Great Companies I Love ( Will be updated when I find new ones I love )
PNRA
I believe them to be offering healthier food choices that taste good and are served quickly. Granted some of this may be more perception that reality, but their bagels, bread, soups, and other fare are prepared from quality ingredients. I might be proven wrong, because I'm not scrutinizing the details, but that's my impression and their reputation.
I'm sure you could put forth an argument that there are competitors doing likewise, nor are there barriers to entry preventing others from jumping on the movement. You could say the very same thing about CMG, or any other restaurant for that matter. Moats just don't exist here, but reputations aren't easily built, and PNRA has established a very good one.
As an investor I like the business model. There's a lot of overhead in creating and running a restaurant. PNRA is able to generate revenue from dawn until late in the evening -- breakfast, lunch, dinner, carry-out, catering. That to me is the special sauce. Few restaurants are doing all those things. The current set of problems are predominately operational. That's a good problem to have. It's correctable. If they were suffering from quality issues or reputation, turning it around is neither quick nor easy. In my mind most of what they are going through could be categorized as growing pains. They've become very popular and are challenged to provide the same level of service.
MasterCard
Few companies sport the kind of mind-blowing financial metrics MasterCard regularly puts up: 55% operating margins, near-40% net margins, 50% returns on equity, and the list goes on. Those figures are outstanding because MasterCard’s competitive position is equally so — part of an industry duopoly, with about as powerful a network as there is, and a brand strength born of decades of successful marketing efforts. Add a highly satisfied workforce and a talented and forward-thinking leader in Ajay Banga, and I'm convinced that this is one to hold on to.
SBUX
Nobody sells coffee like Starbucks. But mix a few ingredients together in 20 or 30 different ways and give people a "third place" to spend their time, and you've got an easy-to-understand, hard-to-duplicate business model. It's not just the coffee that brings people back (though that helps), it's the knowledge that you could settle in with your laptop or simply sit and watch the world go by in a pleasant atmosphere. Simple. Effective.
BOFI
A bank of the future, the horribly named BofI (Bank of Internet) Holding makes consumer and business loans across the entire country through online channels, allowing it to operate only one physical branch (in San Diego). Low fixed costs allow it to achieve a strong level of profitability for any bank, let alone one that started stacking Benjamins barely a decade ago. This federal bank sports more than $4.4 billion in assets, including loans of $3.7 billion, a majority being real estate mortgages. I think I just heard you cringe in fear, but fret not: With stringent loan oversight, only 0.57% of the bank's loans are currently classified as non-performing.
Overall, the business is run to achieve three strong goals, as stated in its SEC filings:
BofI is largely surpassing these goals today, and given its modest size, the runway for healthy growth stretches far in the future. The bank's book value grew more than 30% in the year ended June 30, to more than $25 per share, while its loan portfolio grew 56.5%, and earnings per share jumped 33% to $3.85. Around $73, the stock trades at 14.6 times the more than $5 per share in earnings that are estimated for the coming year. That said, we'll be watching book value, loan quality, and the three factors above most of all. Almost all transactions — check deposits, bill payments, mortgage applications — happen online or through BofI's mobile applications. And BofI's checking account holders don't have to worry about fees when using another bank's ATM; they get unlimited reimbursements. In addition to making banking more convenient, BofI also makes it more lucrative. Without the expensive overhead that comes with managing a slew of brick-and-mortar branch offices, BofI can offer its customers better rates on savings, CDs, and even mortgages and auto loans" Young BofI is taking market share by offering customers a better deal, and word of mouth from happy clients drives more business. As long as management stays focused on sensibly growing profits, this little bank should have a big future.
Blue Nile
Selling engagement rings online would seem a venture doomed to failure. After all, customers have been trained that shopping for the perfect ring is a careful, managed, drawn-out process involving much comparison, consideration, and at least two months' salary. What Blue Nile has done is to bring care, comparability, and education in selecting the perfect diamond to their online experience. Moreover, though it may be an online experience, there's considerable help waiting just a mouse click or phone call away. What Blue Nile has done is turn diamond buying into a truly customer-directed experience — with lower prices. In retrospect, how couldn't this company have thrived versus the so-called Main Street jeweller?
