Philip Fisher's Management Integrity II

Had some interesting comments on the posting Philip Fisher On Management Integrity

From Random:

• Trust.. once lost hard to gain back..
  Hats off to the CEO who has the balls to say "Hey times are hard, expect profits to be down and dividends to be less"
  I don't mind sticking with an honest business owner

From John

• I recall PPB's boss making a statement last year that future earnings in the coming quarters may be not meet that current quarter's strong performance. Something along that line.
  
  Investors who took notice of those comments and sold PPB would be cursing now as it is trading at near record high and having just given some very generous dividends.
  
  SO beware of these opposite kinda moves too, where things are rosy, but they tell you that they are not, so that they can accumulate more at lower prices in the market.

Many thanks for the feedback.

One of the best ever example on this issue has to be Mieco Chipboard!

First let me refresh what Fisher was saying.

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According to Fisher, "It is the nature of business that in even the best run companies unexpected difficulties, profit squeezes, and unfavorable shift in demand for their products will at times occur."

For example, a well-managed company under-taking a massive plant expansion might face unexpected delays, unexpected expenses or unbudgeted costs. And this delay totally messes up the management's profit forecasts or could it even put a huge damper on the group's profits.

And according to Fisher, "How a management reacts to such matters can be a valuable clue the investor."

Now in the plant expansion example, some management may 'clam up' their investors by not telling the investors what exactly is happening because the management does not want to create an impression that either things are out of control or they do not have a contingency plan to correct what is going wrong.

And according to Fisher, "The investor will do well to exclude from investment any company that withholds or tries to hide bad news."

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Let's look at how true his statement that "The investor will do well to exclude from investment any company that withholds or tries to hide the bad news."

Now Mieco Chipboard at that time had a new factory expansion.

Yes, growth via new plants always sounds so sexy. And the common arguement is that for a business to have a new plant then surely the business must be growing and doing good.

However, there are always risks in such a venture. And Fisher explains the risks as follows.

• For example, a well-managed company under-taking a massive plant expansion might face unexpected delays, unexpected expenses or unbudgeted costs. And this delay totally messes up the management's profit forecasts or could it even put a huge damper on the group's profits.

Now isn't this exactly what Fisher is talking about? A new factory expansion was made but the new factory is not delivering!

On 24th May 2005, Mieco reported its 05 Q1 earnings. One can see that Mieco's quarterly earnings dropped from 8.948 million a quarter ago to just 2.498 million.
So instead of explaining to the investors why the sudden huge drop in profits, there was this overly bullish statement made by Mieco on the 17th June 2005, the company management states that Mieco targets 500 million in revenue the next fiscal year. And Mieco was rightly queried by the SC on the 20th June.

Classic example of what Fisher was saying! Company did poorly. Instead of explaining to the investors what went wrong, the company continued to make optimistic statements in the press! Now big question, should the investor listen to Fisher's advice? Would the investor do well if he/she excludes themselves from such an investment?

On 29th Aug 2005, the company announced its 05 Q2 earnings. Net profits slumped to an alarming 120k for the quarter. Remember Mieco had underwent a huge capital expansion to finance the new plant. And the new plant is simply not delivering.

Did Mieco management come out and explain why their results were so extremely poor? No, they did not.

On Sept 13th 2005, RAM downgraded Mieco's RM175mil Al Murabahah commercial paper from stable to negative.

Mieco shares started to tumble badly in the market.

Now get this, on the 12th Oct 2005, the management had a write-up in the Edge weekly. The article carried the title 'Mieco's long-term prospects still bright'. According to the reporter, that was what the director said of the company prospect.

Dejavu!!

Company is not doing well BUT the management still comes out and insist that the company prospect is still bright!

Guess what? On 22nd Nov 2005, Mieco announced that it lost 3.742 million for its 2005 Q3.

Present day? Mieco latest quarterly earnings still showed a loss and Mieco last traded at 50 sen.

Again the Fisher question is asked.

Would the investor do well if he/she excludes themselves from such an investment?