What Investors Want
Comments made during a conversation with G. A. Kraut Company by:
Chief Investment Officer
Gabelli Asset Management Company
"The ideal world for us is to have a good business where we can see earnings per share growth and
cash flow growth. . .but the centerpiece is good management. Like Tom Murphy of Capital Cities Broadcasting,
who did a great job of growing shareholder value over an extended period of time. Or Warren Buffett, or Bill
Gates, or Andy Grove, or John Malone. "
" The good CEOs come in every day and try to figure out how to make money for the shareholders. I know
that because it's me, the analyst, going to analyst meetings. It's me reading their literature. Me reading
their culture. Me reading how they run their business. Mike Eisner, Wayne Huizenga, Mel Karmazin - they're
phenomenal. I know these guys are not giving me a spin. I know they deliver. "
- "What we want are new ideas. Obviously, we first look at the business, not the management."
- "Management is very important, but in general, we think a prince kissing a toad will turn
into a toad, rather than the toad turn into a princess. A good business is what's really important.
I will occasionally be attracted to a lousy business that is so far below intrinsic value that
even a stumblebum CEO will be able to create value. But that's rare."
- "We're not driven by job creation. Our driver is return for shareholders."
- "When we look at a franchise we like to see how the CEO copes with a shifting world and a
shifting environment. We like to see a CEO that is sensitive about how his products spill into a
global marketplace. A classic example, and every so often we come across a real crown jewel is
Lindsay Manufacturing, located in Lindsay, Nebraska. Lindsay's letter from the Chairman talks
about Lindsay's product, how it adds value to the farmer, how the farmer relates to the world,
how the world is changing, and the internal and external trends. The Chairman then also looks at
how he will use the resources available to generate EBITDA cash flow, how he will manage capital
expenditures, and how he will use the excess resources that he's developing to grow the intrinsic
value of the company and also the private market value of the enterprise."
- "And then we will want to see how a CEO does corporate governance. Along that line, we have
a series of proprietary questions that we would ask a CEO ranging from competitive position and
how he intends to improve it, to the competitive environment, and how he differentiates his company.
Another question is how the CEO sees his company's strengths and weaknesses and how they compare
with the competitors'. We also want to know what are the dynamics of changes that are taking place
in the way the CEO approaches the benchmarks that he uses to drive the business. We want to know
what he's looking for in terms of revenue growth, market share, new product introduction, and other
items, depending on the specific company."
- "We want to know what the CEO looks for in terms of gross margins. How does he handle his plant
facilities? How does he handle his pricing? What is his attitude in changing all these in terms of
driving value for shareholders? What is his pretax profit? What are his tax rates? How does he defer
taxes? How does he come up with a P&L both today and over the next five years? What's his model and
what is his driver and what is changed in the last 12 months, 18 months, 2 years, and 3 years in
terms of the way he approaches these products and services? We then look at his balance sheet. How
does he manage the balance sheet? And then we look at how much capex is necessary to maintain the
franchise. How does the CEO spend his time, his money, his shareholders' money...does the company
have a plane?"
- "How does the CEO handle client perceptions of the company? Shareholder relations? What is he
doing to drive the stock in terms of public price and private price? What are his attitudes towards
financial engineering? And there are a host of other variables that we look at."
- "What's the essence and the substance of the underlying fundamentals? To the degree that somebody
has a Pepsi bottling franchise and has a great cash generator, then what we will do is look at how the
CEO uses cash flow to maintain his share of market and grow shareholder value."
- "When I saw the CEO of Southern New England Telephone, I asked one question. I said "Look,
Mr. Dan Miglio, you're terrific. You've been at this company for most of your business career. You
have a challenge, and the challenge is accelerated by the fact that the barriers to entry into your
business have been removed by the Telecom Reform Act and the free marketplace, and that fact is
irreversible. You either have to grow and get scale economics by buying a whole series of companies
or you're going to have to sell out. But one thing you can't do is sell out before the attack on
your company comes from five or six directions. And you're going to have to bargain now if you're
going to sell. So what are you going to do?" And he walked me through a bunch of scenarios and he
didn't tell me which one he's leaning towards... but my knowledge of the business and my knowledge
of the dynamics drove me to the conclusion that he's either going to grow by acquisition, in which
case I probably wouldn't mind owning stock. Or he would sell out to one of those who thinks they can
have a bigger castle and defend their fortress. So the conclusion came after an extended dialog. But
this is after 15 years of my understanding the business and 15 years of my understanding of the trends
of the business and 15 years of understanding what competitors are doing so that I could come to an
informed discussion as to why I'd want to own the stock for my clients. So we became the largest
shareholder of Southern New England Telephone."
- "The ideal world for us is to have a good business where we can see earnings per share growth
and cash flow growth...but the centerpiece is good management. Like Tom Murphy of Capital Cities
Broadcasting, who did a great job of growing shareholder value over an extended period of time. Or
Warren Buffett, or Bill Gates, or Andy Grove, or John Malone. These guys are in sharp contrast to
guys like Roger Norian at Kerr Group who talks the talk but doesn't walk the walk. George Grune at
Reader's Digest and the Pennzoil Management are terrible. They're terrible because they built a
moat around their own values without sharing what they're doing for the benefit of who hired them
and that's their shareholders."
- "The good CEOs come in every day and try to figure out how to make money for the shareholders.
I know that because it's me, the analyst, going to analyst meetings. It's me reading their literature.
