34 Corporate Olympians & Key Lessons for Your Company
by Brian Barnier, ValueBridge Advisors
Olympians take risk striving for the gold. In business, some companies are better managing risk in pursuit of return. Only 34 S&P 500 members in second quarter 2012 earnings reports won medals in the risk-return balanced growth games. This elite group had 12 month net income growth over 3% plus 5 year average annual revenue growth over 10%. While growth usually burns cash, these companies also reported a quick ratio of 1.25 or greater.
Olympic winners result from body mechanics, training and attitude. Winning companies result from strategy, business model, execution and a humble, continual improvement attitude. This is tough to sum up in a number, but painfully clear in real life.
Mexico in soccer, David Boudia in 10-meter diving and Epke Zonderland in men’s high-bar gymnastics were undervalued and yet gained the gold. To find undervalued businesses, add a PEG (Price to Earnings to Growth) ratio of less than 1 and that leaves just 9 companies.
Individual stories lie behind both Olympic winners and companies. For the 9 undervalued, some are benefiting from trends such as Baker-Hughes in oil and gas field services. But, Baker-Hughes is also strong compared to peers. Western Digital is benefiting from the Thai flood price premium, but also acquired Hitachi Global Storage and is sharpening focus on higher margins in enterprise servers. Some are innovating and diversifying, Apple, Discovery and Fossil (especially in fashion watches). Some have been overcoming macroeconomic trends, Fossil and Priceline. Others are bracing to face them, Joy and Priceline. All have their own challenges and resulting analyst recommendations. How well they handle these challenges is key.
Much ink has been spilled on the secret sauce of high-performing companies. Of course, foresight is needed to create a strategy and business model, followed by execution excellence. Yet, overall numbers clearly show this has eluded most companies.
What did the 34 achieving companies have in common?
• A process to balance risk and return in strategy and business model to avoid the “if onlys” that often follow poor decisions.
o In sports, this is immortalized in movies by half-time speeches encouraging players to truly team and focus on fundamentals to more safely take risks to win – “Remember the Titans” and “Hoosiers” are just two.
o In business, this is a risk-aware process combining turn-around and high-growth thinking to more safely seize opportunity.
• A learning process
o In sports, half-time rallies are built on tough training. Olympians focus on fundamentals and then refine.
o In American business, we struggle with learning from history, training and refining. As has been pointed out by commentators such as Deming, Prahalad and Collins, we too often grasp for the flash, rather than focus on fundamentals.
• Ability to apply learning
o In sports, Olympic coaches guide players to avoid injuries, play to competitor weaknesses, and build strength and agility for a winning edge.
o Board members can apply a risk-return balanced process based on decades of proven practice in industry (and sports) to sharpen strategy, build better business models and hone the edge of execution.
o This risk lens is not only powerful, but versatile. The medal count for the 34 was spread across 11 sectors, whereas the Olympics where were dominated by a few countries.
Investors seem to value Olympic-style balanced training. Of the 34, about 65% were more than 10% over-valued–investors are paying a premium for the benefits.
Gold medal tips for a risk-return balanced process:
• Probe management understanding of environment until you are sure your company understands it better than any competitor.
• Repeatedly ask “What if?” until you are confident you have anticipated ugly surprises. What is an “oops?” The risk not managed.
• Watch for warnings based on “what if?” Be sure your management knows what warnings actually look like and can proactively recognize patterns before it’s too late.
• Review the quality of your Plan B for the inevitable. Be sure your company is ready to act to seize opportunity or avoid dangers in the face of a constantly changing world.
• Starting with the board set the expectation that every decision must be risk-return balanced. Check for thoroughness in decision packages.
• Ensure risk management is powerful and agile enough to take on a complex and changing world (especially when people become fatigued). Cumbersome risk management (especially backward-looking, compliance style often used in financial reporting) is clearly the wrong toolkit.
• Ask–are our decisions consistently better than competitors to produce consistently better results?
Each tip is just as applicable on the Olympic field as in the board room, especially being both powerful and agile enough to compete. That’s how the gold is won.
For a list of the medal-winning companies, turn the page.
Brian Barnier has served on non-profit and private company boards, is an OCEG Fellow, and author of The Operational Risk Handbook (Harriman House, London, 2011). He may be reached firstname.lastname@example.org.
• Disclaimer: Company information is provided as an illustration of management principles. It is explicitly not an evaluation or recommendation of the shares of any company. Such an analysis would be more current, based on investor preferences, and include other company-specific operational, financial and risk factors, including the risk factors in a company’s Form 10-K and board risk oversight proxy disclosure (for related review of proxy disclosures, please see www.valuebridgeadvisors.com/ESROPD022812.pdf).
• Data selected on 20 August 2012 using the Zack’s database. This use does not imply an endorsement of the Zack’s product or the accuracy of the data. Zack’s tool was selected because it is widely available, especially to retail inventors to enable replication and extension of the analysis, and provides for selection on S&P 500 member, a measure of widely held stocks.
• Net income was used rather than earnings per share to avoid distortion due to share repurchases.
• PEG ratio is Price/Earnings to Growth ratio. This is usually calculated as price divided by earnings, then that quantity divided by estimated earnings growth rate. Differing earnings estimates yield different PEG ratios from different research services. This effectively compares the share price’s implicit view of growth to expected growth rate in underlying earnings. PEG ratios of less than 1 mean that the growth implied by price is less than the growth expected in earnings. This suggests that a stock is undervalued.
Companies Included (in Alphabetical Order):
BIOGEN IDEC INC
CF INDUS HLDGS
F5 NETWORKS INC
GOOGLE INC-CL A
HEALTH CR REIT
JOY GLOBAL INC
MERCK & CO INC
RED HAT INC