There's truly so much to like here: The company is capital-light, operates no expensive stores, has long-term supply relationships that deliver favorable pricing, and sports a negative working-capital cycle (i.e., its customers pay up front, but Blue Nile can stretch out paying its suppliers). The asset-light, low-working-capital business model allows for aggressive pricing: Blue Nile sells its diamonds at roughly 20% above cost; its bricks-and-mortar counterparts simply cannot match those margins. Low cost wins. Sorry, ladies — this applies even to engagement rings. Think of it as getting more bang for your fella's buck.
And yet, Blue Nile (the stock) has never really lived up to Blue Nile's potential. To my mind, most of that blame lies with the manner in which the company was brought public, and by that I mean the generosity with which the company lavished equity awards on insiders out of the gate. That largesse acts as a retardant to outside shareholder value accrual as the share-count grows, profits are diluted, and the company uses cash generated by the business to buy back shares to offset dilution. To give scale to the problem, I estimate that Blue Nile has generated a cumulative $157 million in free cash flow since going public, yet nearly half these funds — $72 million — have gone toward the anti-dilution cause.
Diageo
Diageo (DEO) meets all of our criteria; it’s the leading premium spirits company in the world, its products are as close to technology proof as you’re going to get, its liquor brands span across all tastes and preferences, its business is robust enough to survive economic shocks, and Diageo is a Dividend Achiever par excellence.
I once, tongue in cheek, argued that Diageo was the ultimate 12- to 18-year play in reference to its premium scotch brands:
Anyone can start an exclusive new vodka brand given a sufficient pool of capital. Consider the example of Grey Goose. American billionaire Sidney Frank created the brand in 1997 and sold it to Bacardi just seven years later for a quick $2 billion. Had he opted instead to create a new scotch brand, he would not have lived long enough to enjoy its success. When the late Mr. Frank passed away in 2006, his first batch of scotch still would have needed another five years or more of aging to be taken seriously.
Diageo’s dominance of scotch via Jonnie Walker and its other brands is a competitive advantage that won’t be disappearing any time soon. Diageo also gives you access to the consumers of tomorrow; the company currently gets 42% of its sales from emerging markets, and it will soon get more than half.
The stock currently pays a dividend of 2.7%. I recommend you buy Diageo, reinvest the dividends, and hold on to it—forever.
Heineken
Next on the list is global megabrewer Heineken (HEINY). Beer is no longer much of a growth industry in the West, but demand is stable. And in many emerging markets, beer is still a phenomenal growth opportunity and an excellent way to invest in rising incomes among the new global middle class.
Heineken gets about half of its revenues and 64% of its sales by volume from emerging-market countries, and it has excellent positioning in Africa, the last real investing frontier of any size. Africa already accounts for 22% of Heineken’s sales by volume and 14% of revenues, and this percentage will only increase with time as African consumer trade-up from home brews to branded beer.
Prices are considerably higher in developed countries, which explains the gap between revenues and sales by volume. Heineken sells less beer in the West, but it charges more for the beer it sells. As incomes rise in emerging markets, expect this gap to close.
30 years from now, Microsoft (MSFT) and Apple may no longer exist, or if they do you can bet that they will look vastly different than they do today. But 30 years from now, beer drinkers the world over will still be cracking open bottles of their favorite brews.
Heineken trades for a reasonable 17 times earnings and pays a modest 1.8% dividend. Buy it and hold it…forever.
Realty Income
Moving away from consumer brands, I want to highlight my favorite long-term REIT holding, Realty Income(O), a conservative triple-net REIT that owns things like pharmacies, gyms and distribution centers. Realty Income is very selective in both the properties it chooses and the tenants responsible for paying the rent.
