Livewire reached out to Hyperion on the topic of global investing. We discuss three ASX-listed stocks in our responses to the questions, which included: Which major global investing theme could impact Australian investors, discuss a company with a sustainable competitive advantage, and how do Australian companies become global leaders? Read on for our responses.
Q: Can you tell us about a major global investing theme that could impact local investors?
The platform revolution; platforms are transforming industries by displacing methods of commerce and interaction that have existed for decades before. These include; Amazon, Alphabet, Paypal and Facebook.
The strongest platforms are driven by the best features, depth and functionality. Coupled with superior data/information ecosystems and networks are created. As platforms grow in size the value created for each user of the platform increases (network effects). Growth often occurs rapidly because the platforms create value using resources they don’t necessarily own or control – the users create the value.
The barriers to rival platforms include the need for scale, talent and a culture of innovation. The longer the platform exists the stronger the barriers become. As these platforms grow in size and power the industries and business models they disrupt will increase.
Q: A strong competitive moat can protect margins for decades. Can you share an attractively priced company from your portfolio that has a very strong moat? Please explain why its moat would be hard to cross.
Cochlear has a proven high return on capital business model with a sustainable competitive advantage that ensures the high returns aren’t competed away. In addition, it has strong organic growth options, which results in capital being reinvested at the high returns that the competitive advantage protects, driving long-term earnings growth and intrinsic value.
Cochlear’s competitive advantage relates largely to the reputation it has built up over time and from scale. Large upfront costs to Governments, health funds and individuals, together with the invasive nature of the product (surgically implanted into the skull), result in superior safety and clinical track records being a critical differentiator for the customer. Cochlear outspends its competitors on R&D and on customer service in an attempt to widen the moat over time.
Q: Locally the focus has been on ASX reporting for the last month, but US companies also recently reported. Can you tell us about the dominant/interesting themes coming from management of US companies?
In keeping with comments made previously on the power of the platform, the large technology companies are getting bigger. Size is not providing the normal handicap on growth due to the snowballing nature of platforms and the large and global addressable markets. Alphabet reported revenue growth for 2016 of 20%, Facebook +54% and Amazon +27%.
The businesses are generating these very strong growth rates despite investing a significant amount of capital in future growth opportunities, either via product development initiatives or via acquisition. The companies are able to do both (generate strong organic revenue growth and invest for the future) due to the low capital intensity of their business models. The platforms are expensive to establish, thereby providing the barrier to entry, but the marginal cost of additional revenue, once established, is low.
Q: Few Australian companies have managed to become global leaders. What are some of the attributes that make a global leader?
A competitive advantage that can be exported. For example, it is no good having a scale advantage over local competitors in Australia and expecting it to translate into a competitive advantage overseas. The product or service has to be unique and provide superior customer experience over what is in overseas markets currently. An example is Iress’s Xplan financial planning software and their expansion into the UK. Another example is Seek’s early investment in leading emerging economy online classified sites.
Quality management teams are integral in ensuring profitable long-term growth from international expansion. Significant allocation of capital and resources are often required which can have a large bearing on intrinsic value creation.
A supportive share register of educated, patient investors is also important in increasing the likelihood of long-term global success.
Responses from Joel Gray, Senior Analyst, Hyperion Asset Management