More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.
It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.
Next up: Rackspace Hosting (NYSE: RAX). Is the executive team of this cloud computing superstar doing all it can to earn you outsized returns?
Foolish facts
|
Metric |
Rackspace Hosting |
|---|---|
| CAPS stars (out of 5) | *** |
| Total ratings | 600 |
| Percent bulls | 93% |
| Percent bears | 7% |
| Bullish pitches | 54 out of 58 |
| Highest rated peers | Spark Networks, PHOTOCHANNEL NETWORKS, Internet Initiative Japan |
Data current as of February 16.
For the most part, Fools love Rackspace's commitment to quality but remain skeptical of the stock's valuation. Shares of this web infrastructure supplier trade for nearly three times analysts' long-term earnings estimates, resulting in a 2.99 PEG ratio as of this writing.
"Though I typically try to find out of favor picks, I'll jump on this despite its lofty P/E. Either I'll get burned following the herd, or enjoy the ride into the clouds," wrote All-Star Fool miclane05 in December. The stock is up more than 24% since, and for good reason.
Rackspace blew away Street estimates for fourth-quarter revenue while profit soared more than 50%. Net margins improved by 100 basis points last year and cash from operations rose 24% to $244 million.
And yet this a growth story with legs. CEO Lanham Napier said in an interview following the report that the company is in the "nascent" stages of a cloud computing opportunity that could unlock billions in revenue. As the guy who's twice recommended Rackspace to our Motley Fool Rule Breakers members, I think he's right.
Management overview
|
Executive |
Years |
Cash Compensation |
Shares Owned |
|---|---|---|---|
| Lanham Napier, Chief Executive Officer | 11 | $576,172 | 399,795 |
| Bruce Knooihuizen, Chief Financial Officer | 3 | $525,840 | 67,047 |
| Lew Moorman, Chief Strategy Officer | 11 | $333,352 | 723,494 |
| Mark Roenigk, Chief Operating Officer | 1 | $82,604 | 41,690 |
Source: Capital IQ, a division of Standard & Poor's. Data current as of Feb. 16.
Management inspires my confidence. Napier has 11 years in various roles with the company, beginning with Chief Financial Officer in 2000. Chief Strategy Officer Lew Moorman has been around just as long and leads the cloud computing business that today is driving efficient growth at Rackspace.
Rackers also tend to take a large share of their compensation via restricted stock awards. Napier and Moorman, in particular, have awards that vest based on the total long-term return of Rackspace's stock versus the top performing constituents of the Russell 2000 index. It's the sort of win-win plan that suggests the company loves investors almost as much as customers.
Management analysis versus competitors
|
Company |
Insider Ownership |
Gross Margin |
ROC* |
ROE** |
|---|---|---|---|---|
| Amazon.com (Nasdaq: AMZN) | 20.31% | 22.3% | 13.5% | 19% |
| Rackspace Hosting | 22.25% | 68% | 9.2% | 11.8% |
| SAVVIS (Nasdaq: SVVS) | 6.02% | 46.3% | 1.7% | (27.3%) |
| Terremark Worldwide (Nasdaq: TMRK) | 8.94% | 48% | 3.4% | (51.4%) |
Source: Capital IQ, a division of Standard & Poor's. Data current as of Feb. 16.
* Return on capital. ** Return on equity. *** Not measurable.
Looking at this table, I think it's a close call between Rackspace and Amazon. But isn't that saying something? Amazon has proven to be a special business and the source of more than a few spiffy pops for our Motley Fool Stock Advisor scorecard.
More importantly, Rackspace has been improving in many of these metrics. Returns on capital are up 280 basis points since 2008. Normalized profit growth has accelerated in each of the past three years. So say what you will about hosting being a commodity business. Rackspace excels at it, and investors have enjoyed the fruits of its success.
Now it's your turn to weigh in. Let us know what you think about Rackspace's products, valuation, competitors, and long-term opportunity using the comments box below. You can also rate Rackspace Hosting in Motley Fool CAPS.
Interested in more info on the stocks mentioned in this story? Add Amazon.com, Rackspace Hosting, SAVVIS or Terremark Worldwide to your watchlist.
