I while ago I posted a excerpt from Buffett in which he explains his idea of the prototype of a dream business (See´s Candy). You can read it here. The dream business has the following distinguising characteristics: See’s Candy has not a growth company as CAGR has only been about 2% but it has strong franchise value in the market that it does operate in. When Buffett bought See’s for $25 million its sales were $30 million and pre-tax earnings little less than $5. The company’s capital requirements were around $8 million meaning that the company was earning 60% pre-tax on invested capital.
The low capital requirements were caused by two main factors: (1) The product was sold for cash (no accounts receivable) and (2) production and distribution cycle was short (low inventories).
Buffett wrote this in 2007 and during that time (1972-2007) $32 million were reinvested into operations. In that period the company earned $1,35 billion all of which, except for the $32 million was distributed back to shareholders.
I did a screen recently on the Zignals website and came across The Greek Organization of Football Prognostics. I thought I wasn´t able to buy it via my broker so I kind of put it aside. Now, a few days ago I came across it again in an article in a recent publication of Graham & Doddsville (you can find it here). There is also another article with an investment thesis on OPAP on Seeking Alpha (link).
The Greek Organization of Football Prognostics has some very appealing characteristics:
– Its operating in a monopolistic environment (through a license which it holds until 2020 at least)
– It has very low capital requirements
– It distributes nearly all of its earnings to shareholders
– 90% of costs are variable and move in line with revenue
– No inventories
– Average life of accounts receivable is 3 days