Could competition kill your portfolio?

I’ve long been a fan of the InvoCare Limited (ASX:IVC) business and have previously written about it here and here .

Afterall, there’s a lot to like.

Despite it being in a fairly morbid sector of the economy — operating, as it does, in the funeral services industry — it’s a company that, over the last five years, has been able to demonstrate robust earnings and dividend growth of almost 21% and 7% per annum respectively.

Returns on equity have also increased from an already-high 30% five years ago to 37% as at June 2017.

It’s therefore a company that has been enjoying strong market share and pricing power in its core markets.

But there was some interesting news in the media last week.

According to the Financial Times in London, InvoCare’s UK equivalent — Dignity Plc —  has been forced to slash its prices in an effort to stave off competition from its main competitor, the Co-operative Group.

This action to reduce prices has seen a dramatic fall in Dignity’s share price recently and the same should be asked, could this happen to InvoCare?

Colleague James Mickleboro thinks not, at least for now, as he discussed the implications for InvoCare in Australia.

But, as a potential investor in any company, you’ll always need to consider what its competitive advantage is, and its ability to withstand competition — the company’s ‘moat’ if you will.

Whether its Australian retailers like Woolworths Group Ltd (ASX:WOW), Coles Supermarkets owner Wesfarmers Ltd (ASX:WES), and electronics retailer JB Hi-Fi Limited (ASX:JBH) dealing with increased international competition on Australian shores from the likes of Aldi and Amazon .

Or Australian banks like Westpac Banking Corp (ASX:WBC) and Bendigo and Adelaide Bank Ltd (ASX:BEN) competing with the potential for rising start-ups in the Fintech space.

You’ll need to at least consider how the companies in your portfolio — whatever the industries they operate in — can fend off those attempting to steal their lunch.

Foolish takeaway

There’s a lot to consider when evaluating companies: balance sheet health, top-line revenue growth, the quality of management, the degree of customer and supplier concentration and, of course, competition.

I don’t necessarily think InvoCare is going to have to actually slash its prices due to competition, but recently-floated competitor Propel Funeral Partners Ltd (ASX:PFP) bears watching.

The important point to consider though, if you’re looking at one company, it’s always a good idea to not rush in and just buy on a whim. Stop and at least consider a broader view of the industry and form an opinion on the factors that potential competition could have on your investment thesis.

The last thing you need is buying shares in companies that are competing with someone who has nothing to lose.

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Motley Fool contributor Edward Vesely has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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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