Show me the money
Michael Lewis’ 2003 book, Moneyball: The Art of Winning an Unfair Game, describes the approach taken by the Oakland Athletics baseball team in the early 2000s. Essentially, the approach involved determining which performance measures contributed the most to the outcome of a baseball game, and recruiting players that rated highly against those measures. Compared with the subjective talent scouting approach employed by other teams, this afforded the Athletics a big advantage.
One of the key performance measures identified was on-base percentage, which credits players who can avoid getting out at the plate. It doesn’t matter if you smack a home run or take a walk to first after four balls, just so long as you don’t get out. This has some appealing logic: if your batters don’t get out, then your score will tend to keep advancing, and that’s a very good thing.
There is an analogous performance measure in business: the ability to not lose customers. If a business has a strong hold over its customers such that they are very unlikely to go to a competitor, its revenue and earnings will tend to keep advancing, and in the long run, an earnings line that only goes in one direction is a highly attractive feature.
Good customer retention can come about in several ways. One example is a service business with very high levels of customer satisfaction that result in low rates of customer ‘churn’. Another example is a business that becomes so highly integrated into its customers’ day-to-day operations that it takes a big effort for the customer to switch. Whatever the reason, high levels of customer retention are a promising indicator of long-term success.
One business that has this feature is Infomedia (ASX: IFM). Infomedia provides software that auto dealers globally use to automate their workflow, particularly in relation to parts and service. It takes time and effort for IFM to establish customer relationships, but once a dealer has adopted IFM’s software, trained its staff and got its systems working smoothly, they are reluctant to change. History has shown that once a dealer becomes a customer, they are very likely to remain a customer.
IFM is not a large company, and is only a small position in The Montgomery Fund, but it is a good example of a business whose earnings should continue to march upward in years ahead. For investors with a bit of patience, that’s a comforting proposition.