Realty income has a 44-year track record as a landlord. It owns 3,800 commercial properties in 49 states and Puerto Rico, all of which are leased under long-term leases typically of 10-20 years. To spread the risk, Realty Income’s tenants are spread across 200 companies and 47 industries.
Realty Income has been a dividend-paying and dividend-raising monster since going public in 1994. In 19 years, it’s made 519 dividend payments and hiked the dividend 73 times. Importantly, unlike many of its brethren in the REIT space, Realty Income sailed through the 2008-2009 meltdown without a scratch. Not only did it maintain its dividend throughout, Realty Income actually raised it.
I have no idea what the world will look like 30 years from now. But I have no doubt in my mind that the three rules of real estate will be the same then as today: location, location, location.
Realty Income has taken a beating of late, as have most income-oriented investments. Fears of rising bond yields and Fed tapering have scared away would-be investors. Use this as an opportunity. Buy Realty Income, enjoy its 5.6% dividend, and hold—forever.
Nestlé
Nestlé (NSRGY) sells food and nutrition products; everything from baby formula and chocolate milk to instant coffee and packaged food. These are the kinds of products that tend to have stable demand, even in a recession. Times would really have to be hard for a person to forgo ice cream or chocolate candy.
Nestlé currently yields 3.1%, and as you have come to expect, that dividend is growing. Nestlé has grown its dividend every year since 1996, and its dividend has grown at a 12.5% annual clip since 2001. (Note: these rates are in the company’s reporting currency, the Swiss franc.)
Few companies in the world have as global a footprint as Nestlé. The company is active on every inhabited continent, and it gets 30% of its sales from fast-growing emerging markets. This is expected to be as high as 45% by the end of this decade, meaning that Nestlé has ample room for continued growth.
I cannot be certain of much is this world, but of this I have no doubt: 30 years from now, Nestlé will still be in business, and the company will be selling a lot more food and drink products than it is today. Its dividend will also be a lot higher.
PNRA
I believe them to be offering healthier food choices that taste good and are served quickly. Granted some of this may be more perception that reality, but their bagels, bread, soups, and other fare are prepared from quality ingredients. I might be proven wrong, because I'm not scrutinizing the details, but that's my impression and their reputation.
I'm sure you could put forth an argument that there are competitors doing likewise, nor are there barriers to entry preventing others from jumping on the movement. You could say the very same thing about CMG, or any other restaurant for that matter. Moats just don't exist here, but reputations aren't easily built, and PNRA has established a very good one.
As an investor I like the business model. There's a lot of overhead in creating and running a restaurant. PNRA is able to generate revenue from dawn until late in the evening -- breakfast, lunch, dinner, carry-out, catering. That to me is the special sauce. Few restaurants are doing all those things. The current set of problems are predominately operational. That's a good problem to have. It's correctable. If they were suffering from quality issues or reputation, turning it around is neither quick nor easy. In my mind most of what they are going through could be categorized as growing pains. They've become very popular and are challenged to provide the same level of service.
MasterCard
Few companies sport the kind of mind-blowing financial metrics MasterCard regularly puts up: 55% operating margins, near-40% net margins, 50% returns on equity, and the list goes on. Those figures are outstanding because MasterCard’s competitive position is equally so — part of an industry duopoly, with about as powerful a network as there is, and a brand strength born of decades of successful marketing efforts. Add a highly satisfied workforce and a talented and forward-thinking leader in Ajay Banga, and I'm convinced that this is one to hold on to.
SBUX
Nobody sells coffee like Starbucks. But mix a few ingredients together in 20 or 30 different ways and give people a "third place" to spend their time, and you've got an easy-to-understand, hard-to-duplicate business model. It's not just the coffee that brings people back (though that helps), it's the knowledge that you could settle in with your laptop or simply sit and watch the world go by in a pleasant atmosphere. Simple. Effective.
