Bon Voyage
America is good at producing world-beating behemoths. Google, Meta, Microsoft, Amazon and Apple conquered Wall Street and pretty much everywhere else too. Some Chinese efforts have also set the bar — Tik Tok, WeChat, Alibaba all enable enormous amounts of commerce all over the place. These companies stretch for maximum reach. Staff don't sleep until they connect with everyone on the planet.
Not so for their European cousins. The last time European companies lived in the ranks of the world’s top 10 or even top 20 was Nokia, Nestle and BP back in the early 2000s. Former Italian Prime Minister Mario Draghi just delivered a 300-page report eviscerating the continent's governments for choosing anti-competitive policies at every turn. The various governments’ maze of rules knee-caps potential European world-beaters before they're born.
Inefficiency as a service
What Europe is really good at, though, is not building a lot of stuff. They make cars, but not too many. They make bags, but just a few. Same for coats, watches, shoes, chocolate etc. By a thousand small choices, rather than by design, Europe specializes in scarcity.
A few plucky business folks have reframed this handicap into something lucrative.
Bernard Arnault began flipping scarcity into status starting all the way back in 1972. He collected unproductive and small-batch bag and booze companies into LVMH. He rode scarcity all the way to sometimes be the world's richest man. Many (most?) of the world's most exclusive luxury brands — Hermes, Ferrari etc. — come from Europe.
Not all European luxury is good for shareholders, though. I'm looking at you, Aston Martin Lagonda, Kering (Gucci). Bernard's success with LVMH is the aspiration, but not the standard. It used a few reliable stitches to weave its success:
Moving upmarket with the growth of their really well-heeled customers,
Acquisitions and strategies that entrench exclusivity and, crucially,
Indulging the interests of shareholders.
Catching Veblen's wave
Sanlorenzo builds boats. Mostly big ones. All for leisure. Nearly half the world's yachts steam from Italian shipyards. Sanlorenzo is the second largest of them. Italy is the cradle of luxurious unproductivity. This works well for yacht building — you don't need to build that many to make it work.
Like jewelry and handbags, selling yachts is an effective way to keep up with the Joneses — er, Rothschilds — and stay at the top of the market. Economists use yachts as one of the few examples of Veblen goods — things that increase their appeal the more expensive they get. More than a boat, you're selling prestige.
Sanlorenzo sells its ships to a growing club of ultra-high-net-worth customers for close to €12 M a pop. The average age of those tony sailors fell from 56 to 49 years since 2016, adding a few years to customer lifetime and customer lifetime value. The kids like to show off. But they don't want to show off old yachts. They want a shiny new one. So, they tend to trade up every 4-5 years. Yacht buying is a repeat business.
In case there was any question about how exclusive owning a yacht might be, Sanlorenzo nudges owners to join their private yacht club. Fancy customers get to schmooze with other fancy customers and compare yacht sizes or whatever. The point is Sanlorenzo's selling status to a growing market who may, actually, prefer high prices.
All aboard
Sanlorenzo went public in 2019. It sailed smoothly through Covid-19 disruptions and has been methodically expanding its footprint since. With a course set to increase prestige and exclusivity, it's made investments in Italian craftsmen that outfit the ships. It bought East Asian ship shop, Simpson Marine, to sidle closer to customers. It bought Nautor Swan to add sail yachts to its offering.
Sanlorenzo is diligently checking the boxes for sound M&A. The additions don't break the bank. The company pays cash. And the collection fills strategic gaps without taking the company into uncharted territory.
So far, the results have been balmy. The company has increased earnings at a 30% clip since its debut. Its done this with ruthless capital efficiency. Its return on the capital its invested has risen from 30% to 50%. All the while management has kept the company on sound financial footing.
Stowaways
Customers yearn for more boats. Sanlorenzo's backlog represents more than a year of production. Its acquisitions add capabilities to the company without risking capsizing the business. Sometimes though, even in the most status-savvy luxury houses, shareholders get treated like stowaways.
Not so Sanlorenzo. This year, the company boosted its shareholder cred by introducing a buyback program. The effort will reduce the company's share count by about 10% over the next year.
Knot a lot
Sanlorenzo won't reach the range of the everywhere Cos. That's not the point. The business is set to cruise through a mix of good-enough volume growth, punchy price and product moves, artisanal production, and savvy acquisitions. Its new buyback program sets up shareholders to benefit from the yard’s thoughtful capital allocation. The market offers all this at a share price that more properly reflects an inflatable dinghy, providing an attractive opportunity to buy a high-quality outfit for not very much.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.