Olam International

[Musicwhiz]

Low net margins is not really an issue since it is an industry norm. It also makes it unattractive to new players and small players will find it difficult to succeed since scale and volume is the key ingredient to success hence there will be plenty of consolidation leading to a few big players dominating a pretty big sector. High margins, on the other hand, means that the company will always face competition from new players seeking a slice of the juicy pie hence it needs to consistently upgrade itself and its products (and keep its staff happy) so that it can maintain its niche.

I don't totally agree with the above.

Low net margins being an industry norm will imply that the industry itself does not demonstrate favourable economics; hence an investment into any company within the industry should be made only after careful consideration and a ton of due diligence (and even then only if there is sufficient margin of safety). The problem with low margins is that any unexpected expense will easily wipe out a chunk of earnings and drive the Company into a net loss position. Even though barriers to entry may be high, this does not itself make a Company attractive for investment.

For companies with high margins, it may not be that it will constantly be assailed by other companies hoping to get a portion of the pie. It could be in a good niche where there are few players but there are also significant barriers to entry in terms of capex to be able to compete effectively. Or it could have a track record and patents/certifications which make it the vendor of choice for its customers. Such a company would have a very strong moat (filled with man-eating crocs, no doubt!) which is almost unassailable. Of course, this is just theory, in practice it is tough to find such a company trading at low valuations.....

Just my 2-cents.