Dec

29

 To what extent are companies that have a high cost of search for an initial order from customers and then have recurring repeat business from profitable subsequent sales better values in the market than others. Such companies in my day were called mail order or data base companies. Companies like Keurig and LinkedIn and Gillette come to mind. Would searches under "repeat business" NYSE enumerate a subsection of companies with superior performance?

Richard Owen writes: 

At the other end, also a great source of accounting pyramids/shorts, as such long term customer strategies provide opportunity to diddle with customer acquisition costs, etc.

Ed Stewart writes: 

One good example of that type of business is the alarm business. U sell the equipment/sensors then sign the user up for a service contract. The service contracts are valued (and trade) at multiples of RMR (Recurring Monthly Revenue). The RMR multiple you can get is based in large part on the credit quality of your customer base - so if you ask for a credit check up front u get a higher RMR but might lose some sales of the basic system install or service up front.

It has been a terrific business for a long time and banks lend very willingly against the cash flow. On of my best friend's father took their relatively small business to a very large private company I estimate well over 1B private market value by pyramiding these cash flows with the aid of leverage, buying something like 70 companies over the years. One of the features of the cash flow is that the customer relationship is ammoritized quite aggressively. Basically so long as you grow u don't pay much in the way of income taxes on all the cash flow. Presently, they are considering keeping the highly valued (by investors) alarm business and sell their physical security (providing security guards to companies) business, which employs thousands of people. It is profitable yet not a great ROI, plus a major headache to operate do to employee count, potential liability, etc.

With employee problems growing including the new O care costs, It makes logical sense at the moment. Yet I can't help but think that in the next 15 years the Alarm business will face more extreme and innovative competition from tech companies (potentially from things like google nest?) as high ROI's must eventually draw in competition. At the same time the "crappy" business might go up in value as there is an increasing need for private physical security, even for residential areas. I could be dead wrong - perhaps Im rationalizing sellling the winner and keeping the loser? Perhaps the formula would be to sell the physical security, use the proceeds to expand alarms, then sell a few years beyond that? 


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