6 Dec 2013

It may seem odd but it is harder than you might think to find companies with clear and measurable strategies. It is depressing how many listed companies offer nothing but a “mission” to be the “best of class”, to be “passionate about their customers” (yuk) and to pursue “value for all stakeholders”. In these challenging times when (thanks to QE) all assets are being priced as if they offer outstanding long-term value, I am inclined to seek companies with reasonably clear medium to long-term strategies. These generally feel obliged to keep their shareholders up to date with progress. Their executives generally accept that their careers depend on their achievements. If the strategies are realistic, they should be quite easy for investors to understand. To be fair, it is easier for a business to offer a clear strategy if it needs to undergo some kind of transformation. It is tougher for e.g. Coca Cola whose strategy understandably consists of flooding ever more of the world with its yummy syrup. The same could be said of Microsoft which has torched billions and billions of dollars trying to add other products to its ubiquitous desk software. There is no call to criticise successful businesses for failing to reinvent themselves – all we need to do is to check their attitude to shareholder value. But if we want to make serious money we should be looking for successful transformations. The simplest but most dangerous transformations are those, like Enterprise Inns, that involve financial rehabilitation. Share investors can be well rewarded if the equity portion of the business rises as the debt decreases. The purpose of this piece is different. It is to look for companies that are taking on the challenge of adapting their business model to changing times. Beware of companies that focus purely on financial targets, especially when these are linked directly to executive remuneration. A German company that I once followed made a quite inexplicable acquisition. While the company’s core business was in software with an operating margin of 25%, it bought a ragbag IT service company with a margin of approximately 0%. The justification offered by the management in defence of the deal was...