Uninspiring…one of the lovely qualities that many undervalued stocks gain as a title for past underperformance, laggardness or just plain investor frustration. I’ll make the comparison of TOC vs. L as a starting point. Each can in their own way be chalked up as uninspiring. Both have lagged against peers, shown futility at times, still paid a dividend, but offered little-to-no capital appreciation over the past few years. Yet looking within their strategic execution has yielded me some “inspiring” results on one (TOC).
“Do what you do best”…I harp on this, but time in & time out the montage proves true in business. If you have the opportunity to be the best that you can be; the industry leader, the business who sets the standard against all other competition…then why not take it.
We all know the story of Loblaw. CEO’s in, CEO’s out. Strategies formed, strategies abandoned. Margins raised, margins slashed. They kinda give the term “futility” a whole different perspective when you look at this company and how it’s been run. I’ve stated before that I feel that their fear of Walmart was unwarranted. True, WMT offers a competitive element to the grocery business in Canada, but not against a giant of the proportions Loblaw once was. Whether it be supply chain management, real estate, customer retention rates, branding or margins…the company had it right and had the consumer paying a premium. I would agree with anyone that streamlining costs and operations would be a necessary goal in order to become MORE competitive against WMT, but they dropped the ball HUGE on this one and aren’t quite sure what they’re doing at the moment and can’t go back to where they once were.
Now that might change next quarter, next year…who knows. Someone eventually in WN will get frustrated with these bozos and find someone who can restore the company to its glory days. But it’s over-valued and sputtering still (recent quarter results were NOT impressive).
So…then there’s TOC. Who for the most part had the same stagnation to their stock price over the past 3-5 yrs. But…look at them today and give me the benefit of the doubt for a moment…
You have a business who had multiple business units in various sectors of information, technology & business services. They created a goal, a strategic plan and began executing those plans even against pressures by the market for results in the short-term. They sold non-core assets, trimmed their balance sheet, created synergies within their own business for what reason?…hmm
To me, it was clear as day that they were getting ready for Reuters, even 12 months ago. They tried once, failed and then aggressively pursued the merger since because of what it offers them in the future. Put the $500M in cost savings aside…what does it give them? Worldwide exposure to all markets, professional products that they can charge a premium for based on quality of information alone and a company that’s been around for how long?…decades. Reuters has, for a long period of time, been damn good at doing what they do best. Also, similar management, similar focus and the ambition to be bigger than either company could do organically on their own.
So back to TOC vs. L. Both have attempted to transform how they do business. They’ve attempted to trim the excess from their operations, focus on core competencies, but only one company actually knew what those core competencies were. Setting an objective is great, but you have to make sure you’re actually picking the RIGHT ONE when you set out to make a plan. Loblaw lost their edge when they decided that they no longer would be the premium higher margin grocer in Canada. If your customers are willing to pay a premium for your product, why on earth would you ever change? People aren’t stupid, consumers know that Walmart is cheaper, but for years were willing to pay a premium for the quality of the PC brands. As I wrote on my blog about why you “never compete on price”…you’re shooting yourself in the foot when you drop your price, because in the end, you’re only taking money out of your own product. That’s just demented…if someone were willing to pay you $15 for a service, would you just decide that you only wanted $10?
I could be wrong about TOC…but from a value approach, the stock is still at the same valuation it was in 2002. If you ask yourself what’s changed without looking at what they’ve done, then you might come to the same conclusion that many others in the market have made. But…I like to think that doing what you do best is something you need to place a premium on. The company has improved in leaps & bounds behind the scenes, even if those future cashflows haven’t shown up yet…they’re coming. McDonald’s recent uptrend from only a few years ago follows a very similar story (selling non-core assets, focusing on stable products, etc)…do the research, look at Apple, Boeing, lots of names with similar stories and they all follow a similar path.
Only time will tell if I’m right…but one comment that caught my interest when I read the Q2 report:
Having vision creates no value if you don’t have the capacity & knowledge to execute a strategy…but if you can…that’s something I’m willing to take a large position on looking forward 5-10 years.
*** This post was from CB Forum about a month ago in response to someone’s questions on TOC. Surprisingly today I was informed that a guest on BNN brought up almost the “exact” same points as I had listed in this opinion. Just felt it was a good enough coincidence to list the opinion on the blog for those readers who do not follow my posts on CB. ***