Table of Contents

Public Support Test

The 30-Second Summary

What is the Public Support Test? A Plain English Definition

Imagine two local charities. The first, “The Smith Family Foundation,” receives 95% of its annual funding from a single, wealthy benefactor: old Mr. Smith. The second, “Our Town Food Bank,” receives its funding from thousands of small, individual donations from people all over the city. Which charity is more durable? Which one is more likely to be around in ten years? Clearly, it's the food bank. If Mr. Smith has a bad year in the stock market, changes his philanthropic focus, or simply gets into an argument with the director, his foundation is on the brink of collapse. The food bank, however, can easily survive a few donors dropping off. Its support is broad, diversified, and resilient. In the world of non-profits, this idea is formalized into a legal concept called the “Public Support Test,” which the IRS uses to determine if an organization is a “public charity” (like the food bank) or a “private foundation” (like the Smith family's charity). Now, here’s where it gets interesting for us as investors. Value investors have brilliantly repurposed this concept as a powerful mental model for analyzing publicly traded companies. For an investor, the Public Support Test isn't an IRS form; it's a qualitative framework for stress-testing a business model. It asks a simple, yet profound, question: How vulnerable is this company to a single point of failure? Instead of donors, we look at three key pillars of corporate support: 1. Customers: Does the company serve millions of customers, or does it rely on a handful of massive contracts? 2. Revenue Streams: Does the company make money from a variety of products, services, and geographic regions, or is it a one-trick pony? 3. Brand & Reputation: Does the company command widespread, loyal support from the public, creating a powerful brand that acts as a protective moat? A company that is heavily dependent on one customer, one product, or one supplier is like the charity relying on Mr. Smith. It may look successful on the surface, but it's standing on a rickety, one-legged stool. A company with a broad base of public support is standing on a solid, stable foundation, ready to weather any storm.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” - Warren Buffett

Buffett's focus on “durability” is the very essence of the Public Support Test. It's not just about today's profits; it's about the resilience of those profits for decades to come.

Why It Matters to a Value Investor

For a value investor, the Public Support Test isn't just a neat idea; it's a critical component of risk assessment and a direct input into understanding a company's true worth. It aligns perfectly with the core tenets of value investing.

How to Apply It in Practice

The Public Support Test is not a simple formula you can plug into a spreadsheet. It's a method of investigative analysis, a way of thinking like a business owner. Here’s how you can apply it.

The Method

Your primary tool for this investigation will be the company's annual report, particularly the 10-K filing for U.S. companies.1)

  1. Step 1: Scrutinize the Customer Base (The “Who”)
    • Action: Read the “Business” and “Risk Factors” sections of the 10-K.
    • Look For: Companies are required to disclose if any single customer accounts for 10% or more of their total revenue. This is a massive red flag. The “Risk Factors” section will explicitly state things like, “Our business is highly dependent on our relationships with a small number of major customers.”
    • Questions to Ask:
      • Is there a named “major customer”? How much of the revenue do they represent?
      • Even if no single customer is over 10%, is the industry naturally concentrated? (e.g., selling parts to only three major automakers).
      • Conversely, does the company serve millions of individual consumers or a large number of diverse business clients? This is the ideal scenario.
  2. Step 2: Dissect the Revenue Streams (The “What” and “Where”)
    • Action: Analyze the “Segment Information” in the financial statements section of the 10-K.
    • Look For: A breakdown of revenue by product line, service type, and geographic region.
    • Questions to Ask:
      • Product Diversity: Is the company a one-trick pony, or does it have a portfolio of successful products? Is all its revenue tied to the fate of a single blockbuster drug or software platform?
      • Geographic Diversity: Does the company earn its revenue globally, or is it entirely dependent on the economic health of a single country? A global footprint provides a buffer against regional downturns.
      • Business Model Diversity: Does it make money in different ways? (e.g., selling hardware, software subscriptions, and services).
  3. Step 3: Evaluate the Brand Moat (The “Why”)
    • Action: This is more qualitative and requires you to step outside the 10-K.
    • Look For: Evidence of genuine public loyalty and pricing power.
    • Questions to Ask:
      • Pricing Power: If the company raises its prices by 10%, would customers flee, or would they grumble and pay up? The ability to raise prices without losing business is a hallmark of a strong brand.
      • Brand Loyalty: Do people buy the product out of habit, necessity, or genuine affection? Think of the lines outside an Apple store for a new iPhone. That's a powerful form of public support.
      • Durability: Has this brand been dominant for decades? A long history of leadership suggests a deep and resilient connection with the public.

A Practical Example

Let's compare two hypothetical companies to see the Public Support Test in action: “Titan Turbine Parts Inc.” and “Global Beverage Corp.”

Analysis Point Titan Turbine Parts Inc. (Fails the Test) Global Beverage Corp. (Passes the Test)
Customer Base Highly Concentrated. 85% of revenue comes from a single contract with a massive aerospace company. Highly Diversified. Sells to millions of grocery stores, restaurants, and vending machines across 200+ countries. No single customer is more than 1% of revenue.
Revenue Streams One-trick pony. Manufactures a single, highly specialized turbine blade. Its entire fate is tied to one product's life cycle. Multi-faceted. Sells sparkling drinks, juices, water, coffee, and teas under dozens of different brand names. Revenue is split across multiple product categories.
Geographic Spread Singularly Focused. All manufacturing and sales are tied to its home country's aerospace industry. A targeted trade tariff could be devastating. Truly Global. Revenue is balanced between North America, Europe, Asia, and Latin America, insulating it from any single country's economic woes.
Brand & Moat No brand power. It is a commodity supplier chosen on price and engineering specs. It can be replaced by a competitor who offers a slightly lower price. Immense brand equity. Its flagship soda is a global icon. Consumers actively seek out its brands, giving it huge pricing power and shelf space dominance in stores.
Value Investor's Conclusion Extremely fragile. While current profits might be high, the business rests on a knife's edge. The loss of its single customer would be an existential threat. This is a high-risk, speculative investment. Highly durable. The business is a fortress. The loss of any single customer, or the decline of one product line, would be a minor setback. This is a classic, high-quality compounder.

Advantages and Limitations

Strengths

Weaknesses & Common Pitfalls

1)
The 10-K is a comprehensive annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a detailed picture of a company's business, finances, and risks.