World Class Operators
It’s a good idea to stay fit. But few of us can become world-class athletes—they have obvious advantages that the rest of us lack. The same is true for companies.
In order to stay fit, businesses need to achieve some level of profit. But some businesses are exceptionally profitable. We choose to own the few companies that display consistent advantages driving extraordinary profitability.
One way of determining whether a company meets this test is to see whether they can produce operating leverage. Stated simply, if you can grow your sales faster than your expenses grow, then your profits grow at an even faster rate. That’s operating leverage.
Not all businesses are capable of doing this—but some rare businesses do this consistently over long periods of time.
MasterCard’s CFO said it perfectly on last week’s earnings call:
“We’ve always operated with the philosophy of delivering positive operating leverage over the long term.”
What this looks like…
Investor capital is treated best by the exceptional businesses that do just that. It’s not enough to grow. And it’s not enough to just be profitable. The best long term compounding comes from businesses that are increasingly profitable as they grow.
Best regards,
Evan McGoff
Disclosure: Dock Street Asset Management, Inc. and our clients own Mastercard (MA). This article is not intended to be used as investment advice.
Dock Street Asset Management, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. You should not assume that any discussion or information contained in this letter serves as the receipt of, or as a substitute for, personalized investment advice from Dock Street Asset Management, Inc.
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