<THE DRIP PORTFOLIO>
Franchises
A Dripper's Best Friend
by George Runkle ([email protected])
PITTSBURGH, PA (Dec. 9, 1998) -- If you think about it, what is the biggest problem in picking a stock for your Drip portfolio? Here you are planning on investing on a regular basis, maybe monthly, quarterly, or whatever, and it will be year in and year out. The company that is doing good today, may be a loser tomorrow. You certainly don't want to be Dripping a stock that is going to be a loser four or five years from now. How can you do this? Looking at earnings estimates and balance sheets today won't tell you much about what to expect in 2002.
Let's take a lesson from super investor Warren Buffett and look for franchises. What is a franchise? I'm not necessarily talking about Burger King or McDonald's here. According to John Train in his book, The Money Masters, a franchise "has attained a privileged position of some sort, so that another company can't muscle in to squeeze its prices and profits." This type of business is going to be around a long time, and will continue to stay ahead of its competitors.
What kind of companies are franchises? Two companies that I can think of right away are Coca-Cola (NYSE: KO) and Procter and Gamble (NYSE: PG). First, let's look at Coca-Cola. Basically, Coke is carbonated sugar water. However, with its superior distribution network, its strong brand name, and its advertising, it is in a particularly strong market position. Sure, there are store brand colas that sell for half the price. However, many of us see Coca-Cola as a minor luxury, and buying an imitator because it is cheaper is, well, just plain cheap. There is Pepsi as a competitor, but one is hard pressed to come up with another cola that is anywhere near the strength of these two brands.
Let's move on to Procter and Gamble. What does it manufacture? Crisco, Pringles potato chips, Tide detergent, Jif peanut butter, Ivory soap, Mr. Clean, and Comet are just a small sample of its product line. Not only are these brand leaders, but they have something else that is very important. They have shelf space. Grocery stores only have so much shelves available, and they're unwilling to remove a proven product from the shelf for another less proven product. Getting the shelf space is a major battle, and Procter and Gamble has an inordinate share of shelf space in your local grocery.
Over the time we own stock in either Procter and Gamble or Coca-Cola, we will certainly see problems occur with earnings. Foreign currency fluctuations, acquisition costs, political problems in the world, all will happen and make the stock price drop here and there for short periods. Other times investors will get overly enthusiastic for the stocks and the price/earnings multiples will go through the roof. Through all this, people around the world will drink Coca-Cola and wash their clothes in Tide. We'll continue cooking with Crisco, and clean our pots and pans afterwards with Joy. It won't matter, the franchises will continue.
The biggest problem in finding a franchise business is just that -- finding a franchise. Any company that gets into a lucrative market is bound to attract competitors. It is very difficult in our economy for a company to position itself so well it has no real competition. In the next Drip report I write (on December 14), we'll look at companies that are possible franchise candidates.
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