Fu­ture win­ners: John Ad­dis

Fo­cus on what’s hap­pen­ing in the present, not try to guess what might hap­pen in the fu­ture

Money Magazine Australia - - CONTENTS - STORY JOHN AD­DIS

There’s a co­nun­drum at the heart of suc­cess­ful in­vest­ing. It’s im­pos­si­ble to pre­dict the fu­ture with any ac­cu­racy but what hap­pens in the fu­ture de­fines the value of any in­vest­ment. In the end, you have to give it a go. The key is to keep your as­sump­tions firmly rooted in the present. So in­stead of think­ing about how things are likely to change, you think about how they are likely to stay the same.

There’s a sub­tle but im­por­tant dif­fer­ence be­tween these two ap­proaches, be­cause change com­pounds quickly, lead­ing you down a mul­ti­tude of dark al­leys, whereas the same, well, stays the same – at least un­til it changes.

With stocks, this means fo­cus­ing less on try­ing to guess how things will ac­tu­ally turn out and more on the fac­tors – which are ap­par­ent now, in the present – that will serve a com­pany well what­ever the fu­ture holds.

These qual­i­ta­tive fac­tors must then be blended with price, which is where much of the art of in­vest­ing lies: a great com­pany can make a ter­ri­ble in­vest­ment if you pay too much for it.

Over the short term, the price – what peo­ple are pre­pared to pay – makes the most dif­fer­ence to an in­vest­ment. But over the long term, qual­ity comes to the fore.

So, here are five stocks we think will still be around in 20 years, hav­ing grown at least in line with the econ­omy. Re­mem­ber, though, that this is not a stock pick for now. Your aim should al­ways be to buy great busi­nesses at at­trac­tive prices.

1 Syd­ney Air­port

Great busi­nesses have pro­tec­tions in three main ar­eas: they have a prod­uct that peo­ple want; they have a com­pet­i­tive po­si­tion that al­lows them to de­liver it with­out too much in­ter­fer­ence; and they have the man­age­ment and cul­ture not to stuff things up.

Based on the idea that we can’t sell for 20 years, it makes sense to pick busi­nesses that could be run by mon­keys be­cause, as Warren Buf­fett notes, sooner or later they prob­a­bly will be. Syd­ney Air­port fits the bill nicely.

If you had to boil “sus­tain­able com­pet­i­tive ad­van­tage” down to two words, Syd­ney Air­port would be it. This 901-hectare site sits on the edge of Aus­tralia’s largest city with 44 mil­lion pas­sen­gers mov­ing through it each year. His­tor­i­cal pas­sen­ger growth was barely dented by 9/11, the GFC or the col­lapse of Ansett.

In 20 years, Syd­ney Air­port will be one year out from finishing its 2039 mas­ter plan, un­der which pas­sen­ger numbers are ex­pected to rise 50% to 66 mil­lion. What’s more, the air­port has “light touch” reg­u­la­tory over­sight, al­low­ing it to take ad­van­tage of its mo­nop­oly po­si­tion, whether that’s through high-mar­gin park­ing fees, aero­nau­ti­cal charges or re­tail sales.

Given its prime lo­ca­tion, we ex­pect de­mand to re­main strong even when the Western Syd­ney Air­port

opens in a decade. While the air­port’s lease is due to ex­pire in 81 years, rev­enues should grow well ahead of GDP while the lease’s value might only de­cay by 10%-20% in the next 20 years. That’s a very nice recipe for in­vest­ment suc­cess.

2 Ram­say Health Care

Hos­pi­tals are hard to build and even harder to run ef­fec­tively. Ram­say ap­pears to ex­cel at both. Most of its hos­pi­tals are lo­cal mo­nop­o­lies and in Aus­tralia Ram­say ac­counts for more than one in four pri­vate hos­pi­tal beds. That gives it ne­go­ti­at­ing power with pri­vate health in­sur­ers and sup­pli­ers of med­i­cal con­sum­ables.

The pro­por­tion of Aus­tralians over 65 is ex­pected to dou­ble over the next 40 years, and yet de­bil­i­tat­ing con­di­tions like obe­sity and di­a­betes are at record highs. Rapidly im­prov­ing med­i­cal tech­nol­ogy means we’re al­most cer­tain to be spend­ing more of our wealth on health care in 20 years than we are now.

