A Stock Is a Company Is People

Abstract

A Company Is People /A8 Stock is a Company is t~t People. There are only three or four really salient factors which determine whether a stock is an attractive investment opportunity. Some of these factors are objective; they relate to a particular company's configuration in its overall market. Other factors are subjective; they relate to the kind of people who are running the company. Let me discuss the objective factors first. In analyzing what makes a specific company grow at a dynamic pacewhich is the only kind of companies we're interested in-the first thing we try to establish is whether the business makes good, economic sense or whether a sharp upswing in profits is merely the result of some passing fad. We are looking for companies whose growth is built on solid foundations and not for the makers of this year's hullahoop. Having convinced ourselves that the company's growth has a sound basis-that its products or services fill real economic needs-we then start to analyze the business in great detail. The purpose of this in-depth analysis is to cut through the 50, 60 or 70 extraneous factors and get to the crux of things-the three or four objective characteristics that actually make the company tickand keep such good time. We call these key factors the parameters. The profit parameters are always different for each company. They are determined by its particular stage of development and the degree of uniqueness of its products or services. In other words, the profit parameters relate to the company's specific position at a given point in time as viewed against the background of the business in which it operates. To take an oversimplified example, the addition of 25 new stores will have a far greater impact on a retail chain with 100 units than the same number of store openings would have on a 500 unit chain. In the retail field, profit parameters also are affected by the length of time it takes the company in question to move a new store into the black. These figures are then measured against the growth rates and profit margins of older stores in the chain. Thus, if we know how many new outlets a company plans to open over the next year or two, we can make reasonably dependable projections of its future earning power for that period. In the case of manufacturing companies, the profit parameters are determined primarily by the uniqueness of the product line. Aeroquip presents a dramatic illustration of this concept. The company is in a rather mundane business: it makes plastic and rubber pipe and tubing, which is sold as a commodity, by the yard. This is a tremendously competitive market, and yet, Aeroquip really has no competition. The explanation for this apparent paradox is that Aeroquip has succeeded in developing pipe and tubing with certain proprietary features, and because its products have these unique features, the company does not have to sell them as commodities. Instead, it is able to command premium prices for its line. For mass marketing companies like Procter & Gamble or Revlon, product uniqueness hinges importantly on how much management is willing to spend on research and promotion. General Foods, for instance, in recent years has been plowing back a hefty portion of sales into new products, and this program has resulted in about two dozen new items of consequence. One measure of how these efforts are paying off is that in 1968 while advertising and promotion costs rose only 5 per cent, the company's sales climbed 7 per cent. Thus in defining profit parameters we are attempting to pinpoint those companies which, because of their unique characteristics, are most likely to demonstrate explosive earnings growth in the future. And the better LAWRENCE A. RADER iS Senior Vice President and Director of Shareholders Management Company where his responsibilities are primarily in portfolio management.