Due Diligence
Your due diligence is probably wrongGlobal Advisors: a consulting leader in defining quantified strategy, decreasing uncertainty, improving decisions, achieving measureable results.
Our latest perspective - What's behind under-performing listed companies?
Outperform through the downturn
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Quantified Strategy
Decreased uncertainty, improved decisions
Global Advisors is a leader in defining quantified strategies, decreasing uncertainty, improving decisions and achieving measureable results.
We specialise in providing highly-analytical data-driven recommendations in the face of significant uncertainty.
We utilise advanced predictive analytics to build robust strategies and enable our clients to make calculated decisions.
We support implementation of adaptive capability and capacity.
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Thoughts
Global Advisors’ Thoughts: Outperforming through the downturn AND the cost of ignoring full potential
Press drew attention last year to a slew of JSE-listed companies whose share prices had collapsed over the past few years. Some were previous investor darlings. Analysis pointed to a toxic combination of decreasing earnings growth and increased leverage. While this might be a warning to investors of a company in trouble, what fundamentals drive this combination?
In our analysis, company expansion driven by the need to compensate for poor performance in their core business is a typical driver of exactly this outcome.
This article was written in January 2020 but publication was delayed due to the outbreak of Covid-19. Five months after South Africa’s first case, we update our analysis and show that core-based companies outperformed diverse peers by 29% over the period.
Management should always seek to reach full potential in their core business. Attempts to expand should be to a clearly logical set of adjacencies to which they can apply their capabilities using a repeatable business model.
In the article “Steinhoff, Tongaat, Omnia… Here’s the dead giveaway that you should have avoided these companies, says an asset manager,” (Business Insider SA, Jun 11, 2019) Helena Wasserman lists a number of Johannesburg Stock Exchange (JSE) listed shares that have plummeted in recent years.
In many cases these companies’ corresponding sectors have been declining. However, in most of the sectors there is at least one company that has outperformed the rest. What is it about these outperformers that distinguishes them from the rest?
The outperformers have typically shown strong financial performance – be that Growth, ROE, ROA, RONA or Asset Turnover – and varying degrees of leverage. However, performance against these metrics is by no means consistent – see our analysis.
What is consistent is that the outperformers all show clearly delineated core businesses and ongoing growth towards full potential in these businesses alongside growth into clear adjacencies that protect, enhance and leverage the core. In some cases, the core may have been or is currently being redefined, typically through gradual, step-wise extension along logical adjacencies. Redefinition is particularly important in light of the digital transformation seen in many industries. The outperformers are very seldom diversified across unrelated business segments – although isolated examples such as Bidvest clearly exist in other sectors.
Analysis of the over- and underperformers in the sectors highlighted in the article shows that those following a clear core-based strategy have typically outperformed peers through the initial months of the downturn caused by the Covid-19 outbreak.
Strategy Tools
Quote: Jim Collins & Jerry Porras – Built to Last: Successful Habits of Visionary Companies
“Building a visionary company requires one percent vision and 99 percent alignment.” – Jim Collins & Jerry Porras – Built to Last: Successful Habits of Visionary Companies
Jim Collins and Jerry Porras are renowned authors and management theorists best known for their influential book, “Built to Last: Successful Habits of Visionary Companies,” published in 1994. This work emerged from a comprehensive six-year research project that aimed to identify the characteristics that enable certain companies to thrive over the long term, often outlasting their competitors and adapting to changing market conditions.
Jim Collins, born on January 25, 1958, is a prominent business consultant and lecturer who has dedicated much of his career to studying what makes companies successful. He is also the author of several bestsellers, including “Good to Great,” which further explores the principles of effective leadership and organizational success. Collins’s research emphasizes the importance of disciplined thought and action, as well as the need for a strong organizational culture.
Jerry Porras, born on September 20, 1938, is an esteemed academic and professor emeritus at Stanford University’s Graduate School of Business. His expertise lies in organizational behavior and change, and he has contributed significantly to the understanding of how companies can develop and maintain a visionary approach. Porras’s work often focuses on the dynamics of leadership and the role of core values in guiding organizational success.
