Our Portfolio Managers recently embarked on a trip to the USA and Europe to better understand how the offshore operations of our investments perform, with a focus on exploring unique competitive advantages that can help them navigate the challenges in these markets.
In part one of this series we delved into company culture as a competitive advantage, in this issue we will consider product portfolio.
Cost of development as a competitive edge
While in the US and Europe, we had several meetings with global specialty biotechnology company CSL Limited. CSL Limited is a considerable investment for us, with most of its business conducted in the US and Europe.
A key takeaway from our meetings was that supply remains tight on many of the raw materials CSL and its competitors collect. CSL’s active R&D group remains ahead of its peers in its ability to roll out collection centres and obtain materials like the plasma that it requires to develop many of its products. In a market where supply is low, this allows CSL to develop a greater volume of products to service the high demand.
We also sought to cross reference our discussions with CSL and met with the Immune Deficiency Foundation and Momenta Pharmaceuticals who, although engaged in a joint venture with CSL, is developing some competitive products.
The prevailing view from these meetings was that the market demand for medical plasma products was growing at about 8 to 10 per cent, and given CSL is tracking ahead of that growth, the consensus is that they are taking market share from other players servicing this market.
The company’s specialised product portfolio is also difficult to replicate, making it hard for new entrants to compete. From our meetings, we were also able to confirm that CSL is the lowest cost manufacturer of these products at 30 per cent less than the nearest competitor in terms of cost of manufacturing. Combined with a strong underlying demand and tight supply of key materials, we see CSL as having a significant advantage over its competitors.
Looking for the best in market
Another company we wanted to connect with on the roadshow was James Hardie, an international building product manufacturer. The company’s product has long been considered one of the best products within its market. With a change in management, the company has now shifted its focus beyond the distributors towards better servicing the end customer.
To confirm this, we wanted to understand how the end market viewed James Hardie products.
In this context, we met with several home builders to understand their view on the product and whether it is perceived as better than what the competitors are offering. We found the end users viewed the James Hardie product as aspirational over competing products.
We also spoke with distributors, a key avenue for James Hardie to get closer to the end customer. Many reconfirmed what James Hardie and the home builders had been telling us in that James Hardie products were considered the preferred option given its quality.
By digging into the product portfolio and supply chain we were confident that James Hardie's strategic direction is sustainable and provides a strong competitive advantage.
In this series, we’ve discussed some of the ways AFIC approaches screening companies for competitive advantage. Although evaluating companies to this level of detail can help investors make better informed decisions about what they buy, it can be difficult for individuals to replicate.
Investment companies, like AFIC, can take advantage of established relationships with companies that have been built over a long history and are able use an experienced team to investigate each opportunity in detail. Contact us if you would like to hear more about our investment strategy and approach to evaluating investment opportunities.