In Search of The Perfect Business
A question I often ask myself is what the best, most ideal business in the world is. One that has been suggested by Alexander Ineichen in his book Assymetric Returns is a lottery business, due to the asymmetrical returns and low capital requirements. Unfortunately, governments have figured this out and monopolize the industry.
Some outstanding investors have given some thought on this topic as well. Warren Buffet has posited that he likes simple, predictable businesses that are easy to understand, generate high returns on capital, have low CAPEX requirements, and have an economic moat. In a similar fashion, Leucadia’s management team looks to buy businesses that have products that people need that are undervalued and have tax loss carry forwards. Peter Lynch likes boring companies in boring industries that grow in the mid-to-high single digits and can be explained to a fifth grader through a crayon drawing, while Bill Ackman has given criteria in his Wachovia stub analysis (this was done before Wells Fargo became a bidder) of what the ideal investment vehicle would consist of. His ideal investment vehicle (which the Wachovia stub would have had had the Citigroup deal gone through) would include:
1. A float business, such as an insurance company;
2. Tax loss carry forwards;
3. Cash Generating Businesses.
James Broadfoot, in his excellent book Investing In Emerging Growth Stocks, calls for investing in companies with benign competition that have earnings visibility in the form of (1) recurring revenue, and/or (2) a backlog. Broadfoot also looks for operating leverage in the form of fixed costs, which can sometimes cause upside surprises as the Street sometimes underestimates operating leverage. He believes that the odds favor more service oriented companies, and a classic example of a company with recurring revenue and operating leverage would be Paychex (PAYX). Pat Dorsey at Morningstar is a big proponent of economic moats, which he believes take 5 basic forms. Moats come in the form of intangible assets, switching costs, networks, cost advantages, and scale advantages according to Dorsey.
My idea of a great business, as pedestrian as this sounds, is a parking lot. I thought of this idea while I was out shopping with my sister. The company has an economic moat in the form of location as there are only so many parking lots that can be built. It’s a simple business, too. You don’t need to be the next Google Guys to do well, and I definitely am no management genius. Demand isn’t extremely cyclical, at least in major cities. People need to park somewhere when they go to work or visit the city by car. Prices per hour from what I have seen are outrageous in some areas, around $20 an hour downtown in major cities or more. Maintenance, while required, would be relatively low with respect to the cash generated, so CAPEX would be minimal, and payroll costs need not be very high either. This lead me to see if there were any interesting publicly traded parking lot companies, and there is at least one that I know of- Standard Parking (STAN).