Hi Investors,
One of the least quantitative aspects of investing is deciding how company management will affect the price of a stock purchase. Recognizing that qualitative measures may be the best we have to work with, is there a list we should look at? A possible list is given below.
- Does the stock price gyrate wildly over time?
- Have sales/revenues increased over time?
- Have earnings per share increased over time?
- Has book value increased over time?
- Does management own a significant number of shares of company stock?
- Are management salaries inappropriate versus annual net earnings?
- Does management return excess earnings to shareholders?
In the long term what every stock owner should be after is predictability in earnings since earnings determine price. Therefore looking at price, revenues and earnings through the last two recessions should provide a good surrogate of management efficiency.
- If stock prices fluctuate widely then management is not managing earnings expectations through their use of earnings forecasts. Expectations of earnings, not actual earnings are what control short term stock price movements.
- For a growing company sales/revenues should increase over time. If they do not then management is not doing their job or you are investing in a poor sector/stock. Use of past year revenues to expand the company’s current year sales/revenues is the primary role of management. Note we are not talking about expanding earnings per share here. Many rapidly growing companies consume all their earnings to fund growth and actually assume debt.
- When sales/revenues expand so should earnings per share unless the company is rapidly growing.
- Book value, regardless of earnings, should increase over time. If the company is growing then the resources (book value) it needs to generate more sales/revenues should also grow.
- When management has a significant portion of their net worth tied up in company stock they act differently than if they merely have stock options. In the first case they try to increase the book value of the company, in the latter they may be satisfied to merely increase the stock price. Given the huge range of net earnings there is no hard and fast rule, but a range of 2 – 50% insider ownership is what I typically use. Insider ownership above 50% must be evaluated on a case by case basis. For very large companies insider ownership in the 0.20 range may be acceptable.
- Determining the value of management is one of the hardest exercises in stock research. In general if any management staff is paid more than 0.1% of net earnings I immediately look at another stock.
- Increase in sales/revenues is paramount. In cases where the market environment is not favorable, has management been able to buy back shares cheaply or increase dividends through use of retained earnings?
Examples
Data for Pepsi, Symbol = PEP
Year | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
High Price, $ | 50.46 | 53.50 | 48.88 | 55.71 | 60.34 | 65.99 | 79.00 | 79.79 | 64.48 | 68.11 | 71.89 | 73.66 | 87.06 |
Revenues, B$ | 23.15 | 25.11 | 26.97 | 29.26 | 32.56 | 35.14 | 39.47 | 43.25 | 43.23 | 57.84 | 66.50 | 65.49 | 66.42 |
EPS, $ | 1.36 | 1.69 | 2.07 | 2.47 | 2.43 | 3.41 | 3.48 | 3.26 | 3.81 | 3.97 | 4.08 | 3.96 | 4.37 |
Book
Value, B$ |
8.65 | 9.53 | 11.9 | 13.57 | 14.23 | 15.45 | 17.32 | 12.2 | 16.91 | 21.27 | 20.7 | 22.42 | 24.41 |
Shares, B | 1.75 | 1.73 | 1.72 | 1.63 | 1.66 | 1.64 | 1.61 | 1.55 | 1.56 | 1.58 | 1.56 | 1.55 | 1.53 |
Dividends, $ | 0.57 | 0.59 | 0.63 | 0.85 | 1.01 | 1.16 | 1.43 | 1.65 | 1.77 | 1.89 | 2.02 | 2.13 | 2.24 |
Retained Earnings, $B | 11.519 | 13.489 | 15.961 | 18.730 | 21.116 | 24.837 | 28.184 | 30.638 | 33.805 | 37.900 | 40.316 | 43.158 | 46.420 |
Insider ownership 0.1%
Salary Ms. Indra K. Nooyi M.P.P.M. 5.73 M$ Net Income Avl to Common (ttm): $B 6.84 Ratio, % = 0.08%
Management at Pepsi has grown revenues, earnings per share and book value significantly since 2001. They have done this while decreasing shares, increasing retained earnings and increasing dividends almost 4 fold. No member of staff seems to be paid excessively and insider ownership while low is acceptable given the number of shares. Share price has not fluctuated widely indicating management is successfully managing earnings expectations.
Data for Ford, Symbol = F
Year | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
High Price, $ | 31.42
|
18.23 | 17.33
|
17.34
|
14.80
|
9.48
|
9.70
|
8.79
|
10.37
|
17.42
|
18.97
|
13.08
|
18.02 |
Revenues, M$ | 161 | 162 | 166 | 172
|
177
|
160
|
171
|
144
|
116
|
129
|
136
|
134
|
147
|
EPS | -0.44
|
0.47
|
1.14
|
2.11
|
1.28
|
-1.50
|
-0.19
|
-3.13
|
-0.28
|
1.91
|
1.51
|
1.41
|
1.62 |
Book
Value, B |
7.79
|
5.59
|
11.65
|
17.44
|
13.44
|
-3.46
|
5.63
|
-15.72
|
-7.82
|
-0.673
|
15.03
|
15.95
|
26.38 |
Shares, B | 1.81 | 1.83
|
1.83
|
1.83
|
1.86
|
1.89
|
2.11
|
2.39
|
3.31
|
3.75
|
3.80
|
3.81
|
3.94
|
Dividends, $ | 1.05
|
0.40
|
0.40
|
0.40
|
0.40
|
0.25
|
0.00
|
0.00
|
0.00
|
0.00
|
0.05
|
0.20
|
0.40
|
Retained Earnings, $B | 10.502 | 8.659 | 8.421 | 11.175 | 12.461
|
-.017
|
-1.485
|
-16.32
|
-13.60 | -7.038
|
12.98
|
20.976 | 23.658 |
Insider ownership 0.46%
Salary Mr. Mark Fields 5.28 M$ Net Income Avl to Common (ttm): $B 6.61 Ratio, % = 0.08%
Management at Ford has had a hard time growing revenues, earnings per share and book value consistently since 2001. Shares have increased while dividends have decreased. No member of staff seems to be paid excessively and insider ownership while low is acceptable given the number of shares. Share price has fluctuated significantly indicating management has difficulty managing earnings expectations.
Data Sources: www.fastgraphs.net
http://www.sec.gov/cgi-bin/browse-edgar?CIK=f&Find=Search&owner=exclude&action=getcompany
http://finviz.com/quote.ashx?t=pep
http://finance.yahoo.com/q/ks?s=F+Key+Statistics
Will share my tips and tools in my next post!
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Mind Kinesis Research Team