchange for money”.
That may serve for the layman. But as an investor, you need to have a much deeper understanding. A company has fixed assets, such as property, for instance.
The out-of-favour grocer Morrisons (LSE: MRW) has a freehold property portfolio worth around £9bn. When you consider that Morrisons has a market cap of £4.65bn, that seems staggering.
Shares in Morrisons have fallen by almost a quarter in 2014. The activist investor Elliot Associates, which has built a stake in Morrisons during a torrid period for the Yorkshire-based supermarket grocer, would like to see all that freehold property transferred into a separate business.
Morrisons’ somewhat less radical approach has been to announce £1bn of property disposals over the next three years. Of course, this alone won’t transform the company. Strategy is incredibly important — and nor is strategy extraneous to our working definition of a company here.
When rating a company an investor needs to scrutinise its management team. Think to the former Tesco (LSE: TSCO) boss, Terry Leahy. Under Leahy, Tesco grew to 31.8% of the UK grocery market.
Tesco’s market share presently stands at 28.7% and shareholders have long suffered on account of Leahy’s over-ambition. (Always, always be wary of over-ambition.)
Here at the Motley Fool we advocate buying quality companies, and subsequently holding them over a period of around five years. Tesco shares have fallen in price by 60p, or 16.5%, over the last five years.
But remember you broker’s disclaimer: ‘Past performance is not an indicator of future returns.’ This refers — if implicitly — to outperformance. But the reverse is true, as well.
Just because a company’s share price has lagged the wider market for an extended period, it doesn’t mean that the shares won’t make healthy gains in future years.
BP (LSE: BP) is another example of a blue-chip laggard. The oil major’s chief executive, Bob Dudley, has spoken of creating “a US-style energy boom in the UK”. To do this necessitates attracting high-calibre young workers.
A company, as we’ve seen, is the sum of many parts. The people — workers, from management down — are integral to its success. In a new survey from Glassdoor, BP was ranked as the ninth best UK company on compensation and benefits. Remember, then, before you next rate a prospective investment, that people are as important — possibly more important — to a firm than its fixed assets.
