Coles, BHP and Honest-To-Goodness Risk Assessment

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Coles or BHP? Which would you rather buy right now? We take a break from two separate discussions—Coles’ organizational future and BHP’s expansion plans—to discuss which is the better business today.

One bases its future on future retail sales and the continued consuemerization of the Australian economy, in which the indebtedness of the consumer, if not desirable, is absolutely crucial. The other tears up the earth and sells its various by-products overseas, especially China.

It’s a little superficial to make arbitrary distinctions between “production” stocks and “consumption” stocks, but then, we have always been a little arbitrary and superficial ourselves. So away we go!

Retailers can mark up items and squeeze out extra profit. That’s one competitive/structural advantage. Producers are capital intensive, and it requires money, skill, and resources to locate new metals. Result? Push.

Both have disadvantages, too. Consumer spending is cyclical. Competition is fierce. Consumers are increasingly loyal to low prices, not brand names. But resource prices are cyclical too. High prices attract new producers, yet sunk capital costs are part of life.

Which business currently has more pricing power? We’d suggest it’s the one where new supply is most difficult to create. And that, we’d suggest, is still in the resource sector. But it all comes down to business and balance sheet analysis and honest-to-goodness risk assessment. As if investor still did that sort of thing.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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