Nov 19, 1999 at 12:00AM
Under most situations, I don't have much of a hang-up with talking about myself. It's the subject I know best, after all. But in security analysis, I am a big believer in remaining as objective as possible. Running with blinders on may work for racehorses, but it can be downright dangerous for investors. In keeping with that belief, I tend to rely on objective measures during the decision process -- lots o' numbers, lots o' data, lots o' information about products, market shares, competitive advantages, and the like.
I've promised Jeff that I would stay away from using numbers today, even though the idea runs counter to the type of investor that I am. While I don't place total faith in the numbers like some all-out quant fanatic, I hold steadfast to the belief that the most important step in determining a business' value is finding out what numerical amount comes out when a certain numerical amount is put in. This is an integral part of my day-to-day analytical routine, just like chugging a pot of coffee and smoking a cigar is an essential part of Jeff's early morning routine.
From a comparative standpoint, I am extremely impressed by Coke and Wrigley. These companies are superior to all of the other companies on our food and beverage list in terms of cash-in, cash-out dynamics. With small amounts of marginal invested capital, Coke and Wrigley are regularly able to produce large amounts of cash flow. Based on all of our standard profitability measures, these two companies are heads and tails above their industry peers.
More subjectively, I am a big fan of the compaines' products, and I believe that I have a reasonable familiarity with their businesses, including what each might be able to do in the future. These are not early stage Internet companies; there is literally a century's worth of data on Coke and Wrigley to analyze. I know how these firms have performed when economic times were good, and I know how they've fared when economic times were not so good. I can project with a fair level of confidence how they will perform in the future assuming both good times and bad, with the nod going to Wrigley over Coke on the basis that I have followed it longer.
So from a completely subjective point of view, I would choose Wrigley first, with Coke a close runner-up. Valuation issues aside, I would be quite comfortable becoming a long-term owner in either of these businesses or perhaps even both of them.
Valuation issues aside...
Valuation issues aside...
Valuation issues aside...
Sorry, Jeff. Like a haunting refrain to some old grammar school music class melody, I can't seem to get those three words out of my mind. The objective cells in my gray matter just won't allow it.
In order to meet our investment return goals, I believe that it is essential to select the company that offers the best opportunity to hit our return targets over the next 18 years. In all honesty, then, it is hard for me to make a bullish case for Wrigley or Coke. At present, I objectively believe that the best opportunity for an 18 year "value pop" actually lies in the third company on our list, PepsiCo.
Here's where objectivity comes into play, and where Jeff and I are most likely to disagree. If I were to buy one of these businesses outright today and assume the position of CEO, I would choose Pepsi hands down over Wrigley or Coke. Why? The rationale is purely mine and mine alone: I believe Pepsi has the greatest potential to reap substantial returns from improving its business and profitability over the next 18 years.
Unfortunately for the goals of this portfolio, Coke and Wrigley already are amazingly profitable businesses. And over the past decade or so, it has been no surprise to see that the share prices of these two companies have moved up in lockstep with their profitability gains. In fact, contrary to the general consensus, I believe gains in profitability ratios, like return on equity and return on invested capital, have been largely responsible for the two companies' historical stock performance, not earnings and revenue growth. That may sound controversial to longtime Coke and Wrigley followers. But actually, if Jeff would allow me to insert it at this point, a simple data chart would bear this out.
Pepsi, while certainly no slacker over this decade, has considerably more room for future share price appreciation under an increasing efficiency theory. Because it is starting from a smaller profitability ratio base than either Wrigley or Coke, I believe it is more likely that Pepsi will succeed in making meaningful incremental gains in return on equity and return on invested capital in the next 18 years. Sure, Wrigley and Coke might squeeze out further efficiencies in their business models and boost these figures in the future as well. But the potential for a bang-up return over what is a relatively short investing time horizon (I'm only 25, after all) is far, far smaller.
Say what you will about the many methods of stock picking out there, but it is hard to dispute the ironclad fact that successful long-term Drip investing hinges on finding and buying companies that will see their market valuations increase over time. In the food and beverage industry, I believe this involves selecting the company with the best opportunity to increase its profitability and overall efficiency year after year. As things stand right now, I believe that company is PepsiCo.
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