The Corporate Life Cycle. Jeremy Thomas

Transcription

1 The Corporate Life Cycle Jeremy Thomas

2 Life Cycles 1

3 Life Cycles 2

4 Companies have a lifecycle 3

5 Companies have a lifecycle 40% 4

6 Investment process Idea generation Thematic Stock selection Stewardship Portfolio construction Company life cycle 5

7 Measuring company lifecycle using CFROI 10,000 5,000 5,000 Cash flow 5,000 5,000 5,000 return on investment n = Life - 25,000 Asset Life 5 years IRR or CFROI 10% 6

8 Companies have a lifecycle 7

9 Companies have a lifecycle MEASURING COMPANY LIFECYCLE USING CFROI - UPS CFROI CFROI Forecast Discount Rate % Source: Holt 8

10 Companies have a lifecycle MEASURING COMPANY LIFECYCLE USING CFROI - NOKIA CFROI CFROI Forecast Discount Rate % Source: Holt 9

11 Return on invested capital Corporate life cycle 20 START DISRUPTIVE UP GROWTH FRANCHISE FADING WINNER CASH HARVEST SPECIAL SITUATIONS DEFENSIVE CYCLICAL Time

12 The Corporate Life Cycle: Case Study The US and UK Retail Industry 11

13 Analysing the Corporate Life Cycle in Retail. The Retail Holy Trinity Price/Value TIME = $ Range/Variety Convenience/ Service 12

14 Start Up: Ocado 13

15 Start up: Ocado A better business model than the traditional supermarket? MEASURING COMPANY LIFECYCLE USING CFROI CFROI CFROI Forecast Discount Rate % A unique model in a large sector: The UK grocery market alone = 185bn in 2017 (IGD) 14

16 Ocado through the lens of the Holy Trinity 60,000 50,000 50k Price/Value 40,000 30,000 30k 20,000 10,000 Range/Variety Convenience/ Service 0 15

17 Is Ocado a credible business model? Operating costs incurred by traditional supermarkets 16

18 What are Ocado s operating costs? Two main buckets: Picking - From an automated, centralised warehouse Delivery - From the warehouse to your door Less land, buildings and bills Fewer people 17

19 Cost Bucket 1: Picking - extraordinary, unique technology

20 Cost Bucket 2: Delivery 19

21 Is Ocado a credible business model? Imagine a 100 order Cash margin pre admin Cost of delivery Cost of picking % Cash Margin (pre admin) vs Tesco 7.2% Cost of goods

22 Near term profitability shrouded by investments Targeted investments in R&D that reinforce Ocado s leadership and have the potential to transform an industry: 950 people technology team 200 qualified engineers 21

23 This R&D supports Ocado.com in the UK, and is now also being monetised via partnerships with overseas retailers 22

24 Disruptive Growth: Amazon 23

25 Eureka! Amazon through the lens of the Holy Trinity Price/Value 606 million Range/Variety Convenience/ Service Previously mutually exclusive consumer needs are satisfied Source: Scrapehero 24

26 $ Billions Amazon s extraordinary growth FY 2009 FY 2011 FY 2013 FY 2015 FY 2017 FY 2019 Est Source: Bloomberg as at

27 Defensive Franchise: Costco 26

28 Defensive franchise: Costco The store that s so cheap, millions of people actually pay to shop there! MEASURING COMPANY LIFECYCLE USING CFROI CFROI CFROI Forecast Discount Rate % 27

29 Defensive franchise: Costco Their business model Membership fees form a stable income stream that account for c75% of profit. Thereafter everything sold close to cost. Most retailers think about how much they can sell their merchandise for. We think about how little we can sell it for We re trying to create a retailer fit for the next hundred years Rich Galanti, CFO 28

30 Defensive franchise: Costco designed to minimise invested capital and operating costs 29

31 Defensive franchise: Costco Low costs = low prices, and retail s virtuous circle begins 34.0% Mark-Ups 22% Operating Costs 21% 12.6% 10% Amazon Wal-mart Costco Wal-mart Costco 30

32 Defensive franchise: Costco Huge price gaps with discounter Walmart Rotisserie Chicken Costco: $1.66 per lb Walmart: $2.40 per lb 31% Cheaper Cake Costco: $9.49 Walmart: $18 47% Cheaper Cheese Costco: 15c per oz. Walmart: 25c per oz. 40% Cheaper Vanilla Extract Costco: 62c per oz Walmart:$1.84 per oz 66.3% Cheaper 31

33 Defensive franchise: Costco Treasure Hunt Atmosphere : what you go to Costco to get Costco is known for its treasure hunt atmosphere, offering constantly changing selections of low priced but very high quality discretionary goods among inexpensive, regularly stocked staples. 32

34 Defensive franchise: Costco What you might also come home with 33

35 Costco through the lens of the Holy Trinity Most retailers think about how much they can sell their merchandise for. We think about how little we can sell it for - Rich Galanti CFO Price/Value Range/Variety Convenience/ Service 34

36 Cyclical Franchise: Home Depot 35

37 Cyclical Franchise: Home Depot The US Home Improvement Giant 36

38 Sales ($bns) Cyclical franchise: Home Depot 2,278 stores in key locations throughout a very large country DUOPOLY: US HOME IMPROVEMENT SALES Home Depot Lowes Menards Source: Home Depot and Lowes Company Reports, Forbes 37

39 Cyclical franchise: Home Depot Proved immune to the disruption caused by Amazon etc. Why? Bulky/low value Immediate need Consultation Hard to ship Hazardous to ship Exclusive Brands 38

40 Cyclical franchise: Home Depot Outstanding franchise, but subject to the vagaries of the housing market HOUSING MARKET FHFA US House Price Index Purchase Only SA Source: Federal Housing Finance Agency 39

41 Cyclical franchise: Home Depot US Home Improvement Giant MEASURING COMPANY LIFECYCLE USING CFROI HOME DEPOT CFROI CFROI Forecast Discount Rate % Terrific business with high barriers to entry, great cash generation, but absolute level may fall in a tough housing market. 40

42 Fading winner: traditional supermarkets 41

43 Fading winner: Traditional Supermarkets e.g. Kroger (USA) MEASURING COMPANY LIFECYCLE USING CFROI KROGER CFROI CFROI Forecast Discount Rate % 42

44 Kroger through the lens of the Holy Trinity Price/Value 50,000 Range/Variety Convenience/ Service >500 million 43

45 Return on invested capital Summary START UP DISRUPTIVE GROWTH FRANCHISE FADING WINNER CASH HARVEST SPECIAL SITUATIONS DEFENSIVE CYCLICAL Time 44

46 Conclusion 45

47 Measuring company lifecycle using CFROI NOKIA CFROI CFROI Forecast Discount Rate % Source: Holt 46

48 Measuring company lifecycle using CFROI APPLE CFROI CFROI Forecast Discount Rate % Source: Holt 47

49 Return on invested capital Where is Apple in its life cycle? APPLE DISRUPTIVE GROWTH FRANCHISE FADING WINNER CASH HARVEST SPECIAL SITUATIONS DEFENSIVE CYCLICAL Time 48

50 Conclusion Themes Stewardship 20 Life-Cycle

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