We don’t normally like IPOs (initial public offerings). They’re a classic lose-lose situation.
The trouble is that banks and big funds get first bite of cherry when the shares are allocated. That means retail investors and smaller funds are left to wait until the company is traded on the market, by which point the price has usually gone up.
Some IPOs do offer allocations to smaller investors, but usually that’s only because the bigger guys don’t want to touch it with a bargepole.
Either way, you’re likely to be taken to the cleaners. Dr Jay Ritter of Florida University has studied IPO returns. He found that most stocks go up a whopping 19% on their first day. But he also found that over three and five years, they go on to lag the market by a large amount.
It’s easy to think of some big flotations in the past few years that have followed this rule – Facebook, Ocado and Zynga are some good examples from the tech world.
However – all that said – I think I’ve found an exception. It’s an Italian company which made its debut last Wednesday, the first company to appear on that stock exchange in nearly a year.
It’s a fast-growing global brand with a quality product with plenty of loyal followers, and lots of room for expansion.
And it makes one of the most resolutely low-tech products imaginable – the notebook.
How a cult notebook turned into a mega-profitable business
We’re talking about Moleskine. The company started life in 1997 as a brand of notebooks produced by the company Mondo & Mondo. Modelled on a classic style that was popular in the 19th century, it gradually acquired a cult following.
However, despite this success, it remained a niche product with the parent company only employing 20 people. It was only when Mondo was taken over by a private equity firm in 2006 that Moleskine started to become a major brand.
The new owners made several big changes. Firstly, they moved the manufacturing to China. While this annoyed some fans, it allowed them to both ramp up production and slash costs.
They also pursued an aggressive policy of global expansion. Finally, they took the bold decision to take advantage of Moleskine’s reputation to launch a range of related stationary products.
The results have been dramatic. Moleskine now sells its wares in 23,000 places in 90 countries. Half of its sales now come from the Americas and Asia. Just 10% of its revenue comes from Italy.
Fast growth in these new territories has helped it to expand even in the face of the euro crisis. Last year, sales grew by 17% while profits shot up by 25%.
Why Moleskine’s expansion will continue
This growth could peter out – or even collapse. It’s easy to name several once-popular brands that have been consigned to the dustbin of history.
But there’s one good reason to imagine that this growth will continue: austerity culture.
One famous alternative indicator pointing to recessionary times is the ‘lipstick’ indicator. This argues that when times are tough, women prefer to buy small cosmetic items rather than more expensive items. So lipstick sales go up, even as sales of more costly cosmetics fall.
A similar trend towards ‘little luxuries’ is happening in the consumer sector right now. In the current climate, having an expensive sports car or wearing designer clothes is more likely to earn you angry stares than admiration.
Indeed, tax officials in some countries are deliberately going after owners of expensive goods on the theory that it is a sign that they are not paying their fair share.
Moleskine is the perfect brand for this environment. While it’s upmarket and elegant, it’s also a lot more discreet. After all, £10 might be expensive for a notebook, but it’s not going to mark you out in the way that an expensive watch might.
The Moleskine brand has also demonstrated its resilience in the face of the competition. For the last four or five years, many firms have tried to cash in on the luxury stationary boom by selling nearly identical (though much cheaper) pads at a fraction of the price. However, they have all failed to displace the original.
By selling low-ticket luxury to a loyal consumer base, Moleskine can get away with much higher profit margins than any other consumer group. It’s not dissimilar to the way that Apple’s cult following means it can get away with charging relatively high prices for its products. Moleskine’s profit margins, at 41%, are even bigger than those of Prada at 27%.
The decision to increase the proportion of Moleskine products sold through its own stores rather than through third parties should help it capture even more revenue.
There is also plenty of room for expansion. Goldman Sachs thinks that the company is currently reaching less than 2% of its target market, which it estimates as 228 million people around the world.
It’s is also trying to find new revenue streams. For example, it has launched an iPad app that will enable customers to produce customised versions of the notebook (the narrow range is one of the biggest complaints).
A risky buy
On the face of it, Moleskine (MIL: MSK) isn’t cheap. Indeed, it has a price/earnings ratio of 25. In contrast, the wider Italian stock market trades at only 11 times earnings. And you’ll need a broker who trades individual Italian stocks to buy it.
However, comparing it with the wider Italian stock market is misleading – a better comparison is with global luxury brands such as LVMH and Prada, which trade at 20 times and 35 times earnings respectively. Given Moleskine’s growth potential, this suggests that it offers substantial value. One for adventurous investors who want to expand their portfolios beyond the better known big brand names.