Boring Companies Part 2

Healthy Margin

If the company does not have a key product or service that has a healthy margin this company is not boring. Without a solid margin to rely on companies will tend to expand product lines beyond core competencies in an attempt to increase profits, or to just stay solvent.
Harley Davidson is a good example of just this scenario. Harley has seen its production costs increase over the last twenty years due to gowing material costs, inefficiencies, poor production standards, and increased labour costs. As a result of these changes their margin has not surprisingly suffered. Luckily, Harley has been able to stall any truly dire news by increasing their product’s retail in step with these increasing costs- a feat they have only been able to achieve due to strong branding and rock solid marketing.
As sales dipped Harley expanding out into branded clothing, children’s toys, food products and housewares. These areas are well outside of Harley’s core competencies of making motorbikes. While some of these ventures may be profitable it dilutes the market impression of the brand and distracts employees from the key task of making better motorbikes. By the way my favourite product in the lot is the Harley Davidson dinnerware set- classy.

Boring companies stay focused on their core competencies. They don’t get distracted chasing every dollar, not because they are any stronger willed than other businesses, but because there is less pressure- the current products they are making are returning a healthy profit due to their solid margin.

Fits consumer’s needs now and will do so in the future

Companies that repeatedly launch new products are not boring companies. There is never an opportunity in these businesses to focus on reducing production costs, or improving product pipelines. Boring companies on the other hand produce the same product for years, sometimes even decades. These companies can quite successfully drive down all of their production and material costs making them a lean highly profitable business with an ever growing moat.

NVidia produces video cards among other things. As the gaming industry grows so to do the video card requirements to run the newly produced games. With new games coming out every few months the estimated lifetime of a video card is about a year, after which time it must be replaced by a newer card. The limited time use aspect of this business is appealing but consumers are not buying replacements, they are expecting new and better products every iteration. Consumers also have no brand loyalty to Nvidia- there is no guarantee that the consumer will repurchase from Nvidia instead of a competing company. This translates to a dry moat for Nvidia and an unclear picture if the company will meet the consumer’s needs in the future.

An example of a boring company that does meets this criteria would be Able Smith Button Company. Able Smith has almost no active product ingenuity, they produce the same products that they made twenty years ago. It is also very likely that in twenty years there will still be a need for 1/4 inch white buttons. This allows Able Smith to aggressively negotiate prices with vendors and focus on improving its other production costs.

Conclusions

Boring companies are great finds and can have substantial positive impacts on an investor’s portfolio. Hopefully by providing a more indepth explaination of what boring companies are and aren’t you will be better positioned to find one and add it to your own portfolio.

6 responses to “Boring Companies Part 2”

	Daniel M. Ryan July 30th, 2009 at 13:04 If you’re interested, I found a boring company lurking in the lowest quintile P/E part of the stock universe. It’s called Compass Minerals [CMP], and it mines rock salt and sulfate of potash – two boring product lines. Unfortunately, it’s not been a company all that long and its growth so far is a little too high to be trusted. Also, it may have expanded its inventory imprudently as of the last quarter. Compass is a speculative growth stock, a real oddity in the low P/E collection. But its gross margins are high and its current P/E is low. Rock salt mines are hard to find nowadays.
	JB August 25th, 2009 at 02:32 Please tell me how a commodity producer or rock salt is a growth company? CMP sells into mature, slow growth end markets. Volumes will vary with weather conditions, and yes, salt prices have been on the rise – but this has been more of a function of capacity constraints and not incremental structural demand. If you buy this company…you buy it for the mix shift in their SOP production…not as a growth company.
	Daniel M. Ryan September 7th, 2009 at 01:17 What would you say about a company whose seven-year EPS growth was about 50%? Granted that a 50% rate is unsustainable, which is the main reason why I labeled it “speculative,” but EPS growth rate is the reason why I labeled it “growth.” Revenue growth in the same period is 12.5%. If Compass has managed to squeeze out that kind of growth in “mature slow growth end markets,” then they either are or soon will be the dominant producer in the market. From its 10K: “We are among the lowest-cost salt producers in our markets because our salt deposits are high-grade quality and among the most extensive in the world, and because we use effective mining techniques and efficient production processes.” That constitutes a moat of a sort, if not an inherently fast-growing one. The company also acknowledges “The salt industry is characterized by modest growth and steady price increases across various grades.” If you’re saying that the salt market is going to limit them in the future, I understand. That must be one of the reasons why its P/E is so low: a lowest-quintile 10.19. Its yield is only 2.49%, but its dividend has been increased once per each year it’s been in existence. (There was a post-IPO increase that made for two in a year, but that extra increase was unique.) The payout ratio, as of the end of 2008, is 27.9%. Note: both growth figures are estimated using logarathmic regression. They’re estimated yearly rates.
	value investor September 9th, 2009 at 03:41 An interesting company, I haven’t done my research on them the one concern I have over that EPS is their association with potash. Potash was a flash in the pan explosion last year and has now fizzled right out. Unless you are fairly confident that there will be a resurgence Compass has a few concerns. Just passing my eyes over there numbers their quick ratio and current ratio seem a touch off where I would like to see them. I would look hard at the balance sheet and see if they are spending like potash will have another great season or playing it safe and calling last year a flash in the pan.
	JB September 9th, 2009 at 04:26 I get what you are saying. CMP has unique assets that cannot be replicated. Their salt seems are much thicker than any competitors so they can basically obtain more salt per blast, if you will. So they have lower unit costs. All I am saying is that I think it’s one of this stocks that is kind of a boring story…nothing reallly exciting to hang your hat on. That said, its a regional business, highly defensive….all in all, it’s a pretty cool, if not compelling stock. I know more about potash than I do salt. Have visted POT’s lanigan mine. Listened to CFO tell me that prices couldn’t/wouldn’t crack and when I tried to tell him otherwise, he just kind of tuned me out. Nevertheless, I think their SOP is extremely interesting and I like the stock because they are reducing their dependence on generic potash and shifting their production to be solar pond based…which lowers costs tremendously and they will no longer need to purchase MOP from Mosaic. Not entirely sure if CMP prices out though. Would like to see it below 50. Feels rich at 57.
	Daniel M. Ryan September 10th, 2009 at 04:16 @value investor: You’re right about it not being a value stock. Soem of its ratios push it out of the value zone. @JB: Yes, it’s had a bit of a run-up thanks in part to a slew of buy recommendations. It might go back below 50.