About a decade ago, I spent a bit of time trying to better understand what about TTI, Inc. (history) might have intrigued Warren Buffett. The following comments by Allan Mecham of Arlington Value, from the September 2016 issue of The Manual of Ideas, add some wonderful color:
The Manual of Ideas:
You have shown an apparent affinity for distribution-related businesses (e.g., DNOW, MSM, CHEF). What do you find particularly attractive about the business models and long-term competitive positioning of such companies?
We favor the sniper rifle over the shotgun approach to investing, so I’d hesitate to endorse all distribution companies, as distribution is a huge category with different businesses carrying different financial characteristics and risks. For instance, Cable TV distributors have different characteristics (and risks) than industrial distributors, like MSC Direct (though I happen to like cable co’s too). Cable companies have historically had impressive pricing power, carried little working capital but had large cap ex needs, whereas an industrial distributor, like MSM, has very low cap ex requirements but large working capital needs. What I have an affinity for are companies with staying power that I feel I understand well.
I like the hourglass model, where a distributor stands in the middle of fragmented markets. That model allows a well-managed distributor to enjoy strong bargaining power in both buying and selling while occupying a niche that’s valuable to customers and difficult for competitors to dislodge. I also like when there’s a high-touch service component that’s valued, which further fosters sticky customers.
Curious, I dug a bit deeper and three slides from recent investor presentations grabbed my eye which I share below:
(June 15, 2016 investor presentation)
(March 9, 2016 Investor Presentation)