During this interview with MOI, François Rochon explains how he identifies great businesses through a combination of quantitative and qualitative analysis. He begins by reviewing past performance metrics such as return on capital, margins, debt levels, and profit quality to find strong companies.
However, he acknowledges that past performance alone cannot predict future success. Rochon assesses whether the factors driving past success, including competitive advantages and durable moats, remain intact.
He highlights the critical role of management in creating and sustaining strong performance, particularly in capital allocation, product development, acquisitions, dividends, and stock buybacks. This holistic approach ensures a company’s potential for long-term, outstanding performance.
Here’s an excerpt from the interview:
Rochon: We want to own great businesses, and the best way to identify them is to look at their past numbers, their past performance. We look at what you describe as quantitative. We look at the numbers of the company from the last 5, 10, or 15 years to understand how they did during recessions.
We look at average return on capital, margins, debt level, and the quality of profits in terms of the accounting they use. That’s the first step. We want to find strong companies with strong numbers.
But also, we realize the limitations of an approach that focuses too much on the past because past numbers only reward past shareholders. When you buy shares today or you stay a shareholder in a company, it’s the future that will decide whether you get rewarded or not.
We want to be certain the ingredients that created the great numbers in the past are still present in the company so the future will be, let’s hope, as good as the past. This is where the qualitative analysis enters. We try to understand why the company performed so well, why it has been able to be so profitable in terms of margins or return on capital.
We try to understand the nature of its business model, its competitive position, its competitive advantage. That’s a key part of the analysis to understand if it has a moat and how durable the moat is.
Also, we have learned over the years that one main reason a company does well – does better than the others in its industry – is usually because a management creates great performance. Yes, we want a moat within the business model.
But we also want good management because a moat doesn’t usually come from thin air. It has been created by human beings, and it’s also sustained over the years by human beings. We want to be sure we have a management that understands the importance of building a great culture.
Another part of the importance of having a great management is how they’ll allocate capital because if you’re a long-term shareholder – let’s say 5 or 10 years – a big part of the rewards will come from the management’s capital allocations.
We look at how they bring new products to the market and how they make acquisitions. Were intelligent acquisitions made at sensible prices? Also, they can reward shareholders by either paying dividends or buying back stock at opportunistic moments when the stock trades at a price less than its intrinsic value.
The quantitative approach is the first step then we go further to try to see the qualitative ingredients, to see if they are present for the company to continue being outstanding.
You can listen to the entire interview here:
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