Last week in his goodbye wrap-up, Matt reminded us of the qualitative tenets of Rule Maker investing:
- At least one sustainable competitive advantage -- and the more, the better.
- Great management with unquestionable integrity and a track record of excellence.
- Expanding possibilities that will allow the company to have a future that's sweeter than the present.
- A reasonable purchase price that allows for the clear possibility of 2x/5y.
While all four criterion require some subjectivity, every time the Maker team discusses #2, it's grimaces all around. Not that we don't like the subject, but we understand just how delicate an issue it is, not to mention the difficulty of teaching it to others. Judging management quality is definitely more art than science.
Let me digress for a moment while I highlight the "track record" part. Rule Makers are not startups. They are not companies that have potential to be something big and great. In other words, they're not Rule Breakers. Makers are established companies that have proven themselves already. JDS Uniphase (Nasdaq: JDSU) didn't fit this profile and is out. What about Yahoo! (Nasdaq: YHOO), you ask? Stay tuned, same bat time, same bat channel.
Now, back to our regularly scheduled program. How can you find a management team with unquestionable integrity if it's never had its integrity tested, and who are we to determine that integrity? Also, it's difficult to distinguish between the media's portrayal of top management and reality. That's why I love a good interview. It's an opportunity to observe, interpret, and nit pick an executive's every word.
TV interviews are the best because body language can be observed. Conference calls provide the opportunity to interpret voice inflections but analysts rarely ask the tough questions. All too often, the Wall Street Wise stick with the standard "good quarter, guys" and move on to some question about a number they need to update their financial models. Then, there is the one-on-one sit down. A good one can shed light on the thinking of corporate bigwigs if the right questions are asked.
Management personalities filter through an organization. Understanding those personalities provides insight into a company's character. Take Southwest Airlines (NYSE: LUV), for example. Would its employees be as bold and charismatic if Herb Kelleher wasn't? Doubtful. Andy Grove, Intel's (Nasdaq: INTC) Chairman and former CEO, is another example of a personality that resonates throughout a company.
Grove, along with Gordon Moore and Robert Noyce, is one of the original wunderkinds who helped pioneer microprocessor technology. An engineer by trade, he's considered one of the greatest business managers of the 20th century and was voted Time Man of the Year in 1997. Wired magazine recently interviewed Grove, and I was reminded of why I own, and why the Maker port owns, Intel.
Grove is working on his 33rd year with Intel so he's been around the block a few times. He's seen inventory cycles, wild company valuations, and dramatic changes in technology. He's known as a no-nonsense guy and famous for his skepticism, so when he says he's optimistic about the market -- the technology market, that is -- I suddenly forget about that E.F. Hutton guy and concentrate on what he's saying (while maintaining a healthy level of Foolish skepticism, of course).
In the interview, Grove refers to the Internet as a "globalization of culture, of business, of commerce" that will inevitably change the way we do business. Once business-to-business (B2B) ecommerce becomes commonplace, watch out. Grove's view of the "new economy", a phrase he disapproves of, is captured with comments like, "We are in the process of deploying another package of technology, which is just as significant as the railroads, the telephone, the telegraph, electricity, and so on..."
Whoa -- back up, Andy. This sounds an awful lot like the miscellaneous ramblings that when combined with investor's irrational exuberance got us into this mess in the first place. Thankfully, Dr. Grove follows up his Internet praise with, "I just don't think it alters the fundamentals of supply and demand, the fundamentals that determine pricing, that determine economic growth..." Ok, that's better, now you're talking.
What impressed me most about the interview was Grove's extremely solid sense of reality. Many executives, especially ones with 11.4 million beneficially owned shares, can get caught up in their own reality distortion fields. Grove appears to have both feet firmly planted on terra firma with regard to Intel's competitive position in both the near term and long term. With comments like, "It is entirely possible that the microprocessor business will not have a satisfactory growth rate in the years to come" and "we are probably as big as we can get in computing, approximately speaking," he is questioning Intel's core business. With Grove, it's not about ego, it's about Intel. While the microprocessor and chipset group still kicks in three quarters of Intel's revenues and all its operating profits, the wireless, networking, communications, and new businesses groups are Intel's seedlings. Recognizing this, Farmer Andy has donned his overalls (over a mock turtleneck, of course) and is tending to his garden.
No longer content with being the world's largest microprocessor maker, Intel wants to make the chips that power the communications industry also. Those aren't my words, they're Dr. Grove's. "We also have a new silicon opportunity in communications -- in connecting all those computers together -- which is faster growing than our core business." With more than 30 acquisitions in the past three years, topped off by its purchase of Level One Communications, Intel is remaking itself, again, into the next next-generation company. Trauma such as this could easily cause palpitations in Intel's strategy, which is why it's nice to have straight-shooting, levelheaded Dr. Grove in the surgeon's mask.
Fortunately, management depth does not end with Grove. Intel's management team has been in place longer than most: Grove's 11-year stint at the helm is backed up by CEO Craig Barrett's 16-plus years as vice president or higher. With Intel in the middle of a corporate makeover, the company is a case study for relying on management when the future is sketchy. As Matt pointed out last week, "the best way to minimize the risk and maximize the opportunity of what you don't know is to buy a company with best-of-class management." Hear, hear.
After its last earnings announcement, which was preceded by a couple of painful warnings, Intel's near term is scary. Earnings estimates for the year are $0.56 versus $1.65 last year. Granted, 2000 earnings were bolstered big time by non-core investment income of $4.7 billion, but investment income spends the same as other income and last year's $4.7 billion could go a long way to paying for the $7 billion Intel plans in capital spending this year. Getting back to that level of profitability will take a while, but it's great to know the man behind the plan.
For more on getting to know the management of your favorite companies, check out our online seminar on evaluating stocks.
Todd Lebor is not quite as obsessed with golf as the Footjoy guy. He owns shares of Intel, but you'd know that if you were paying attention to the article. Todd's other holdings can be found online along with the Fool's complete disclosure policy.
