Qualiport

[ October 9, 2000 ]

Great Management Investing

By Maynard Paton (TMFMayn)

Carburton Street, London -- Last week was one of those rare occasions when the Qualiport management made a "good call". Well, one half of a good call to be precise. So please let me continue to bask in our partial glory, just for a little bit longer.

I am, of course, talking about Dell Computer Corporation (Nasdaq: DELL). In short, I had expressed earlier doubts over whether the US computer giant could maintain its stated growth target. To recap, here's what I wrote in August, just after Dell had released their second-quarter numbers:

"Company Chairman Michael Dell commented that 'the second-quarter results and expectations for strong industry demand in the second half of the year keeps us on track toward our goal of 30% full-year sales growth'. This 30% target looks a tall order. With sales of $25,265m recorded in the year to January 2000 and first half fiscal 2001 sales of $14,950m, the stated goal requires Dell to generate revenues of $17,895m in the next six months.

If we assume that sequential sales growth in the forthcoming two quarters will be equal, then third and fourth quarter revenues of $8,492 and $9,403 respectively can be expected. Or in other words, near-term sequential quarter-on-quarter growth is forecast (by Dell) to be around 10.7%.

Achieving that 10.7% figure will be quite a feat, especially when the previous four quarters had recorded sequential sales growth of 10.4%, 0.2%, 7.0% and 5.4%. Given the latest Dell (second-quarter) results, I suspect the current 25%-28% annual growth rate target is a more realistic ambition."

As we know, Dell recently admitted that it wouldn't meet the 30% goal and instead it revised its annual sales growth target to 27%.

I mentioned earlier about making "one half of a good call". Sensing that an upset is on the cards is one thing. Actually doing anything about it is another. And I didn't do anything about Dell. After writing about my concerns when the stock price was $38, Dell has since slumped to around $25. With the shares having since lost a third in value, I look back with a tinge of regret.

Management Investing

The Qualiport has now experienced the real life difficulties of "great management investing". Last week, I was looking to Michael Dell to steer the Qualiport through the PC industry's troubles: "Simply, I'm placing my investing faith in a man who obviously does know a thing or two about PCs, and to hope that he continues to keep his eye on the ball."

So, has Michael Dell now lost sight of the ball? I mean, only two months after "expecting strong industry demand", he then goes and changes his mind. Of course, I'm being a little harsh. It's unlikely Mr Dell has suddenly turned into an industry no-hoper in just two months. I must admit that my faith in Mr Dell has diminished slightly, but remains intact for the moment. I still think he's a "great manager". However, after the Apple Computer (Nasdaq: AAPL) crumble, it just goes to show how difficult it can be for even the best of the PC industry to predict the "tech" future.

Eternal optimists

So think about this. Michael Dell has created a highly profitable computer manufacturer. But what of other unproven managers who run profit-less companies in fast-changing "tech" industries? There are numerous smaller, less-established outfits all busy working to produce the "killer application" of the "industries of tomorrow". So, just how reliable are their sales expectations, both for the short- and long-term?

I've yet to come across a Chief Executive of any high-flying tech stock who is anything but upbeat in their outlook. Can they all be right? No. But shareholders not up to speed with the technology, including the Qualiport with Dell, continue to place their investing faith upon the management's shoulders. And as we've seen, if Michael Dell can make the odd slip-up, think about the less well-established "tech" management who lead companies with investor expectations far in excess of Dell's. Investment danger certainly lurks.

More on management

All this talk about management takes me back to past Qualiport features. When outlining my thoughts on "Great Management", I suggested that the "judging of management skills is best answered by considering the business first and foremost". I pointed to a quote from Warren Buffett.

"In contrast to a have-to-be-smart-every-day business, there is what I call the have-to-be-smart-once business. For example, if you were smart enough to buy a network TV station very early in the game, you could put in a shiftless and backward nephew to run things, and the business would still do well for decades. You'd do far better, of course, if you put in Tom Murphy, but you could stay comfortably in the black without him."

Unfortunately, there aren't many have-to-be-smart-once businesses. And even fewer sell at attractive valuations. Indeed, of the two Qualiport companies identified as possible have-to-be-smart-once businesses in this feature, one has since been disposed of!

So, to round off, here are my brief thoughts about events at Dell and the investment concept of "great management investing":

• Great managers will only remain great until they make a significant mistake;
• Great managers will always make mistakes, often significant ones;
• Great managers may appear optimistic even when the number-crunching can identify forthcoming difficulties;
• Great managers, working in a fundamentally poor business or industry, are likely to lead to investment disappointment;
• Great managers should never outweigh the combination of a lofty valuation and a deteriorating financial performance, and;
• Buy businesses that don't require great managers, but have them anyway.

Where Next?

Bruce Jackson (TMFGoogly) remains firmly on the Dell fence.