Tuesday, September 2, 2008

Why did you buy that stock? [Fletcher Building Ltd]

As the series Why did you buy that stock? comes to an end-unless I add a new company to the Share Investor Portfolio- the last company in the portfolio I will look at is blue chip darling Fletcher Building Ltd [FBU.NZ]

I have a small holding of 1000 shares which I bought for NZ$9.75 in November 2006 and it has provided me with a gross dividend income of approximately $1400 in total. FBU shares last traded at $7.20 as I write this.

Why did you buy that stock?

Why did you buy that stock? [Freightways Ltd]
Why did you buy that stock? [Kiwi Income Property Trust]

Why did you buy that stock? [Hallenstein Glasson]
Why did you buy that stock? [Briscoe Group]
Why did you buy that stock? [Fisher & Paykel Healthcare]

Why did you buy that stock? [Pumpkin Patch Ltd]
Why did you buy that stock? [Ryman Healthcare]
Why did you buy that stock? [Michael Hill International]
Why did you buy that stock? [Mainfreight]

Why did you buy that stock? [The Warehouse Group]
Why did you buy that stock? [Goodman Fielder]Why did you buy that stock? [Auckland Airport]
Why did you buy that stock? [Sky City Entertainment]

OK Darren, you are not usually too concerned about these temporary market driven figures so whats up?

Well I'm trying to make a point actually.

The fact that I have "lost" $1150 approx since my purchase doesn't concern me. It is a temporary thing and it is due to a number of factors.

Most NZX stocks have been punished by weak overseas markets and fallout from the Sub prime mess and Fletchers is no exception.

Building stocks like Fletchers are also cyclical and the company is facing the bottom of a domestic building slump, in Australasia and in the United States-their products are getting harder to shift.

All these things will inevitably change for the better, and if you are a long term investor don't sell. If you are a short termer, you might as well just bugger off now because this piece ain't for you.

The main impetus for me to invest in Fletcher Building was its pedigree for good management.

The company has existed in one form or another for more than 100 years and has grown from humble beginnings, to today developing into a very large multinational building supplier and manufacturer, retailer and commercial and residential builder in its own right.

Throughout that time it has been well manged and the current CEO Jonathon ling has done a good job so far, with the notable exception of buying the over priced Formica Corporation last year-we can all make mistakes.

As I pointed out above the building sector is highly cyclical and clearly good management is very important. So far Jonathon and his team have managed to weather the current economic storm well.

The previous CEO managed to structure the company in such a way as to diversify the company's revenue streams, so as to make the cyclical ups and downs less, well ,up and down.

Ling looks set to continue this in the future.

More revenue has come from markets outside New Zealand and Australia, with an increase in sales in Asia and America.

Good forward planning has also given Fletcher Building a good backlog of commercial building work in New Zealand and this has clearly offset the downturn in the domestic housing market, in which Fletcher's is the biggest player.

To go back to the price of the share again, when I bought at $9.75, the 60c odd per share in gross dividends represented an approximate 6 % return, which was a better return than the cash rate at the time and of course buying shares in a company that will grow profit means there is going to be a higher capital value for that company eventually.

So value for money and good returns was a compelling tick of the box for me to plunk down my hard earned.

Warren Buffett
rears his bald, Coke bottle glasses adorned head again in the last column in this series.

The reason is because Fletcher Building, in my not so humble opinion, has a "economic moat" in some of the sectors in which it operates, it is:

  • New Zealand's sole manufacturer of gypsum plasterboard;
  • a major participant in the New Zealand steel industry;
  • a major producer of aggregate, cement and concrete products in Australasia;
  • the world's largest manufacturer of decorative surfaces and high pressure laminates;
  • a distributor of a wide range of building materials in New Zealand;
  • a substantial construction contractor in New Zealand and the South Pacific Islands;
  • a major builder of residential homes in New Zealand;
  • a major producer of insulation products in Australasia; and
  • the world’s largest producer of steel roof tiles.

An economic moat, as coined by Warren Buffett, is an advantage in business, through dominance in the market and/or strong brands that gives the business a competitive edge, that is very difficult to compete against.

Fletcher Building have that competitive edge, they have strong brands and are dominant in the manufacture and distribution of several building materials and have a large enough and efficient enough infrastructure and well managed employees to be able to construct, commercially or domestically.

These sorts of business advantages are especially important in this heavily cyclical industry and management have clearly understood this.

Fletcher Building's strong brands are well known by consumers and the construction industry alike and even Formica Corporation will end up being a positive contribution once the fat has been liposuctioned from the company hierarchy.

So brands and a big competitive advantage were big ticks for me.

I am not adding any more new companies to the Share Investor portfolio currently or adding additional shares to those companies that I already hold, but I would be buying more Fletcher Building now if I was.

It is a great long term company and is therefore is a blue chip for a very good reason.

Fletcher Building @ Share Investor

Fletcher House built on hard times

Fletcher Building down tools in the short term
A solid foundation for the future
Fletcher Building raises profit through canny management
Fletcher's got game

Related Reading

Fletcher Building History - Auckland University

 Click here for full Media Release - FBU 2008 Annual Results

c Share Investor 2008

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