One of the most useful exercises an investor can perform on stocks they might want to buy is to look beyond the financial metrics, and scrutinise the strategies that could be employed by the business in the coming years.
That is because earnings follow strategy, but the results can take several periods to show up in the numbers. In addition, looking for strategies in their early stages allows you to measure how they are tracking, and by extension the competence of the management team.
Here is that process in action for one of Australia’s largest insurers, and a favourite of many notable fund managers, Suncorp Group Ltd (ASX: SUN)
One of the major attractions of Suncorp Group is the sheer size of its customer list, which stands at around 9 million Australians. That number represents a strong base of revenue and earnings that the company can use to generate cash flow to finance ongoing operations.
Within that customer base is also a less recognised asset: data. In 2016, the concept of “big data” and analytics is a core feature of business, with companies of all sizes recognising that more data allows better targeting of products and offers to customers, which in turn, lifts efficiency and profitability.
The existing customer base, plus the potential to develop better data models to identify where cross-selling and up-selling can take place, is a key plank in a buy case for Suncorp.
The store network
Another compelling reason to consider Suncorp shares is the latent advantage that the company may have through its store network. While traditional transactional banking services are migrating away from banks, existing Suncorp branches could be repurposed into a consulting room of sorts for the full range of financial products from home loans, to insurance and income protection.
This approach would be more holistic and also allow for greater education about products and services, which, in turn, would result in greater average revenue per customer. Management has flagged plans to look into this initiative, and crucially, this would offer Suncorp a point of difference in the market where online-only competitors are fast-gaining market share.
Suncorp Group also operates a broad portfolio of brands from the widely known to the more niche offerings. In fact, Shannons, APIA, GIO, AAMI and Suncorp are just a few of the group’s 14 different brands.
Unfortunately, in the current environment, having 14 separate brands soaks up a lot of time and money. Each brand has to be positioned differently, has to have a different marketing strategy, and has to have advertising revenue allocated to it.
That results in cannibalisation of revenues as brands without clear differentiation, such as GIO, AAMI and Suncorp effectively end up competing with each other.
It would be far more rational to cut down the number of brands and focus the marketing efforts and budget on a smaller number of key brands, rather than maintain the drain of servicing 14 different propositions. Once again, Suncorp management have stated that they are investigating reducing the number of brands, which would seem like something of a no-brainer.
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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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