The Century Club - Chris Mayer

https://www.woodlockhousefamilycapital.com/post/the-century-club?mc_cid=d07adb9fc4&mc_eid=f8fb6e6a50

Companies have lifespans. And they seem to be shortening.

In my book 100 Baggers, I included a couple of tables to show this. Here they are:

Average lifespan by sector:

Now, this is not an exact science and different people will get different estimates. But I think the story here is directionally accurate.

Juxtapose this phenomenon against the median time it took for companies in the study to reach 100-bagger status: 26 years. (The mean was also about 26 years).

So, we see another aspect of the 100-bagger challenge: You need to have a company survive long enough to compound returns into multi-bagger status. What kinds of companies survive? In this post, we’ll take a stab at an answer.

Inspiration comes from a book I read recently: Lessons from Century Club Companies by Vicki TenHaken. (Thanks for the recommendation Ian Cassel! @iancassel). The book focuses on companies that have been around for at least a century.

TenHaken became interested in these companies after hearing a presentation by Makoto Kanda, an economist who studied long-lived Japanese companies. Japan is home to some of the oldest continuously operating firms in the world, with seven founded prior to the year 1000. These are the bristlecone pines of the corporate world.

Fascinated, she turned to see how US companies fared. Corporate lifespans seem to be somewhere around 12 to 15 years. Not many have joined the century club. In the US, there are over 1,000 companies that have survived more than 100 years, a population of less than one-half of one percent of all companies operating today.

So, how did these companies beat the odds?

TenHaken’s book, essentially, seeks to answer this question. After ten years of work - conducting surveys, interviews, etc. - TenHaken presents the following model as the keys to the club:

I’ll share some highlights and thoughts on each below.

Strong corporate mission and culture

You have to figure these keys are going to be intangibles that are not so easy to pin down - like “culture.” But there are some elements that go into it that you can look for. For example, century club companies tend to be conservative financially; they don’t use a lot of debt. They emphasize profitability overgrowth; TenHaken shows how century club companies tend to be very profitable. In Japan, they are 2x more profitable than peers. In other countries, the gap is less pronounced but still significant.

Culture comes across in other ways, such as consistently reiterating the company’s purpose. “They talk about their purpose all the time,” TenHaken writes of century club companies. Many companies seem to get this, at least based on my reading of annual reports, but perhaps more informative tells may come from management in less scripted settings. Anyway, a strong sense of purpose seems to be a common element among the members of the century club.

Unique core strengths and change management

“Century club companies are not dinosaurs,” TenHaken writes. Survival comes from a willingness to change and innovate.

TenHaken gives us many examples, but here is one: the Jelly Bean Candy Company (est. 1898). The founding Goelitz family has a history of experimenting. The second generation made Candy Corn and buttercreams. The third and fourth generation made tangerine slices and spice drops. In 1965, they experimented by injecting different flavors in mini jelly beans. In 1973, they introduced Chocolate Dutch Mints. They didn’t stop with jelly beans.

I can think of other, more extreme, examples. AO Smith, for example, started out in 1874 making metal parts for baby carriages and bicycles. Today it makes water heaters, boilers, and filters. In between, AO Smith made steel frames for cars, vessels for the oil and gas industry, glass brewery tanks, and more. AO Smith also pushed out into other countries, such as China and India. That’s a company that doesn’t sit still. It has remade itself several times over in the course of its history.

So, century club companies don’t rest on their laurels, as the saying goes. They also tend to have offerings that are difficult to copy and a strong appeal other than price. These are things we naturally look for as long-term investors anyway.

Close relationships with business partners

This one is interesting; long-lived businesses tend to have long-lived relationships with suppliers and customers. So, Morse Lumber (est. 1853) has been doing business with Mascot Construction for 60 years. And both are proud to acknowledge the relationship. Armstrong, the flooring products company, has been doing business with Derr Flooring since 1918. Alden Shoe (est. 1884) has been getting its leather from Horween Leather Company (1905) since 1930.

You get the idea. Maybe an interesting question to ask the management teams of your favorite company: What are some of your longest-running relationships with suppliers and/or customers, etc.?

Long-term employee relationships

Another simple one to suss out. And this is something I’ve asked about when doing research on my companies (if management doesn’t mention it in their annuals. When the turnover is particularly low, management usually does mention it). I’ll ask about the turnover of employees at different positions.

TenHaken says century club companies have long-tenured employees. She cites General Mills (est. 1866). Even though they have 16K employees, more than half of their workforce has been on the job for more than ten years. Nearly 3,500 for more than 20. That’s incredible. There are many more examples.

Active members of the local community

Century club companies tend to be very rooted in where they are, visible in their community, and willing to help out with various causes. TenHaken has, again, many examples. When an oil spill created a crisis in Marshall Michigan, Schuler’s Restaurant (est. 1909) fed over 2,500 clean-up crew members, round the clock, for months. With the pandemic, I am sure you have examples of companies that stepped in to help out their local community.

There are other ways this communal aid shows itself. One interesting example is from King Arthur Flour Company (est. 1790), which gives its employees paid time off for helping with local nonprofits during work hours.

Century club companies are also environmentally conscious. TenHaken says that of the “Global 100 Most Sustainable Corporations in the World” about half are over 90 years old. So, there is another bit of evidence you can look for.

Conclusion

I think these points are useful and give you something else to consider when you are looking at which stocks you want to take with you on the long journey up the mountain of multi-bagger returns.

Also, if you invert everything, you get an intuitive picture of what won’t last: companies having an ill-defined purpose with lots of financial leverage, low profits, lack of innovation, easy to copy products, short-term relationships with vendors and customers, lots of employee turnover and one that repeatedly turns the cold shoulder on its community.

The book ends with an index of all the companies in the study (almost 90% of which were private). The text of the book only runs about 90 pages and it’s an easy read. I particularly enjoyed the many examples she used to illustrate all the points. If you’re a business nut, these little vignettes are like buttercreams. Definitely worth the $16.99 on Amazon.

Thanks for reading!

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Published April 26, 2021

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