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Family-Owned Business: A Source of Alpha

GuruFocus.com
·4 mins read

Family-owned companies tend to outperform, according to research conducted by Credit Suisse in 2017 and 2018. The Swiss investment bank defined "family-owned" as founders and their family members holding at least 20% of the company's economic interests or voting rights.

Credit Suisse ascribed the share outperformance of these businesses and their superior fundamental performances to numerous factors. For instance, the family influence may insulate the management from Wall Street's short-term mindset, which leads to a focus on research and development and other capital investments in the long run. Additionally, these family businesses are typically conservatively run without much financial leverage or unnecessary risk-taking. They are also more likely to favor internal reinvestment opportunities over returning capital to owners through buybacks or dividends.


Browsing through Credit Suisse's database of family-owned companies (i.e., "The CS Family 1000"), we at Urbem easily spotted quite a few high-quality names. Below are our top five picks from the list.

Brown-Forman

Tennessee-based Brown-Forman (NYSE:BF.A) (NYSE:BF.B) produces and markets high-quality consumer alcoholic beverages, including whiskey, tequila, vodka, liqueur, wine and ready-to-drink products. The company claims to be the largest American-owned spirits and wine business. It owns an enviable portfolio of many of the most historic brands, including Jack Daniel's, Old Forester, Herradura and Early Times, all of which have been around for more than a century now. Brown-Forman is mainly controlled by the Brown family, which holds over 50% of all voting rights, while individual insiders account for 6% of the total equity interests.

Estee Lauder

New York-based The Estee Lauder Companies (NYSE:EL) is one of the world's leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. The company owns several world-class brands, which digs a broad and deep moat. Examples include Clinique, MAC and the company's namesake brand, all of which were among the world's 20 most valuable cosmetics brands in 2018, per Brand Finance. According to the latest filing, the Lauder family controls approximately 86% of the total voting rights of the company and owns 40% of the total common stock.

Coloplast

Denmark-based Coloplast (OCSE:COLO-B) develops, manufactures and markets medical devices and services related to ostomy, urology, continence and wound care. The company leverages the Chronic Care model to secure a predictable revenue stream and stable revenue growth. Thanks to user loyalty, the management estimates a customer lifetime of 10 to 30 years once a new patient is "acquired." With a strong market position in Europe and great commercial potential internationally, the company attempts to take advantage of the favorable trends in demographics and emerging markets. Coloplast was founded in 1957 by Aage Louis-Hansen. His son Niels Peter Louis-Hansen, currently Deputy Chairman, owns 20% of the company and controls 41% of the voting rights.

Hermes International

France-based Hermes (XPAR:RMS) designs, manufactures and markets ultra-luxury goods, with specialization in leather goods and saddlery, ready-to-wear and accessories, silk and textiles and perfumes. According to both Interbrand and Forbes, Hermes is among the top 50 global brands and one of the only three luxury brands on the list. The company is controlled by H51 SAS, a holding company formed by descendants of the founder, to prevent any takeovers.

KONE

Finland-based KONE Oyj (OHEL:KNEBV) is a pure-play in the four-company oligopoly of the elevator and escalator industry. The company employs an installed-base strategy, generating sizable revenue from recurring activities of maintenance and modernization, and builds its business upon one of the most enduring technologies in the world - the "safety elevator." Antti Herlin, the wealthiest person in Finland and the great-great-grandson of the founder, is currently Chairman of the company and controls 62% of the voting rights and 22% of the total shares outstanding.

Conclusion

As with our picks above, many other family companies employ the dual-class structure. Although such a shareholding arrangement does not necessarily hinder performance, it does generally put the company in the face of more governance challenges compared to single-class peers.

Lastly, thanks to high quality, it would be rare to see family-owned businesses trading cheaply, providing few bargain-buying opportunities in our experience.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Hermes International.

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This article first appeared on GuruFocus.