Three Top Wealth Creators…
Proprietary pharmaceuticals has long been a “hit record” business. When such a company has a hit on its hands, life can be very good for its shareholders: high margins and a high growth rate, both of which get reflected in its stock price. Gilead’s once-daily pills for HIV are the treatment of choice for their effectiveness, convenience, safety and affordability. Gilead also has a portfolio of treatments for liver, cardiovascular and respiratory diseases. Also, it has a promising near-term, new-drug pipeline, including a treatment for Hepatitis C, which contributed to its high MVIC and EM Change scores.
Dr. Martin has made good decisions about the therapeutic areas Gilead has pursued, the drugs themselves, partnering with other firms at times to deliver winning outcomes and has wisely managed its capital.
Hooch. It’s evergreen. But Brown-Forman has managed their product line and their business remarkably well for a very long time, which has continued on Varga’s watch. Its Jack Daniels’ powerful lifestyle brand gives its fans (yes, there’s a social-networking “fan club” called Friend of the Order), plenty of opportunities to show others who they are (shirts, hats, barrelheads—yes, really), both of which likely contribute to the sale of its bourbon. Then, there’s the innovation behind its ultra-premium-priced brand extensions: Jack Daniels’ Tennessee Honey and its ready-to-drink products like Jack and Cola. Under Varga, Brown-Forman has tuned its portfolio of businesses for the better, divesting consumer durables and wine brands. It’s growing nicely internationally, and has a long history of sage management of capital.
“I want my HGTV!” she said. Both Scripps’ HGTV and its Food Network programming attract upscale viewers, who, in turn, attract advertisers who want to reach them and cable channels who want to carry the content. Both advertisers and the cable carriers pay Scripps to reach these viewers. As a result of distributing its one-time-cost content widely, Scripps delivers nice margins (EBT 35 percent + last three years). The depth and quality of its content is a barrier to entry.
Graham has continuously evolved the Post company, mainly for the better, since 1991. But it’s hard to prosper when hit with the double whammy of newspapers’ print decline and the for-profit-education industry’s slide, including the Post’s Kaplan (education) division, brought on by students’ less than acceptable student-loan repayment record, the resulting investigations and declining enrollment industry-wide.
But after our measurement period ended, Graham did manage to get the declining Post out of its portfolio, courtesy of Jeff Bezos.
Rowan is an oil exploration and production company that provides drill rigs under contract to customers worldwide and is paid a daily rate for their use. When a rig sits idle, Rowan still bears a significant fixed cost. Demand for Rowan’s drilling services depends significantly on oil prices, with all of their long-known volatility. In their industry, drilling contracts are awarded based on competitive bidding, where the winner is often determined by price—and there is now an oversupply of rigs.
In 2011, Rowan chose to make a significant capital investment in four new high-end drilling rigs. But the company may not be able to recoup its investment due to customers’ lack of willingness to pay a sufficient price for their use. In other words, Rowan went for a full-featured offering, which does bring higher utilization and therefore revenue but without contracts to use them and without knowing whether they would be able to earn back their investment because of the challenged pricing environment they’re in. This is not news; for the past three years, they’ve been investing without earning more than their cost of capital (thus the “F” grades on Management Quality in the rankings).
Dell began with a great value proposition: “My PC is exactly what I want!” and a great business design: direct to consumer sales and a just-in-time supply chain, which combined to produce a 12 percent cost advantage back in 1997. Dell rode the wave up.
Dell then skewered its brand with customer-service-outsourcing gaffes, turning off customers, some for good. In recent years, Dell has evolved too slowly, missing key market shifts: cloud, smartphones and tablets. It’s difficult to catch up from behind. In trying to do so, Dell has overpaid for acquisitions, such as Perot Systems. Dell is trying to go private, ostensibly so it can fix this set of issues, although it’s unclear that will help them do more than cut prices and profits further.