You wrote before, I think a year ago, that you want to invest in high quality companies, you said high quality companies were relatively cheaper at this time. What’s your definition of a high quality company?
Yacktman: "I would make it a function of high return on asset businesses. In other words, the businesses that have the sustainability to earn high returns on assets, I think they are the high quality businesses. And if you were to take your piece of paper and use two axis, one would be fixed assets, the other economic sensitivity, you could plot any company on there. The companies that have low capital intensity and low cyclicality like Coke (KO) or Pepsi (PEP), you can go on and on, Proctor & Gamble (PG) certainly, those businesses have the ability to earn some of the highest returns out there. What you’re looking for is not only both the low asset requirements and low cyclicality but in addition to that, and that usually means a disposable type product or service, it also means you have a large market share.
Proctor & Gamble, while struggling in the short term, no question about it, it’s disappointed people and they haven’t been able to get gross margins up, they’re various reasons for that. But I think the reality is when you have 50% of the detergent market in the U.S., somebody else can’t take it from you. You can blow it, but they can’t take it from you. And what happens is when you have those market shares, 40% market share versus 20% market share, you don’t earn twice as much, you earn 4 times as much. Because what happens is your cost structure gets to be lower and lower, relative to your competition. And you can spread your costs across more units.
And that’s why if you’re going to be a great international company for the next 20, 30, 40, 50, years, I think you’re going to have to have exposure in both the U.S., because 20-25% of the world GDP is there, and you’re going to need that to get the volume, then you want to expand those entities that you’re making into particular areas, like China or India, because you get the volume growth, and that will enhance your strength.
It’s a matter of getting it all together in the right format, and some companies are probably ahead of other companies in doing it, but you look a few years ago, Kraft (KFT) had to buy Cadbury and Irene (Rosenfeld, Kraft CEO) had to make that decision, it was a very expensive decision, and I don’t think she handled it the best way. But she knew she had to get that international exposure, get a huge international exposure as a distribution channel to start moving things through it, and she had a lot of lagging low growth businesses. We put Kraft next to Pepsi for instance, and here you’ve got Pepsi with snack foods, what would you rather have, Frito Lay or Nabisco if you’ve looked at an aisle in the grocery store, look at the Frito Lay aisle compared to the cooking aisle, what would you rather have, Maxwell house coffee and crystal light, or would you rather have the carbonated beverages, Tropicana and Gatorade. Why would you not want to own Pepsi versus Kraft? In the short term Pepsi hasn’t executed itself well in certain areas, but again in the short term, look at Coke. In the past 15 years Coke went from 89 to below 40, back to the mid-70s. It’s a matter of when you bought it. It’s the same company, yes there were periods of time when it didn’t execute very well, and they’re doing better now, but the big decision was when you bought it. We bought ours in the low 40s, and we did very very well."
With that we used our “All-In-One” Screener to screen the companies with the highest ROA in Yackman’s portfolio. Here is what we got:
|PM||Philip Morris International Inc.||$91.44||$154,012||25%||43,189||0.03%|
|TJX||The TJX Companies, Inc.||$44.28||$33,122||20%||19,526||0.01%|
|APOL||Apollo Group Inc||$27.20||$3,412||19%||5,601,770||1.50%|
|BCR||C.R. Bard, Inc.||$97.31||$8,431||15%||6,762,949||4.60%|
|LANC||Lancaster Colony Corp.||$69.43||$1,910||14%||460,000||0.21%|
The entire interview will be published soon. In the interview Mr. Yacktman also discussed the best times to buy stocks and his view on value traps. Stay tuned.
In the meantime, check out the cheapest stocks in Don Yacktman’s portfolio.