Taking Stock 22 January 2026

James Lee writes:

“The best time to be CEO at Auckland Airport, James, is after the last CEO has just finished a wall of capex spend.”

I was sitting with the then CEO of Auckland Airport after a global roadshow and he was explaining that the enjoyment of the CEO role went in cycles, depending on capital expenditure (capex).

When the airport needed to invest large sums of capital, their clients hated them because airline prices were going to increase, they needed massive amounts of capital, large capex had lots of risk and the demand was always a risk. When they had just finished investing, prices would go up nicely because their returns were regulated, earnings would pay off debt, earnings per share would go up, keeping shareholders happy, and life was easier than the previous person had it.

It is this concept of cycles and business being hard that I want to talk about this week and then incorporate that discipline of cycles into our investment thoughts.

Over the break many of my feeds were full of geo-political commentators who, by and large, were just shaking their head at just how the US is behaving, whether that be internally or internationally.

The others were full of media and market commentators being incredibly critical towards a range of listed companies in New Zealand, or how bad employment and the economy had been, and finally some lamenting that the All Blacks had had a poor season.

Between these views it is hard not to be nervous and negative about the world.

The fact, however, is that it is easy to commentate after the fact that a company falters, or the All Blacks have been beaten. Most commentators have never actually done the job they are commenting on, and ignore the simple truth that running a company or being an All Black is hard. And I mean really hard.

The very best commentators don’t judge after the fact. They explain what led to the change and what to look for next time so you can see it coming.

In 2023 I listened to a podcast from a large investment bank where the investment manager was explaining that the key thing to watch was a change in tone towards Venezuela from the US. Venezuela was a top 10 country by value of its natural assets, but 128th on a GDP per capita basis. Eventually either the regime would change or the US government would alter its tone. To be fair to the commentator he never assumed it would be via force, but his logic back then seems pretty sensible today.

Therefore, reading commentators’ views, or self professed experts portraying hindsight gospel without explaining, is mostly noise, and does little to actually help inform our next decision. Frankly that should be their job, not to entertain but inform. Clickbait is for the mindless.

Jim Cramer, John Oliver, Hasan Minhaj and Madison Malone all do a decent job using their roles to inform on different topics for those wanting some easy to watch versions.

In 2026 at Chris Lee & Partners we want to focus on helping, what to look for going forward, as I am sure our clients will know by now, we think the world is very tightly wound with lots of relatively large risks that are almost unforecastable. My central view is that logic always prevails, but in this case it might take time.

Over the past seven years, the economic environment has been tremendously difficult, the normal economic cycle was running out of steam in 2019 but we then got Covid, collapsing interest rates, massive debt build up, huge input inflation, trade disruptions, two wars, surging energy costs, employment went up, especially as people invested into IT, then rates went up in almost a straight line and now AI is leading to spiking unemployment in white collar jobs.

To say a company is poor because it didn’t navigate that set of events well is insane. What matters is what it does next and how it is set up for success.

Xero is one my favourite companies. In that time period its stock has gone from $40 to $140, back to $70, then $190, and today back to $100, so in 7 years it outperformed the Nasdaq but over the last five years materially under-performed.

That doesn’t make it a bad company. Business cycles, investment cycles, and economic cycles are long and hard.

Two things matter in investing; being on the right side of that cycle, and the management team/ board being aligned to the right things during those cycles.

The company I am going to use to highlight that is Fonterra.

Fonterra is New Zealand’s biggest company, with revenue last year well over $20B. What many forget is that it is a young company. Fonterra was formed in 2001 with the stated purpose to build a unified, farmer-owned co-operative that would be globally competitive and deliver strong economic returns to New Zealand dairy farmers. Within two years both the CEO and Chair were new, and began the era that was dominated by Henry Van Der Hayden and Andrew Ferrier.

The first phase (or Henry & Andrew phase)

In 2001 Fonterra was a new company with a new CEO and new Chair. It began its life by expanding globally. Between 2003 and 2011, Fonterra grew into Australia via Bonlac, formed a joint venture with Friesland Campina, entered China with Sanlu, Chile with Saprole, and formed Dairy Partners America with Nestle. I would argue it did what the farming community asked. Debt actually fell until it undertook a large capex upgrade.

Van der Hayden and Ferrier oversaw Fonterra growing from 12B of revenue, a circa $4 milk price and 500m EBIT to 20B of revenue, $7.6 milk price and $900m of EBIT. Now I would note that revenue growth and the milk price are highly correlated.

The second phase (or John & Theo phase)

Two things changed in 2012; new leadership, with both CEO Theo Springs (a 30-year global veteran most recently from Friesland Campina) and chair John Wilson taking the rein. The co-op listed the Fonterra Shareholders Fund and began to act like a listed company. Consultants were brought in for enormous fees to change strategy, and the company began a new 6-year plan.

This period saw a few things happen. The company’s plan was to double EBIT from 1B to 2B, so it rapidly expanded its balance sheet, with debt going from $3.8B to $7.2B at its peak. It invested heavily into China, both directly into farms and an infant formula brand, which would appear at face value to have cost them $1B in losses.

