SIMON BROWN: Looking back to look forward

Investing is about looking back at what a company has done and then looking forward to try to understand what it will do in the future. The looking back is easy, because we have results and can crunch the numbers and listen to management presentations and interviews. The management interviews can also help us understand what the future may hold, but like everything about the future, it is truly unknown, and we’re making assumptions.

But we can be smarter with our assumptions, to a degree.

The first is management guidance. Locally it’s usually fairly vague in terms of what they expect. In the US, guidance is detailed in terms of revenue and profit ranges. The trick here is to go back to previous guidance from years ago and work your way forward to determine how accurate it has been. The same for management interviews and presentations. See what they said then and what actually transpired.

Your broker or an online platform may also have analyst consensus. This is typically a buy, sell or hold recommendation along with revenue, earnings and maybe dividend growth with a target share price. This is useful if there is a lot of coverage of the stock. But it also suffers from herding. If everybody loves a stock, there are very few real doubters and in such a case I’ll check out the data, but I don’t base my entire decision on it.

What I also like doing is checking how others are doing. For example, Famous Brands vs Spur. Both are very similar, except that Spur never went shopping for overpriced gourmet burgers in the UK.

Here you can spot differences and similarities in companies that quickly help you understand the individual stocks and the industry. Another example is that if Exxaro, Sasol and Thungela are seeing slight improvements from Transnet, it is likely other bulk commodity exporters are too.

From this research you start to build expectations of what you think the company should be able to do over the next three to five years in terms of revenue growth and profitability.

I take copious notes — these days digitally — and I keep them pretty much forever. I also write down my key expectations of what I think drivers of profit will be and any risks I identify as worth watching out for.

This now gives me a base to measure my process against. Going back to Spur, recent results showed that customer numbers were flat but spend per customer increased ahead of internal price inflation. It’s a good metric, and was likely helped in part by the company’s loyalty programme. But even with its cautious outlook, I’d want customer numbers to increase in the year ahead as the pressure on consumers eases with lower inflation. I’d also want to see spend per customer still better than internal inflation.

Ultimately the plan here is to create templates against which we can measure both management and ourselves. How do they deliver on promises and how well do we assess the future of the company?