Me reading their culture. Me reading how they run their business. Mike Eisner, Wayne Huizenga, Mel
Karmazin--they're phenomenal. I know these guys are not giving me a spin. I know they deliver. You
look at numbers. You look at what these individuals accomplished. You look at their style and resources,
and you look at how they analyze their own business. You look at how they evaluate risk. You can see
that the good CEOs look at their business the same way we do."
- "A track record of a CEO that accomplished a great deal may cause me to consider investing in
a company that I normally would not consider. I would certainly want to understand what he sees in
this ugly duckling because I could be wrong. Why is Chuck Dolan buying The Wiz? What does he see out
there? And then I have to become the equivalent of his psychiatrist. What is going through Chuck's
head at his age, at this stage of his career, that says "I want to buy The Wiz." And why is he willing
to take the risk? After a closer look, I was able to understand why he bought Madison Square Garden.
And I understood why it was a risk but a risk worth taking, even though the Street drove his stock down.
But by my understanding his mental filtration of how he looked at all of the variables that were coming
to him to make a decision and pull the trigger, that was very important. Whereas I look at some companies
like American Brands when they bought Cobra and conclude that they overpaid. But I can see how their
culture would cause them to overpay. I was willing to live through a couple of bumps in the road which
I knew were going to happen because I know they didn't know what they were doing in the short term."
- "The CEO should get feedback from his shareholders, but that doesn't mean he's going to follow
it. Chuck Dolan was going to buy the Wiz no matter what I said. But I needed to understand how serious
the risk was. Why did Smithburg buy Snapple from Lee? What was he thinking of?"
- "CEOs frustrate me when they build moats around themselves, and when the moats deal with any
issue of corporate governance that precludes shareholders who have strong opinions--particularly when
the shareholders have been in the stock for five or ten years. Poison pills are a clear example of
where managements, in my judgment, are creating bad will between themselves and their shareholders."
- "Another issue would be where an individual like the CEO of Reader's Digest has a country club
atmosphere with fancy artwork and other corporate trappings that are not justified by the company's
- "We prefer that CEOs don't make forward-looking statements. We don't need them. Our job is not
to report what management says, our job is to understand the environment in which the company operates
and have our own opinion."
- "We also like to look for change in management."
- "We do not generally define a negative surprise as an earnings shortfall in a particular quarter.
A negative surprise to us is when the CEO takes his company's cash resources and makes another company
rich. In other words, if a CEO goes out and spends his liquid resources on someone else's business
that's selling at a $1.00 market price but is worth $0.60, that's a surprise to us. The fact that
Fisher from Kodak has a lousy quarter because the Japanese are beating on him is okay with us. I don't
care about that because he's trying to defend his moat and in the world marketplace where currencies
are changing rapidly, you can't anticipate everything. Because if you could, George Soros would be
worth $100 billion and not just $20 billion, or whatever he's worth."
- "I can't speak about those CEOs that are inundated with calls from shareholders worried about
the next quarter's results. We're focused on the long term. We caution CEOs not to try to manage
investors' short-term expectations. I came into this business in 1967 and I believe that Litton at
the time had 139 consecutive up quarters. Then they had a down quarter. But the franchise kept going
and the analysts eventually came back."
- "We expect the CFO to have 100% knowledge of everything. He's the primary guy I'll go to with
all my assumptions about what happened in the last quarter and the quarter before."
- "The CFO has to understand all the financial variables that any investor following Graham and
Dodd would want to know about. And he better know those numbers cold."
- "The CFO also has primary responsibility for analyst contact. And he should know and formulate
the structure of how his enterprise should look and how he's going to finance the operation. He should
know how to do deals and understand the difference between pooling and purchase accounting. He should
understand how to do pro-formas and make sure that he models out and delivers to the investment
community exactly what the investment community needs."
- "The fact that a CFO may be new to his job is not an acceptable excuse. Because the bottom line
is that the new CFO is the only CFO of his company, and the reality is that he doesn't understand
the Street. If the guy is smart enough to get hired by a smart company, he's should know how to handle
my questions. Even on day one."
- "I expect the CFO to be as articulate with regard to his company's vision as the CEO. A CEO and
CFO at a large company should be joined at the hip. A CEO and a CFO at a smaller company may not be.
The analyst has to use judgment."
- "If a CFO doesn't reach out to the investment community, I can just walk. I don't need to buy
every stock. If the business is truly a great one, we will tolerate management inadequacies for awhile.
Again, we believe that an average management running an above average franchise will do an above average
job. An above average management running a lousy franchise will do a lousy job."
- "I don't want make blind, generic statements about the quality of management and my investment criteria because I've found some great ideas in places that most people would never have looked. I don't always need a 42 long."
Mario Gabelli founded Gabelli Asset Management Company in 1977 to provide discretionary investment services to a broad spectrum of investors. Mr. Gabelli is widely regarded as one of the world's foremost investment managers.
G. A. Kraut Company has helped corporate executives augment their investor relations programs since 1969. Offices in New York, Brussels, and Tokyo.
An Institutional Investor survey of corporate executives cited G. A. Kraut Company as "distinguished for its knowledge, account management, service, and professionalism in providing pure consulting and strategic guidance." In terms of helping companies attract investors, G. A. Kraut Company was "regarded as a standout for meeting setup and administration." Kuhn Partners, our alliance in Europe, was cited as "far and away the No. 1 choice of those surveyed."
A prominent Japanese publication (The Journal) recently G. A. Kraut Company as "the acknowledged premier in bringing U. S. companies to Japan." Another independent survey stated that G.A. Kraut's Asian investor relations support is considered the most effective.