The cost of build­ing hos­pi­tals makes Ram­say rather cap­i­tal in­ten­sive, with a re­turn on cap­i­tal of just over 15%. That means you need to be par­tic­u­larly care­ful about how much you pay for this busi­ness. At the mo­ment, though, with a free cash flow yield of around 5%, we think it’s at­trac­tive, which is why it’s on our buy list right now.

As Aus­tralia’s largest pri­vate hos­pi­tal com­pany, Ram­say could eas­ily take a greater share of the in­dus­try over time. Greater pri­vati­sa­tion and over­seas ex­pan­sion also of­fer op­por­tu­nity.

3 Wool­worths

Of­ten un­der­es­ti­mated, Wool­worths is one of the best busi­nesses in the land. As one half of a pow­er­ful du­op­oly and with Aus­tralia’s unique pop­u­la­tion char­ac­ter­is­tics (low den­sity, large land­mass), on­line re­tail­ing is un­likely to ever pose a se­ri­ous threat to this busi­ness.

Add to that a su­perla­tive sup­ply chain, a hard-to-repli­cate store net­work and fine op­er­at­ing nous (not­with­stand­ing some poor strate­gic de­ci­sion-mak­ing), Woolies is a good shout for do­ing well decades from now.

Com­pe­ti­tion is in­creas­ing from the likes of Costco and Aldi and mar­gins may come down a lit­tle but Wool­worths re­mains a good busi­ness with a dom­i­nant mar­ket po­si­tion. It’s likely to at least grow in line with the econ­omy over time.

4 CSL

CSL is the ASX’s king of health­care. De­spite its cat­e­gori­sa­tion, the com­pany has a for­mi­da­ble set of com­pet­i­tive ad­van­tages that should en­sure an­other 20 years of growth and profit.

As the world’s largest plasma ther­apy maker with a mar­ket-lead­ing net­work of dif­fi­cult-to-repli­cate plasma col­lec­tion cen­tres, CSL has a more sta­ble sup­ply of raw plasma than its com­peti­tors, mak­ing it the in­dus­try’s low­est-cost op­er­a­tor.

CSL fo­cuses on niche ther­a­pies for pa­tients with com­pro­mised im­mune sys­tems or other blood dis­eases and many of its drugs have no vi­able sub­sti­tute. That means it can charge through the nose and there’s lit­tle health in­sur­ers or gov­ern­ments can do.

Top this off with a few lottery tick­ets like a new choles­terol drug cur­rently in clin­i­cal tri­als but po­ten­tially worth bil­lions of dol­lars, and there’s lit­tle doubt this be­he­moth will still be with us 20 years from now.

5 Wes­farm­ers

The con­ven­tional view is that store-based re­tail­ing will be dam­aged by on­line. We think on­line sales will even­tu­ally hit a ceil­ing. Some goods don’t lend them­selves to on­line sell­ing, in­clud­ing many of those sold by Bun­nings and even much ap­parel. In any case, there’s no rea­son why Wes­farm­ers can’t cap­ture its fair share of on­line sales in its ex­ist­ing re­tail brands.

More im­por­tantly, Wes­farm­ers may not even own any re­tail busi­nesses in 20 years – it’s an in­dus­trial con­glom­er­ate ut­terly ag­nos­tic about its port­fo­lio. Man­age­ment’s sole task – fa­cil­i­tated by the com­pany’s long-term cul­ture – is to gen­er­ate good re­turns on the cap­i­tal de­ployed. His­tory shows it’s done a very good job of ex­actly that.

Over time, we ex­pect man­age­ment to re­cy­cle cap­i­tal into high-re­turn­ing busi­ness op­por­tu­ni­ties within and be­yond the ex­ist­ing port­fo­lio.

John Ad­dis is founder of In­tel­li­gent In­vestor, part of the In­vestSMART Group. To un­lock more stock re­search and buy rec­om­men­da­tions, reg­is­ter for a free trial at in­vestsmart.com.au/money. This ar­ti­cle con­tains gen­eral in­vest­ment ad­vice only un­der AFSL 226435.

A great com­pany can make a ter­ri­ble in­vest­ment if you pay too much for it

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