In “Built to Last,” Collins and Porras introduce the concept that while having a clear vision is essential for a company’s direction, the real challenge lies in achieving alignment across the organization. The quote, “Building a visionary company requires one percent vision and 99 percent alignment,” encapsulates this idea, highlighting that the execution of a vision is heavily dependent on the collective efforts and commitment of all members within the organization. This alignment ensures that everyone is working towards the same goals, fostering a cohesive culture that supports long-term success.
The book has been widely referenced and praised by business leaders and strategists for its practical insights and frameworks. It identifies key habits and practices that distinguish visionary companies, such as maintaining a core ideology, embracing change, and setting ambitious goals. The principles outlined in “Built to Last” continue to resonate with organizations seeking to cultivate enduring success and navigate the complexities of the business landscape. Collins and Porras’s work has left a lasting impact on the field of management, inspiring countless leaders to prioritize alignment and shared purpose in their strategic endeavors.
Fast Facts
Fast Fact: Great returns aren’t enough
Key insights
It’s not enough to just have great returns – top-line growth is just as critical.
In fact, S&P 500 investors rewarded high-growth companies more than high-ROIC companies over the past decade.
While the distinction was less clear on the JSE, what is clear is that getting a balance of growth and returns is critical.
Strong and consistent ROIC or RONA performers provide investors with a steady flow of discounted cash flows – without growth effectively a fixed-income instrument.
Improvements in ROIC through margin improvements, efficiencies and working-capital optimisation provide point-in-time uplifts to share price.
Top-line growth presents a compounding mechanism – ROIC (and improvements) are compounded each year leading to on-going increases in share price.
However, without acceptable levels of ROIC, the benefits of compounding will be subdued and share price appreciation will be depressed – and when ROIC is below WACC value will be destroyed.
Maintaining high levels of growth is not as sustainable as maintaining high levels of ROIC – while both typically decline as industries mature, growth is usually more affected.
Getting the right balance between ROIC and growth is critical to optimising shareholder value.
Selected News
Quote: Jim Collins & Jerry Porras – Built to Last: Successful Habits of Visionary Companies
“Building a visionary company requires one percent vision and 99 percent alignment.” – Jim Collins & Jerry Porras – Built to Last: Successful Habits of Visionary Companies
Jim Collins and Jerry Porras are renowned authors and management theorists best known for their influential book, “Built to Last: Successful Habits of Visionary Companies,” published in 1994. This work emerged from a comprehensive six-year research project that aimed to identify the characteristics that enable certain companies to thrive over the long term, often outlasting their competitors and adapting to changing market conditions.
Jim Collins, born on January 25, 1958, is a prominent business consultant and lecturer who has dedicated much of his career to studying what makes companies successful. He is also the author of several bestsellers, including “Good to Great,” which further explores the principles of effective leadership and organizational success. Collins’s research emphasizes the importance of disciplined thought and action, as well as the need for a strong organizational culture.
Jerry Porras, born on September 20, 1938, is an esteemed academic and professor emeritus at Stanford University’s Graduate School of Business. His expertise lies in organizational behavior and change, and he has contributed significantly to the understanding of how companies can develop and maintain a visionary approach. Porras’s work often focuses on the dynamics of leadership and the role of core values in guiding organizational success.
In “Built to Last,” Collins and Porras introduce the concept that while having a clear vision is essential for a company’s direction, the real challenge lies in achieving alignment across the organization. The quote, “Building a visionary company requires one percent vision and 99 percent alignment,” encapsulates this idea, highlighting that the execution of a vision is heavily dependent on the collective efforts and commitment of all members within the organization. This alignment ensures that everyone is working towards the same goals, fostering a cohesive culture that supports long-term success.
The book has been widely referenced and praised by business leaders and strategists for its practical insights and frameworks. It identifies key habits and practices that distinguish visionary companies, such as maintaining a core ideology, embracing change, and setting ambitious goals. The principles outlined in “Built to Last” continue to resonate with organizations seeking to cultivate enduring success and navigate the complexities of the business landscape. Collins and Porras’s work has left a lasting impact on the field of management, inspiring countless leaders to prioritize alignment and shared purpose in their strategic endeavors.
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