Wednesday, February 11, 2009

What To Look For When Investing In A Company

Yesterday the market dropped almost 400 points. The market clearly did not like the plan Timothy Geithner outlined and it overshot the loss. Investors saw the market dip over a hundred points and started to panic and sent it down even more, way more than it should have been. The news was not that bad that it was worth an almost 5% drop in the DOW. The market has done this before, it gets some bad news, panics and plummets way more than necessary. In today's market investors are constantly scared so overshoots are common. The market will bounce back from today's overshot drop as investors realize yesterday's drop was not a fair evaluation of the market. This has happened before folks.  So when you see these dips, don't panic and stress out, think of them as a buying opportunity. I did.

Today I added AT&T to my portfolio. Why? Because I trust their management. It is my personal opinion that the most important thing to look for when investing in a company is their management. After all, the management is the one running the business, they have the power to make it soar or drown. When you are investing in a company, you want to know how it will perform in the future, and who knows that better than the management? Whenever I contemplating investing in a company the first thing I do is look at conference calls and management's outlook for the company. This gives me a huge amount of insight on how my investment is going to do. Let me give you an example of two companies I was debating between, Caterpillar and AT&T. 

Both firms recently released their earnings for the 4th quarter and more importantly, their outlook for 2009.

Here are the opening lines of Caterpillar's outlook for 2009:
Global economic conditions and key commodity prices have continued to decline significantly. Financial markets remain under stress, and our expectations for 2009 have deteriorated. Uncertainty around the depth and duration of this recession makes it very difficult to forecast sales and revenues. As a result, Caterpillar is rapidly executing strategic “trough” plans and implementing actions throughout the company to deal with a very challenging global business environment. We have initiated actions which will remove about 20,000 workers from our business and every indirect spend dollar will be heavily scrutinized. These actions support lowering our production costs in line with a 25-percent decline in sales volume and reducing Selling, General and Administrative (SG&A) and Research and Development (R&D) costs supporting our Machinery and Engines business by about 15 percent. We are encouraged by government stimulus programs and actions taken by central banks around the world to spur growth. However, economic conditions remain uncertain, and we are planning for 2009 sales and revenues to be in a range of plus or minus 10 percent from $40 billion. At $40 billion in 2009 sales and revenues, the company expects to achieve profit of $2.50 per share, excluding redundancy costs.

“These are very uncertain times, and it’s imperative that we focus Team Caterpillar on dramatically reducing production schedules and costs in light of poor economic conditions throughout the world,” Owens said. “While it’s painful for our employees and suppliers, it’s absolutely necessary given economic circumstances. We expect to have most of the actions needed to lower employment and cost levels in place by the end of the first quarter,” Owens added.
And here is AT&T's 2009 outlook:
In 2009, despite a challenging environment, AT&T expects to deliver solid results. AT&T expects to grow consolidated revenues, make significant progress in its key growth initiatives, keep an aggressive focus on cost management and continue its strong record of returning substantial value to shareowners. Specific expectations for the full year, based on 2008 reported results, include the following:
  • Continued consolidated revenue growth in the low single-digit range, led by gains in wireless and IP data services.
  • A significant increase in wireless margins as the iPhone 3G customer base matures, with continued revenue growth. AT&T expects to achieve wireless service OIBDA margins in the low 40 percent range by the end of 2009, with a longer-term expectation of reaching the mid 40 percent range.
  • Stable reported consolidated earnings and margins excluding pension and retiree benefit costs. AT&T expects approximately $0.19 of incremental noncash pressure to 2009 reported earnings per share due to increased expenses related to pension and retiree benefits. This reflects 2008 plan returns and AT&T's consistent accounting approach that accelerates recognition of the effects of large changes in plan asset valuations. AT&T does not anticipate significant pension funding requirements in 2009.
  • Stable free cash flow while executing a disciplined capital program that focuses investment in key growth initiatives. Total capital expenditures for 2009 are expected to be down 10 to 15 percent versus 2008 levels. AT&T expects to make continued good progress on its network build in 2009. Deployment currently reaches 17 million living units, and the company expects to reach its previously announced target of 30 million living units in 2011, a year later than its original plan.
It is obvious the difference between Cat and AT&T. Caterpillar's management does not think the company is going to do well in 2009 while AT&T's management in confident it can grow the business in 2009. Now you might say AT&T is lying and just trying to make people think they are ok. But they have no incentive to do so, it hurts the company to give misleading expectations for the future because then when they fail to deliver it not only looks really bad on management's behalf, putting their jobs in jeopardy, but it also hurts the stock price. However, that doesn't mean you should trust everything they say. You need to look at management's past performance. Randall Stephenson has done a great job with AT&T in the past and has really grown the business. On top of all that, AT&T is buying back shares throughout 2009, a move done when management thinks they are going to perform well. Buying back shares is a vote of confidence by management for their ability to deliver in the year to come. 

If Caterpillar's management doesn't see growth in the year ahead and AT&T's management does, the choice is clear.

Now management is not the only factor I look at, but it is a pretty big one. Other things attract me to AT&T such as their drive to gain market share in the cell phone business through iPhone subscriptions and the fact that they do a lot of government contracts which provides them with some steady income. AT&T has a great dividend, yielding over 6% and has a strong balance sheet with a lot of cash. Also AT&T is one of the few companies to continue to raise its dividend. AT&T increased the amount of wireless and broadband customers in the quarter 4, which is impressive considering the economy. AT&T is also currently cheaper than its competitor Verizon. 

So remember, when investing in a company, make sure you scrutinize management and their outlook. They are the ones in the driver seat of the company and ultimately your investment. To find management's outlook, go to the company's website and look for an investor relations.

Info from Caterpillar can be found here and info for AT&T can be found here.


  1. I agree with you. If I am in your shoes and I have to choose between Caterpillar and AT&T. My choice will be the same.
    I already know that the market is in a depressed state and that companies are really facing a very challenging time ahead of them but as an investor I would like to hear a ray of hope - a positive outlook.
    AT&T's optimistic approach in today's economic climate is really outstanding which had set them apart from other businesses in same field. If AT&T management believes that they can make it through this economy then they will. Confidence is all what it takes for companies to survive and thrive, recession or not.

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