BOFI
A bank of the future, the horribly named BofI (Bank of Internet) Holding makes consumer and business loans across the entire country through online channels, allowing it to operate only one physical branch (in San Diego). Low fixed costs allow it to achieve a strong level of profitability for any bank, let alone one that started stacking Benjamins barely a decade ago. This federal bank sports more than $4.4 billion in assets, including loans of $3.7 billion, a majority being real estate mortgages. I think I just heard you cringe in fear, but fret not: With stringent loan oversight, only 0.57% of the bank's loans are currently classified as non-performing.
Overall, the business is run to achieve three strong goals, as stated in its SEC filings:
- Maintain an annualized return on average common stockholder's equity of 15% or better;
- Annually increase average interest-earning assets by 15% or more; and
- Reduce annualized efficiency ratio to a level 35% or lower [this measures overhead compared to revenue; the lower the better].
BofI is largely surpassing these goals today, and given its modest size, the runway for healthy growth stretches far in the future. The bank's book value grew more than 30% in the year ended June 30, to more than $25 per share, while its loan portfolio grew 56.5%, and earnings per share jumped 33% to $3.85. Around $73, the stock trades at 14.6 times the more than $5 per share in earnings that are estimated for the coming year. That said, we'll be watching book value, loan quality, and the three factors above most of all. Almost all transactions — check deposits, bill payments, mortgage applications — happen online or through BofI's mobile applications. And BofI's checking account holders don't have to worry about fees when using another bank's ATM; they get unlimited reimbursements. In addition to making banking more convenient, BofI also makes it more lucrative. Without the expensive overhead that comes with managing a slew of brick-and-mortar branch offices, BofI can offer its customers better rates on savings, CDs, and even mortgages and auto loans" Young BofI is taking market share by offering customers a better deal, and word of mouth from happy clients drives more business. As long as management stays focused on sensibly growing profits, this little bank should have a big future.
Blue Nile
Selling engagement rings online would seem a venture doomed to failure. After all, customers have been trained that shopping for the perfect ring is a careful, managed, drawn-out process involving much comparison, consideration, and at least two months' salary. What Blue Nile has done is to bring care, comparability, and education in selecting the perfect diamond to their online experience. Moreover, though it may be an online experience, there's considerable help waiting just a mouse click or phone call away. What Blue Nile has done is turn diamond buying into a truly customer-directed experience — with lower prices. In retrospect, how couldn't this company have thrived versus the so-called Main Street jeweller?
There's truly so much to like here: The company is capital-light, operates no expensive stores, has long-term supply relationships that deliver favorable pricing, and sports a negative working-capital cycle (i.e., its customers pay up front, but Blue Nile can stretch out paying its suppliers). The asset-light, low-working-capital business model allows for aggressive pricing: Blue Nile sells its diamonds at roughly 20% above cost; its bricks-and-mortar counterparts simply cannot match those margins. Low cost wins. Sorry, ladies — this applies even to engagement rings. Think of it as getting more bang for your fella's buck.
And yet, Blue Nile (the stock) has never really lived up to Blue Nile's potential. To my mind, most of that blame lies with the manner in which the company was brought public, and by that I mean the generosity with which the company lavished equity awards on insiders out of the gate. That largesse acts as a retardant to outside shareholder value accrual as the share-count grows, profits are diluted, and the company uses cash generated by the business to buy back shares to offset dilution. To give scale to the problem, I estimate that Blue Nile has generated a cumulative $157 million in free cash flow since going public, yet nearly half these funds — $72 million — have gone toward the anti-dilution cause.
Diageo
Diageo (DEO) meets all of our criteria; it’s the leading premium spirits company in the world, its products are as close to technology proof as you’re going to get, its liquor brands span across all tastes and preferences, its business is robust enough to survive economic shocks, and Diageo is a Dividend Achiever par excellence.
I once, tongue in cheek, argued that Diageo was the ultimate 12- to 18-year play in reference to its premium scotch brands:
Anyone can start an exclusive new vodka brand given a sufficient pool of capital. Consider the example of Grey Goose. American billionaire Sidney Frank created the brand in 1997 and sold it to Bacardi just seven years later for a quick $2 billion. Had he opted instead to create a new scotch brand, he would not have lived long enough to enjoy its success. When the late Mr. Frank passed away in 2006, his first batch of scotch still would have needed another five years or more of aging to be taken seriously.
