Great Companies

What Makes a Great Company Great?

When examining a company in which to possibly invest, make sure that the firm is a first-class operation. Here are some marks of great companies.

Powerful brands. Think of well-known brand names in America or, better yet, around the world. Brands such as Coca-Cola (NYSE: KO), General Electric (NYSE: GE), Nokia (NYSE: NOK), McDonald's (NYSE: MCD), Ford (NYSE: F), and Disney (NYSE: DIS) fit the bill. If most people don't yet know a company's name, then it still has a lot of work to do building its brand.

Significant products or services. Look for a company that's selling something people really need or really want. Pharmaceutical companies, for example, manufacture products that people will buy whether they're flush with funds or strapped for cash. Firms such as Apple Computer (Nasdaq: AAPL) and Starbucks (Nasdaq: SBUX) offer consumers things they love. Also appealing are repeat-purchase products -- things people buy over and over again -- such as express mail delivery, cheeseburgers, and shampoo, instead of items bought only sporadically, such as cars or trash compactors.

Strong competitive position. Ideally, a company will have advantages over its peers. These can include brand value, economies of scale (if it's making so much that its costs per item are relatively low), and bargaining power. (Wal-Mart (NYSE: WMT), for example, is so big that it usually calls the shots.)

Consistent, reliable earnings and sales growth, and robust profit margins. Look for sales and earnings to have increased steadily over past years, suggesting that management is planning and executing well. Stack your company's gross, operating and net profit margins up against those of its competitors to see who's wringing the most value out of each dollar of sales.

Lots of potential. A stellar past isn't enough. Make sure the company has much potential for growth. Is it expanding abroad? Is it coming out with exciting new products or services? Are its offerings taking the country by storm? Is it spending significantly on research and development?

Finally, consider how well you know the company and industry and how much you'd enjoy keeping up with its developments. A firm might have enormous potential, but if reading about it puts you to sleep, it might not be the best addition to your portfolio.

-- from The Motley Fool Investing Basics newsletter, 12/21/04