The Elephants That Galloped

Published in Investing on 3 October 2011

If you are in search of growth, don't restrict yourself to small companies.

One of the most famous investing sayings is "elephants don't gallop", which is a quote from growth guru Jim Slater. His point was that it is much more likely that nimble small companies will grow fast than lumbering blue chip leviathans.

Although there is truth in what he says, I think it is a sweeping generalisation to say that big companies can't grow fast. There are plenty of examples of large concerns that have grown at a rapid pace, and there are many large businesses which are likely to grow quickly in the future. Here I give some examples.

Reckitt Benckiser

Fast moving consumer goods companies such as Reckitt Benckiser (LSE: RB) have huge scope for expansion. After all, the appeal of most consumer goods is global. You are as likely to use products such as Cillit Bang, Nurofen and Vanish in Mumbai and Marrakech as in Manchester.

And 6.9 billion people is a heck of a large potential customer base. As the middle classes grow in emerging markets, more and more people can now afford the whizzy products that Reckitt Benckiser makes.

Many consumer goods companies, from Reckitts to Unilever (LSE: ULVR) and Procter & Gamble (NYSE: PG.US) have started out in their home markets, expanded to other developed markets, and then expanded further to developing markets.

These businesses also tend to be very acquisitive, buying companies with strong brands in certain markets, building up these brands with clever R&D and marketing, and then using their global networks to take the products all around the world.

The result is that these companies have an impressive track record of growth. From 1999 to 2007 the share price of Reckitt Benckiser went from £5 to £27 -- a more than five-fold increase (excluding dividends), and an astonishing rate of growth for a business that was already a blue chip.

Yet the research and acquisition driven growth model of Reckitts continues to roll on, and I would expect the company to carry on expanding for many a year yet.

Google

Google (NASDAQ: GOOG.US) is a company that has enjoyed meteoric growth in the past decade. Although it started out as a research project in 1996, the earliest opportunity for the general public to get on board was at Google's initial public offering in 2004, with each share going for $85. The IPO valued the business at $23 billion -- already a big company.

But revenue and profit growth combined with considerable momentum drove the share price to $700 in 2007, giving a market capitalisation of $190 billion. Anyone with the prescience or the luck to get in at the IPO would have enjoyed an eight-fold increase in 3 years!

Admittedly the share price has gone sideways or down since then, but Google has continued to grow profits, and at its current price of $515 it is on a forward P/E ratio of just 14. This is a growth company which is starting to turn into a value proposition.

Coca-Cola

Warren Buffett bought into Coca-Cola (NYSE: KO.US) at the end of 1987, picking a time when the drinks maker was suffering after the abortive launch of 'New Coke' and a fierce price war with rival Pepsi.

In the twenty years from 1988 to 2008, the value of the business rose 15-fold, at a compound annual growth rate of 13.5%, and that's excluding dividends.

Coke's strategy during this period was similar to Reckitt's -- it took a winning formula and expanded it across more and more markets around the world.

And the company continues to do well to this day, with the share price doubling from its credit crunch low in 2009.

BSkyB

I have written previously about British Sky Broadcasting (LSE: BSY). This company has grown turnover steadily from £93 million in 1991 to £6.6 billion in 2011. In the past decade in particular profits, and also the share price, have leapt after a difficult time around the turn of the century when hefty losses were incurred.

The business model for BSkyB is quite different to the other companies in this article. Rather than expanding into different countries around the world, this business focuses on the UK.

"Surely this limits future growth?" I hear you say. But I think the key thing about BSkyB is critical mass. What the broadcaster is doing is building up more and more high-quality, popular content.

This ranges from sports and movies to documentaries and dramas, including a wide choice of high definition channels. Sky is building up an offer which is getting better each year as it makes deals with networks like HBO and ESPN, and also invests in home grown content.

Of course, if you do not have enough subscribers then you will not be able to cover your costs. But once you reach a certain critical mass of customers, you turn a profit, and as you add more customers above this your profit balloons.

I think critical mass for BSkyB was around 7 million subscribers, and today the number of customers has reached 10.3 million, and the company makes £1 billion in profit -- eight times what it made in 2003.

It has been predicted that as subscriptions continue to increase, and take up of services expands, this profit could double in five years.

It seems elephants can indeed gallop. So get your saddle, jump on and prepare for a bumpy but exciting ride!

More from Prabhat Sakya:

Prabhat owns shares in BSkyB. The Motley Fool owns shares in Google and Reckitt Benckiser.

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Comments

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liesarenocomfort 03 Oct 2011 , 1:23pm

... and never let it be said they can't play footy (or "trunky" as they sometimes call it).

http://www.youtube.com/watch?v=OZ-42l9XfB8

HighbrowNick 04 Oct 2011 , 4:11pm

I agree with the sentiments here. When I first started investing in the 1990s, I read Jim Slater's books, and avoided blue chip shares exactly because of that phrase "elephants don't gallop." I had a few winners on aim, but lots more losers. In the last five years, I have started to focus more on big blue chips, and my investment returns have improved.

Another great company in my opinion is Apple- now the biggest company in the world by market cap. Can that gallop?

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