Good Stocks Cheap by Kenneth Jeffrey Marshall

Author:Kenneth Jeffrey Marshall
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2017-04-09T04:00:00+00:00

http://www.goodstockscheap.com/12.1.htm

First is breadth analysis. Regarding customers, the company’s annual report states “Kone’s customer base consists of a large number of customers in several market areas, with no individual customer representing a material share of Kone’s sales.”

This isn’t the ideal statement, as it doesn’t define material as 10 percent or more. But it’s adequate. One can safely conclude that the customer base is acceptably fragmented.

Could the customer base consolidate? Unlikely. Building owners don’t seem poised to go through some sort of global consolidation frenzy.

Is the supplier base broad? Here the annual report offers even less ideal statements, like “a significant part of Kone’s component suppliers and global supply capacity is located in China.”

So, as usual, one must think about the things that Kone needs to buy. It’s helpful to divide the business into two parts: goods and services.

The goods are elevators, escalators, and parts. What Kone needs to buy here is commodity materials like rubber, glass, and steel; and the services of subcontractors to make components. Commodity materials come from many sources. And while some subcontractors are better than others, it’s likely that many potential subcontractors exist.

The services are maintaining and fixing elevators and escalators. Here, what Kone needs to buy is labor. How tight is the labor pool? Becoming an elevator service technician clearly requires some training. But it’s not like becoming a medical doctor. Total training time is likely to take months or a year, not a decade or more. In other words, the size of Kone’s service labor pool can be readily grown.

Is the labor unionized? In much of the world, yes. But it’s not like airline pilots that are both unionized and require years of training. So while the service supplier base isn’t ideal from the perspective of an outside investor, it’s just broad enough, and just unlikely to consolidate enough, to be satisfactory. On balance, breadth analysis gives Kone a clean bill of health.

It’s probably already clear that I rooted around for information beyond that provided in Kone’s annual report. But my sources are available to anyone. I’ll detail them shortly.

The second tool is forces analysis. It’s again useful to think of Kone in two parts, goods and services. Start with goods.

First is the bargaining power of customers. Breadth analysis made clear that there were many customers. Plus, they’re unlikely to backward integrate. Building owners and property developers don’t go into the elevator manufacturing business, because so doing would require a very different set of competencies than does managing a skyscraper or developing real estate. To be sure, capital equipment sales is competitive. But on balance, the bargaining power of Kone’s goods customers is weak.

Next is the bargaining power of suppliers. Breadth analysis found that the supplier base was sustainably fragmented. In addition, it’s hard to picture a glass maker or a component subcontractor forward integrating into the escalator business. Plus, Kone can change suppliers without incurring significant switching costs. As evidence, the annual report notes that Kone focuses on developing “readiness for transferring the manufacturing of critical components from one production line or supplier to another.

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