Inside SAB: a short analysis using Warren Buffett’s criteria for a great company

ImageThis post is aimed at evaluating whether SABMiller meets Warren Buffett’s and Charlie Munger’s criteria for a great company namely: the company must have an understandable product or service that they render to consumers, durable and sustainable competitive advantage over its rivals, management with integrity, and a strong margin of safety. SABMiller has a similar strategy in place which should make it easy for it to meet Buffett’s criteria. Another relevant question that will be answered after the analysis is whether or not SABMiller is a great investment to a potential investor and this will be accompanied by a small financial analysis.

Understandable Product/Service

SAB has about 400 products but for the sake of this analysis I would like to pick one that is relevant to our county South Africa, carling black label famously known for being the “champions’ beer”. Carling black label is an understandable product not only because it is the number one beer in South Africa but because people think of it as a daily rewarding refreshment after a long day especially for hardworking men. Carling black label is a winner of 25 International Awards which is why it is known as the champion beer for champion men (Online, 2013).

The South African subsidiary (SAB ltd) contributed 22% to the groups’ revenue for the year ended in 2012 and a significant sum of these South African revenues came from carling black label sales, Carling black label sells more every year than any previous year which ultimately makes it a wonderful product as it is superior to its rival beers and carling black label comfortably meets the criteria of being an understandable product (Annual Financial Statements, 2012).

Durable/Sustainable Competitive advantage

Herman Mashaba the chief executive officer of Leswikeng Minerals & Energy Limited defines competitive advantage as being a step ahead of your competitors. When Herman started his company Black like me (Pty) Ltd the one thing that gave his company an edge during hard political turmoil, where people of colour were not allowed to pursue entrepreneurship was competitive advantage. Black like me produced hair products for people of colour, which was a big market at the time and the company was able to distribute products where other companies were afraid to send their people as it was considered dangerous. Black like me reaped fruitful profits at the time and continued to prosper (Mashaba & Morris, 2012).

 

Competitive advantage is not limited to market share or brands, other companies have strong intangible assets such as copyright, intellectual property that is worth millions such companies include Apple Inc, Samsung, Aspen etc. These companies use the uniqueness of their intangible assets to dominate the market and increase barriers to entry. (Labitan, 2012)

An interesting finding about SAB Ltd (South African subsidiary) is that during the economic meltdown in the year 2008 the share price was not strongly affected. SABMiller’s strategy remained constant, the company reported profits that year unlike its rivals Anheuser Busch inBev that decide to retrench its employees and cut down on discretionary expenditure, which at that time was the common strategy among companies, a strategy that led to losses and an increase in the unemployment rate. SABMiller and its strong brands managed to excel in both Bullish and bearish markets because their beer is unique, difficult to replicate and the consumers felt the need to distress by consuming more of SAB products at stressful times. This is a great demonstration of sustainable competitive advantage. (Sibun & Neate, 2008).

Management with integrity

 

According to the oxford dictionary integrity refers to adherence to moral and ethical principles and soundness of moral character.

SABMiller has very competent board of directors and managers who have the shareholders and other stakeholders’ best interest at heart and they serve with integrity. The board includes great people like Graham Mackay, Cyril Ramaphosa, Jamie Wilson,Helen Weir and a lot of other people who are known for their strong business ethics and financial intelligence that is not quantifiable. Management is remunerated very well so they have no intention to deviate from their call of duty. In South Africa SAB complies with all statutory requirements and it goes the extra mile to comply with the King III even though the holding company is now in London. Management has very strong ethical principles as well as a very strong social and ethics committee.

Margin of Safety

When you buy a company or part of a company in a form of stocks, you always seek to get the best price that the market can offer and that means buying at a bargain price. SABMiller has a lot of margin of safety mainly because of its strong brands which are inelastic and its competent management; however this will not be possible without the laws of demand and supply from the market as the market perceives SAB to be a strong and resilient company which I also believe, and this is a good enough margin of safety since the noise and other externalities hardly affect the share price of the company.

I am not here to say buy SAB shares but I can assure you that SAB meets the above criteria very well and who knows…maybe Buffett has his eye on SAB. A short Du Pont analysis on SAB will be posted soon.

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2 thoughts on “Inside SAB: a short analysis using Warren Buffett’s criteria for a great company

  1. Firstly I would like to commend on your effort at analyzing the company and recommending it as seemingly well managed entity that has good future prospects but I have a few qualms with your analysis and it’s relevance as a whole.

    You start off by referring that the main discussion of this piece is to fundamentally analyze whether the company, SABMiller is run along the ideology and philosophy of a well known, investment icon, Mr. Warren Buffet. I have my reservations about whether this should be a benchmark in any way. It’s true that the aforementioned has made a resounding success through holding long term equity investment but we should not forget the fact that he himself, has been quoted on numerous occasion, stating that his investment methods are based on the reading of the famous writings of Graham & Dodd. Should this not be rather be used as the academic literature reference for your analysis.

    You also fail to mention as to what exactly are the requirements and standards that are needed by Mr. Warren Buffet in order for a firm to be successful and have failed to provide any empirical data as to where his methods have been used to a degree of success by other firms alike. Surely if it was widely acclaimed it would have attracted quite a lot of academic thesis’s critically analyzing his methods and what sets them apart.

    Your article also seems to lack direction as to where exactly or how SABMiller is exactly performing. There is no fundamental analysis or technical analysis, and we are not given reference to any of the other industry players in the sector to compare which is quite disappointing. It is noted that Black Label is a largely successful brand, but not even comparing it to it’s nearest competitor or mentioning the industries relative performance to it leaves these statements shallow and unfortunately bias.

    I would also like to criticize the micro stance you take in the specific product, which is 1/400 (as mentioned by you) and ask you what it’s revenues are in relation to the company as a whole as speaking of one brand, in such a diverse a portfolio is literally saying nothing much about whether it is a main driver of the firm’s success and leads you to window dressing.

    There is also the use of words such as “great and Call of duty” and these have no standing in an academic or even a finance piece.

    My main problem must be how the article seems to fail totally in not only in showing how Warren Buffet’s criteria have been met, but also in changing my opinion about SABMiller in a constructive manner and my position whether I should hold shares or not had I been an investor. A duPont analysis can’t surely be the only analysis you give in helping your argument that SAbMiller is a prime share, it’s trivial, at best and gives a shallow view of what a complex structure such as this company is.

    This is not a personla attack, just appreciate in open intellectual dialogue among like minded peers.

    • I would like to start by saying thank you for yor feedback.

      The analysis as you can see is based on the Buffett’s criteria and not any corporate finance model as this will be going against the initial intention which is to make it easy for people with no background in finance to understand that there are other ways of analizing companies if they are considering buying the stock.

      This is no academic paper but merely a thought or should I say a well thoght opinion of my own of what I think about the company.

      I admire the works of Ben Graham and I will keep him in mind next time I post.

      If Anhauser is not good a competitor for SAB then I guess SAB has no big competition as all the other breweries are privately owned breweries and they are no where to the size of SAB and Anhauser.

      I only chose one very strong brand to demonstrate the concept of a what Buffett means when he speaks of an understandable product. If one products brings 22% of revenues for the company I dont see why it is wrong to use that product to demostrate my point especially if the other products bring less to the table.

      Degrees dont run companies but competent individuals run companies.

      I dont see why I shouldnt be able to use a Du Pont if big banks in our country se them all the time before issuing out loans to big companies such as contruction companies.

      I am not here to criticize his method especially if his method has made him what he is today.

      I strongly suggest you google his method and you might surprise yourself by what you might discover.

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