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Published: December 20, 2009
Not a day goes by when we're not bombarded
by advertisements to save money on auto insurance. Geico,
Allstate, Progressive, 21st Century... I'm not sure how they can
all be the cheapest, but that's entirely another story.
The point is, these messages don't really hit home with me. I'm
fond of the Geico cavemen, but they don't compel me to switch
insurance carriers.
First, there's always the concern about whether the price
comparisons are truly apples-to-apples when it comes to specific
features and benefits. Even if one of these companies could save
me a few dollars initially, what's to stop them from jacking up
those premiums a few months down the line?
Plus, I get multi-line discounts for having auto, homeowners and
other policies with the same agency -- and switching might
jeopardize those favorable rates I'm paying for other products.
Finally, dealing with a new insurance agent can be a wild card,
who knows how responsive they will be with claims and other
customer service issues?
And then there's the hassle of paperwork.
Don't tell State Farm, but they could raise my premiums and I
probably still wouldn't switch. The point is: Customers on the
books tend to stay on the books. This can translate into big
rewards for shareholders.
Sticky Customers
Very few companies escaped last year's downturn unscathed. But
for a handful, it was business as usual.
Take CSG Systems (Nasdaq: CSGS), for example, which
handles billing and other services for cable and satellite TV
providers like Comcast (Nasdaq: CMCSA) and Dish
Network (Nasdaq: DISH). The company gets paid to mail out
monthly statements to roughly half the households in the United
States, and it processes about $3 billion in transactions every
month.
Setting up the firm's complex billing infrastructure can cost
millions and take months to complete. Once a customer like
Time Warner (NYSE: TWX) has made that type of commitment, it
is usually very reluctant to take its business elsewhere. Most
sign long-term multi-year contracts. As a result, CSG Systems
has money coming in the door rain or shine.
Despite a sharp plunge in consumer and business spending, the
company posted a healthy +13% increase in revenue last year.
Those improvements help explain why CSG Systems swam when the
rest of the market sank like a rock. The shares delivered +19%
in 2008, while the S&P 500 nosedived -38%.
The stock is a prime example of how a sticky customer base can
keep a company's stockholders happy in any environment.
"Switching Costs" Are a Headache
We all know that neighborhood gas stations have basically zero
pricing power. It takes almost no effort to pull in next door to
save a few cents a gallon, so pricing is cut-throat and margins
are razor thin.
At the other end, there are well-placed firms like CSG Systems
that can milk their customers. Clients aren't going to throw
away millions in upfront installation expenses and then spend
time and money retraining its employees on a new system just to
save a few bucks.
As a result, the business tends to be
highly stable.
Banks and asset management companies often benefit in much of
the same way. It's not that we couldn't find a cheaper checking
account or better performing mutual fund somewhere else, but the
headache of signing papers, transferring assets, filling out new
direct deposit forms, etc. is enough to dissuade most of us from
jumping ship.
Simply put, these "switching costs" usually outweigh any benefit
associated with moving to a competitor.
Think of Fiserv (Nasdaq: FISV). The company provides the
software that process millions of ATM withdrawals, checking
deposits and other transactions for banks and credit unions.
It's not a glamorous business, but can you imagine the possible
disruption of handing this critical behind-the-scenes task to a
rival that might not be as reliable.
Fiserv rarely loses customers -- the company boasts a
near-perfect retention rate of 99%. That's a big reason why its
shares have delivered an eye-popping gain in excess of +4,000%
during the past two decades.
Companies with a Committed Customer Base
There's no easy way to screen for a sticky customer base.
Superior pricing power often shows up in lofty margins and
robust returns on equity relative to industry peers. Along with
CSG Systems and Fiserv, the companies in the table below are all
worthy of consideration.
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-- Nathan Slaughter
Editor
StreetAuthority Market Advisor
Half-Priced Stocks
The ETF Authority |
