pwallace,I have for many years been a shareholder in, and fan...

pwallace,

I have for many years been a shareholder in, and fan of, CCL.

Not a manic fan, but mildy enthusiastic about the business prospects.

The doubts for me began to creep in when they bought the SPC Ardmona business. At the time I thought it was a really dumb thing to do given some of the vagaries of the inputs of that business.

I have also never been deliriously excited by the Indonesian foray. Yes, there are over a hundred million adult mouths simply yearning for fizzy drinks and flavoured water, but I don't know anything about the competitive landscape across Indonesia, nor about the resonance of CCL's brands over there.

So, while Indonesia represents roughly only 15% of group NPAT, with the slowing in the growth rate of the Australian businesses, Indonesia accounts for about half of profit GROWTH for CCL.

And on the subject of competitive landscape, it had been evident that the competitive pressures in Australia have been intensifying for some 18 months to two years.

So when the downgrade happened in May, it was not simply a one-off hiccup for me. Instead, I see it as a maturing business that is likely to find growth less easy to come by in Australia. Asahi/Pepsi are hell bent on taking market share, and what was for a long time a cosy and benign competitive environment risks becoming a bit of a low-intensity and protracted bun fight, in my view.

Don’t get me wrong: I don’t loathe the business. I think that quality-wise, it’s a 7.5 out of 10 business.

Trouble is, at the time of the downgrade, it was trading on an EV/EBITDA multiple of 13x, valuing it like an 9 out of 10 business.

Which is one of the reasons I sold my shares. (The other reason is that I wanted to buy my first shares in VRT, as well as more RMD and AZJ, so CCL became the natural funding source)

And even after its share price fall in the past few months, the stock is now trading on an EV/EBITDA multiple of some 10x, and a FCF yield of 4.5%-odd, neither of which are mouth-wateringly cheap enough for me, especially when I am not overly comfortable with the exact nature of the headwinds facing the company, ie., are they merely “cyclical” or are they “structural”, in which case the de-rating will continue, I sense.


As for COH, you might notice that I have listed it as one of the companies I consider to be definitively investment-grade.

And I hear what you are saying about the N6 launch in the US, which will drive sales velocity over the course of 2014.

A bit like CCL, COH is a fine business that generates super-normal returns, but like all excess-returning economic activity, capital ultimately becomes mobilised and chases after those returns.

Which I think is happening – a bit – in the global hearing implant industry. Note that I’m not saying that COH is going to crumble under the weight of its competitors reeling it in. I think it will always be the industry leader. I just think that some of the activity by some new entrants – the Chinese and the French (William Demant’s purchase in March of Neuralec is not to be sneezed at, I don’t think) – will take the edge of COH’s growth prospects.

But I’m quibbling, really. I think the company will continue to flourish, even if penetration of implants in children in developing economies is reasonably mature.

The reason I don’t own COH is because I don’t see it as a must-own story until the competitive landscape has normalised.

Just in case it doesn’t normalise, and more newcomers arrive on the scene.

In which case, all bets will be off.


As for your follow-up post:

“I'm now convinced that buying high quality businesses and holding for the long term is for me. ...If I were to switch off the share market and check the prices of these companies in 10 yrs time I wonder what return I would have in dividends and capital return? I know that I have missed out from buying and selling too often and trying to time the market. I'm now thinking that I won't sell unless there is a major change in any of the above businesses....I've missed out on some big returns but I think I've learned some major lessons - I reckon I have the confidence and experience to let time now do most of the work!”

That is music to my ears. I think that people fail to realise the opportunity cost of not being invested in high-quality, well-managed, surplus-capital generating companies. They also fail to realise the cost of taxes and transaction fees from trading shares. Trading is a construct of the stockbroking industry, I’m convinced of it!

And the other reason people fail to be fully invested is because they actually don’t really know how to invest in businesses that increase their intrinsic value over time...as a result, the way they adjust for this insecurity is by trying to time the market.

The right businesses will weather any storms (in fact, I have observed often that major economic and equity market slumps often make good businesses even stronger, as their weaker competitors cease to operate or become weakened by such slumps).


Thanks for the contribution.

Cam