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KIRK KAZANJIAN<br />
period, along with what management has done with cash flow and<br />
whether that money is being spent correctly for the future. If it’s a<br />
drug <strong>com</strong>pany, you’ll want to check on spending for research and<br />
development and whether it has a history of bringing out new<br />
products. If it’s an insurance <strong>com</strong>pany, find out if it is keeping up<br />
with technology and whether it’s focused on the new distribution<br />
paradigms that are being created through channels such as the Internet.<br />
I also like to look at the footnotes to make sure I don’t see anything<br />
that strikes me as novel in the accounting, or whether the<br />
<strong>com</strong>pany is faced with any threatening lawsuits. I really don’t like<br />
the special charges that are constantly being coughed up by <strong>com</strong>panies<br />
these days. They are often referred to as ‘restructuring charges.’ I feel<br />
this gives <strong>com</strong>panies an awful lot of latitude to restructure today and<br />
report good earnings tomorrow, then <strong>com</strong>e out and restructure two<br />
years from now and report good earnings even farther down the line.”<br />
Having said that, Davis concedes he’s been wrong about his dislike<br />
for restructuring charges when it <strong>com</strong>es to consumer product <strong>com</strong>panies<br />
such as Colgate. “This <strong>com</strong>pany has had several restructuring<br />
charges, and it doesn’t seem to matter because investors realize it was<br />
a valid step to take,” he says. “I mean, if you’re going to consolidate<br />
50 toothpaste plants down to five, maybe you need to have a special<br />
charge to give away severance packages, close the buildings, and sell<br />
off machines. Coca-Cola hardly ever has a restructuring charge. PepsiCo<br />
has had dozens of them, and it’s been a relatively poor stock<br />
<strong>com</strong>pared to Coke. Sometimes new management <strong>com</strong>es in and keeps<br />
taking restructuring charges to make it look as if they have a turnaround<br />
going, when maybe they don’t. On the other hand, Colgate<br />
has been brilliant. The president, Ruben Mark, is using EVA. (EVA<br />
stands for Economic Value Added. Under this structure, managers are<br />
forced to act like owners by putting their own capital at risk. EVA<br />
provides a strategy for creating corporate and shareholder wealth. It<br />
also gives investors a better measurement of a <strong>com</strong>pany’s true profitability.)<br />
Mark is driving up returns, and the ongoing earnings power<br />
is valid. I don’t know whether I trust earnings over any one-year<br />
period. But in Colgate’s case, this has gone on long enough that I<br />
believe it.”<br />
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