Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: cfimx who wrote (320)	9/23/1998 10:12:00 AM
From: Robert Douglas	Read Replies (1) \| Respond to of 4691

Twister you wrote the following about Gillette: high quality businesses like g are able to grow earnings WELL in excess of revenue growth. It was either in college or in my studies for the CFA (Chartered Financial Analyst) exam that I read a piece by Mr. Buffett on returns and financial statement analysis. What you're suggesting flies in the face of all that I learned there. For a business to increase earnings "WELL in excess of revenue growth" each year you have to increase the amount of each dollar brought down to net earnings. In 1988 Gillette brought down 7.5 cents to the bottom line for each dollar of sales. During the next decade this number has grown to an estimated 16 cents in 1998. What you are suggesting is that this will keep growing indefinitely. This is absurd. For G to double their return on sales for the next decade they would have to be earning over 30 cents on every dollar of sales, about what Microsoft does and more than triple the average of all American companies. What is more likely, in my opinion, is that these high profit margins are already at unsustainable levels and will recede in the coming years. The other option you mention is growing the top-line by acquisition: They can take an expanding stream of free cash flow and purchase other great businesses (perhaps faster growing ones, like duracell), repurchase stock, or if the market is not valuing a dollar of retained earnings at a dollar or higher, pay it out in dividends True, top line growth is easy to produce by acquisition. Top-line growth without diluting your profit margins is not so simple. You would have to find a company with above average growth that has net-income as a percent of sales higher than Gillette and is selling at a reasonable price in the market. Good luck! You also wrote: if gillete can't grow their earnings 5% a year then we are all in deep doo doo. Correct conclusion. -Robert