Right Price Checklist: Business

Charlie Munger has said that checklists are the best option when researching a company.

I've been using the checklist from The Warren Buffett Way to research companies, but have decided to create my own 'Right Price' checklist, that covers more information and will evolve continually as I learn and grow.

The checklist will cover: business; moat; management; financials; valuation; psychology; and the buy or sell conclusion (including two-minute drill).

Sections may be added or subtracted in the future as my philosophy evolves, but the basics will probably stay the same.

I'll go over the checklist in different posts and may ammend them as I go. To illustrate the checklist I'll use Best Buy (whom I've written about before).

Business

Translate Business Description

In the 10k businesses are required to write a description of their business, this should usually be simple and if I can't easily translate this into Real English then the business isn't that simple and should be put into the 'too-hard' pile.

Customers, Suppliers

I haven't read a lot on how to analyze these two yet, but I do know that if there are too few of them it is bad for the company. Here I will check the amount of suppliers and customers.

Risks

The company also has to write about potential risks in the 10k, I'll go over non-generic risks and what potential they have of occuring.

Products

What differnetiates this from the competiton? Is it a repeat purchase product? If the company sells a product that needs to be purchased over and over again (like a razor) it's easy to create revenues, but if consumers only purchase the products every few years (like a car) then they may have trouble staying consistent.

Consistency

Because of my love for turnarounds this one will be loosely judged, I will want to have a few companies in my portfolio that have very consistent histories and easily predictable future earnings. But, I will also want to own a few companies that do not have a consistent history or no history at all and will probably turn-around.

High Returns

Finally, if the business has a repeat purchase product, a consistent history, hundreds of suppliers and customers, no real risks, but low returns on capital there is no reason to invest in it. I will look at returns on capital and margins.

Best Buy

Translate Business Description

Best Buy has a business description that Mohnish Pabrai would like: it's only two paragraphs. My translation:

Best Buy is a speciatlity consumer electronic retailer. It does this through its brands: Best Buy; Five Star; Future Shop; Geek Squad; Magnolia Audio Video and Pacific Sales Kitchen and Bath Centers.
Best Buy attempts to make life fun and easy for consumers. They believe they offer customer advantages in store environment, product value, product selection, and a variety of other servcies related to product purchasing.

Customers, Suppliers

This one is easy for Best-Buy it has millions of customers (literally), and most likely will never have to worry about anyone of them accounting too high a percentage of sales.

The suppliers are less diversified with the top 20 vendors accounting for >60% of their products. This includes huge companies that will likely not go under or stop selling at Best Buy soon, so this does not worry me.

Risks

Of the risks mentioned only two come across as being big enough to stop me from investing.

First, the competitive pressures from traditional retailers and the Internet. Best Buy absolutely blows all the other brick-and-mortar competitors out of the water, but I am very worried about the potential for a tech-focused, or even Amazon, website to come along and compress Best Buy's margins and returns.

Second, and less risk, Best Buy's earnings are very dependent on the fourth quarter (Christmas). This is true with most retailers, but if they screw up one or two ads in October it could mean a huge hit to total earnings.

Products

Best Buy is a tech retailer. It's products, like computers, DVD players, TVs, etc. are not repeat purchase products, but I do believe that customers who buy a TV from Best Buy and are satisfied with the service are very likely to come back and buy the DVD player for the TV and a few DVDs from Best Buy.

Also, Tech is traditionally a high growth industry and I believe Best Buy is shielded from the volatility of more focused tech companies because it doesn't suffer from bad products releases because consumers would just buy a different computer (or other product) which Best Buy also sells.

Consistency

Best Buy has done pretty well over the past ten years, and pretty consistent, it did not post negative growth year-over-year.

Returns

Over the past 10 years Best Buy's returns have routinely thrashed the industry average.

That concludes the business section of the check list.

I'm pretty sure I left some stuff out so if you have any things you feel should be added please comment with your suggestion.