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A Case Study in Franchise Analysis: Linear Technology
Investment Strategy | 4 Comments | Thu 10 Nov 2011
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The existence of a franchise is often cited as the rationale for buying a stock. But true franchises are not common place and are difficult to identify ex ante. This article will take a look at the Linear Technology franchise. It will try to identify the source of the franchise and discuss the issues around the sustainability of that franchise. (As an aside the article will also touch on the investment banking analyst community and their non-existent attempt to cover these issues in their research reports or ask about them on quarterly conference calls.)



Comments

1.
On 11/11/2011 10:14:01, John McElligott wrote:
Fascinating article guys. Most of us think of franchises in terms of sustainability of superior margins or growth, or barriers to entry around natural/regulatory monoploies, patents etc. Not too many think of franchises as stemming from the human capital side of the business and how steady or volatile that is.
I guess a sceptic looking at this company would have to question just why it is the company ceased reporting the level of that human capital & is this in anyway related to the step up in relative R&D spend.

The point raised re sell side analysts is valid. I am continually surprised by the amount of irrelevant research that is produced. I guess it comes down to the following (i) most clients still want it, (ii) very few investment firms specialise in producing research that is provoking, contentious and actually looks at a business and valuation istead of the present qtr. Eliminating qtrly earnings would be a start in my vie, but I conceed that it is unlikely to change.
Well done.

2.
On 30/11/2011 05:04:24, Anonymous wrote:
Interesting insight, not many think in terms of human capital as a source of moat.

The only concern I have with regards to linear integrated circuits is the long-term potential, in the face of digital gaining ascendancy. That they have survived (and done well) over 2 decades is testimony to their staying power. But few have managed to resist a business that potentially could enter the inexorable decline category.

Yellow pages is one example. Long-term performance for guys like YELL is reasonably good. Strong margins, attractive returns on capital and yet, losing >85% market value, as they are in a business in inexorable decline (FCF is 2x market value for YELL, 1.5x pe). Even though they are attempting to reorient towards the internet medium, the imposing presence of Google effectively poses a huge entry barrier.

Enjoyed reading you. I'll come back for more.

Cheers!

3.
On 07/12/2011 11:53:40, Ken Power wrote:
In a digital world you do not do away with analog. When mobile phones went from analog to digital you did not do away with analog because the analog voice had to be converted into digital/binary 0s and 1s.
There is therefore no sign of Linear going the way of Yell.

4.
On 23/12/2011 17:22:56, Anonymous wrote:
I believe there is several potential explanations for why they no longer disclose the number of design engineers at each location. A particular design's engineering location can usually be obtained by company documents or innocent inquiries to the sales team. A bright recruiter could match this information with the number/location of engineers to narrow a particular recruiting search making it easier to find the skills their client is looking for and to target their recruiting efforts. Secondly, portions of designs are often contracted out to external engineering firms and the company may not want this information to be easily understood.

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