Diageo’s dominance of scotch via Jonnie Walker and its other brands is a competitive advantage that won’t be disappearing any time soon. Diageo also gives you access to the consumers of tomorrow; the company currently gets 42% of its sales from emerging markets, and it will soon get more than half.
The stock currently pays a dividend of 2.7%. I recommend you buy Diageo, reinvest the dividends, and hold on to it—forever.
Heineken
Next on the list is global megabrewer Heineken (HEINY). Beer is no longer much of a growth industry in the West, but demand is stable. And in many emerging markets, beer is still a phenomenal growth opportunity and an excellent way to invest in rising incomes among the new global middle class.
Heineken gets about half of its revenues and 64% of its sales by volume from emerging-market countries, and it has excellent positioning in Africa, the last real investing frontier of any size. Africa already accounts for 22% of Heineken’s sales by volume and 14% of revenues, and this percentage will only increase with time as African consumer trade-up from home brews to branded beer.
Prices are considerably higher in developed countries, which explains the gap between revenues and sales by volume. Heineken sells less beer in the West, but it charges more for the beer it sells. As incomes rise in emerging markets, expect this gap to close.
30 years from now, Microsoft (MSFT) and Apple may no longer exist, or if they do you can bet that they will look vastly different than they do today. But 30 years from now, beer drinkers the world over will still be cracking open bottles of their favorite brews.
Heineken trades for a reasonable 17 times earnings and pays a modest 1.8% dividend. Buy it and hold it…forever.
Realty Income
Moving away from consumer brands, I want to highlight my favorite long-term REIT holding, Realty Income(O), a conservative triple-net REIT that owns things like pharmacies, gyms and distribution centers. Realty Income is very selective in both the properties it chooses and the tenants responsible for paying the rent.
Realty income has a 44-year track record as a landlord. It owns 3,800 commercial properties in 49 states and Puerto Rico, all of which are leased under long-term leases typically of 10-20 years. To spread the risk, Realty Income’s tenants are spread across 200 companies and 47 industries.
Realty Income has been a dividend-paying and dividend-raising monster since going public in 1994. In 19 years, it’s made 519 dividend payments and hiked the dividend 73 times. Importantly, unlike many of its brethren in the REIT space, Realty Income sailed through the 2008-2009 meltdown without a scratch. Not only did it maintain its dividend throughout, Realty Income actually raised it.
I have no idea what the world will look like 30 years from now. But I have no doubt in my mind that the three rules of real estate will be the same then as today: location, location, location.
Realty Income has taken a beating of late, as have most income-oriented investments. Fears of rising bond yields and Fed tapering have scared away would-be investors. Use this as an opportunity. Buy Realty Income, enjoy its 5.6% dividend, and hold—forever.
Nestlé
Nestlé (NSRGY) sells food and nutrition products; everything from baby formula and chocolate milk to instant coffee and packaged food. These are the kinds of products that tend to have stable demand, even in a recession. Times would really have to be hard for a person to forgo ice cream or chocolate candy.
Nestlé currently yields 3.1%, and as you have come to expect, that dividend is growing. Nestlé has grown its dividend every year since 1996, and its dividend has grown at a 12.5% annual clip since 2001. (Note: these rates are in the company’s reporting currency, the Swiss franc.)
Few companies in the world have as global a footprint as Nestlé. The company is active on every inhabited continent, and it gets 30% of its sales from fast-growing emerging markets. This is expected to be as high as 45% by the end of this decade, meaning that Nestlé has ample room for continued growth.
I cannot be certain of much is this world, but of this I have no doubt: 30 years from now, Nestlé will still be in business, and the company will be selling a lot more food and drink products than it is today. Its dividend will also be a lot higher.