Revenue from 2012 to 2017 was flat, EBIT fell from $900m to $750m, the milk price fell from $7.60 to $4.60, and as mentioned before, debt levels went up significantly.

Culturally Fonterra was viewed as a big corporate now, and was widely viewed by the corporate world as arrogant, self important and showing too much interest in what a small contingent of its stakeholders (i.e. the capital markets) thought. Salaries were plump and farmers were broadly unhappy.

It would be easy to say that this period was just poor execution, poor leadership, or bad luck. Critics of listed companies would say that the problem with listed companies is that incentives drive behaviour, and that while only a tiny proportion of its equity was provided by listed market investors, they had too much influence vs the other stakeholders.

But I think this is too simplistic. In 2007 Fonterra was reviewing its capital structure because the dairy industry was growing more competitive, and the legislation was such that Fonterra had to buy back any equity when farmers wanted to sell, leaving its balance sheet inappropriate, given the ambition of global expansion.

It had two options: change the capital structure to support the strategy, or change the strategy to work within its capital structure.

 It chose to try to change the capital structure. It was this decision and the ultimate execution that failed, and in a large part it failed because the actual people funding the strategy, being the farmers, had had enough and effectively took back the company.

2018 to today (the Peter and Miles era)

After six years of investing, nearly doubling of debt and flat EBIT, the board of Fonterra clearly had a long look at itself. One of my favourite analysts wrote that, since inception, Fonterra had invested billions of capital but had returned less than 200m of free cash. It would have been better to have just taken those billions and bought Nestle shares.

In 2018 the board took the view that somewhere between 2003 and 2011 it had lost its connection to both its stakeholders and its purpose. It made a number of hard choices, including cutting the fund, selling assets and simplifying the business to focus on its actual purpose, being to deliver strong returns to farmers, not build a global empire.

It sold pretty much everything non-core - China, Chile, DFA, Tip Top, investments and finally Mainland. It gave farmers a few billion dollars back and reduced debt to sustainable levels.

Today Fonterra appears to be a focused co-op that will stick to its actual purpose and what its actual capital providers want. My bet is the corporate veil continues to dwindle and over time it becomes an increasingly simple business – a cooperative.

To put some context, revenue in 2026 was 26B, EBIT in 2025 was over 1.7B, nearly double what it was in 2018, and debt is now very much under control.

Summary

The listed history of Fonterra had two clear stages, the 2012-2019 and 2019 to today period.

Reading this cold, you would have said the stock would have declined from 2012 to 2019 and then gradually recovered from 2019 to 2025. The truth is that, between 2012 to the start of 2018, the stock was broadly flat, with some good days and some bad periods. The stock began its slide at the start of 2018, falling from over $7.00 to $2.5 in 2024, and really only recovered once the Mainland sale process started. But today the share price is back to levels of 2012.

My take on this is that markets often stay positive too long when cycles turn, i.e. give companies the benefit of the doubt, and then take a long time to believe that a cycle has turned, and are then too pessimistic when the cycle has turned.

What can we learn from this for our 2026

Businesses, no matter how big or profitable, need a few simple things - a clear strategy that is agreed by its stakeholders, a structure to support that, and the resources to execute. It doesn’t matter if you are running a 20B revenue dairy company or corner dairy. Those three things are uniform in business.

Businesses go through cycles, even good businesses. Sometimes it might be the economic cycle, sometimes it is the commodity cycle, but being disciplined and ensuring your strategy meets the needs of your stakeholders is critical.

It doesn’t matter whether that is Disney, Nike, Fonterra or Xero, they will go through those cycles. Half of their choices are affected by random, unpredictable events.

As we look for investment opportunities this year we need to do two things - look at our winners who appear to be doing really well, and look at the stocks everyone is saying are terrible companies. It’s like Spark at $5.00 and Fonterra at $2.5; sometimes the opportunities are when everyone loves one or hates the other, an emotional, illogical mindset.

We should be looking for where the board and management team are making significant cultural and structural changes, and finally we should be patient. The markets will not reward these companies instantly when they turn around, but when they do we should be willing to look.

So in 2026 we will reopen the file on Fletchers, Sky City, Warehouse and Air NZ, given the changes they are making to see if our position should change, and we will check that we aren’t complacent on some of our traditional winners like Infratil, EBOS and Fisher & Paykel Healthcare.

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Travel

23 January – Wairarapa – Fraser Hunter (FULL)

27 January – Christchurch – Fraser Hunter (FULL)

28 January – Auckland (Albany) – Edward Lee (FULL)

29 January – Auckland (Ellerslie) – Edward Lee (FULL)

12 February – Lower Hutt – David Colman

13 February – Blenheim – Edward Lee

18 February – Christchurch – Johnny Lee

3 March – Ashburton – Chris Lee

4 March – Timaru – Chris Lee

James Lee

Chairman

Chris Lee & Partners Ltd