Noteworthy to see Jeff Saut of Raymond James US enthuse recently about platform companies, one of the key themes developed by Gavekal Research.
How to define a platform company? One that has moved its model away from owning assets to growing intellectual property and has proven the value of the strategy by consistent and high levels of cash flow generation. Here’s a piece from the note:
“There are a couple of very characteristic signs that you can see when a company becomes a platform company. You can look through their financial statements and you can see the shedding of fixed manufacturing assets. And you can then see – hopefully – the productivity enhancements and superior returns that they’re gaining as a function of doing that. So when we look at Furniture Brands, we see a company that in 1998 had over $300 million in net property and plant equipment. Today, they have about $250 million. They’ve radically shed fixed assets. They shut down a lot of factories in North Carolina and [elsewhere in] the U.S., and moved a lot of production to Asia. In 1998 Furniture Brands generated $90 million of free cash flow. Last year [2005], they generated $160 million of free cash flow. That’s largely because cap-ex [capital expenditures] was running at an annual rate of about $50 million in 1998 and now it’s running at an annual rate of about $30 million. So you see the movement and reconstitution of their assets. They’re investing money into intangible capital – investing in brands and in employee training.”
He goes on to make two interesting points, consistent with earlier notes, about the nearer term market situation: though it remains a tough call to talk about an economic reacceleration, the next few months should help to clarify the situation. This interest rate move combined with the “buy signal” from early December on the U.S. Dollar Index, tallies with the stronger than expected economic figures we have seen year-to-date and gives credence to a potential economic reacceleration. Despite all the huffing and puffing, the S&P has made very little progress over the past seven weeks. But it may be best to pay more attention to the “December Low Indicator” that states, “If the December low is taken out to the downside during the first quarter of the new year – watch out!” For the record, the “December Low” closing price for the DJIA and S&P 500 are 12194.13 and 1396.13, respectively.
