Posts by Laxman Sonale

Hello friends, In today’s article we see 15 points of the outstanding company from chapter 3 of the common stocks and uncommon profits book. In 15 points of an outstanding company, you have to apply for each and every company to show the outstanding company. Philip A. Fisher gives these 15th points from his investment strategy they use for 10 years, with getting a good return.

previous chapter 2:

Chapter 3: What to buy: The 15 points of an outstanding company

In this chapter, we have to talk to customers, suppliers, management, and competitor about the company, by asking about these 15 points of outstanding company.

These 15 points define whether the company is outstanding or not. so let’s start with the first points

1. Does the company have products and services with the sufficient market potential to make possible a sizable increase in sales for at least several years?

The author says, ” if sales are constant or decline, then also you make the one-time profits from that company.”

A company can minimize costs and improve profits so that is why the cost price also increases, so in this company, investors can’t make the big money. (15 points of the outstanding company)

In other situations, profit can be big while the change in the industry, for example, If one company makes the first radio as a product, but now they are making Television and sales are increasing and that’s why profits also increase, but it has limited up to the time when everyone has the T.V., then profits is stopping and growth of sales also stops. so this is a type of situation that is also a one-time profit, but better than the first situation.

The author says, ” Sales do not grow like a uniform, they grow like irregular form, so don’t see the sales of annual reports or one year, see them for several years. (15 points of the outstanding company)

We need that type of company, they have the following two characteristics

1) Fortunate and able: (example: An aluminum company in America)

2) Fortunate because they are able: (example: Du Pont )

@ Aluminium Company of America is fortunate and able, because companies founder do the commercial and show the use of aluminum in daily routine, and they got a bigger market for their product, whatever they expect, this market is bigger than their thought. And they also take the advantage of fortunate scenarios.
Company stocks of the aluminum company of America his stocks increase 6 times their continuous previous year of medium return, which goes up to 40% down, and they become the 6 times. (15 points of the outstanding company)

@ Du Pont: This company makes the blasting powder for lots of the year, but in peach time, their sales come down, and close to the mining industry level. So in making blasting powder company develops the skill and this skill is very useful for making new products, and they launch one after one, and each product sells quickly and they make themselves a fortune.

So both types of companies have one thing that is important is that the management ability is the highest order, so without them, this sale not stay for a long period of time.

If any amateur investor invests in a chemical industry company and they see the talk like, ” in the industry those company is more attractive that have, their develop good growth product.” So they say’s the wrong way

Because of that the company is developing attractive growth products, that why they become an outstanding company. (15 points of the outstanding company)

if any company management is outstanding, the industry is in a change of technology, and the company has more focus on research, so the investor has to be alert about how management take the advantage of that opportunity to increase their sales and profits.

The Author say’s, ” His friends, make a survey in  1947, of the television industry and they found the competition is going to be very competitive and in between that there is the shortage of glass bulbs for picture tubes in T.V.

So Corning Glass Works company has the technology and research ability to supply the glass bulb to the T.V. Industry, so opportunity becomes the new revenue source for the company. (15 points of the outstanding company)

So author’s friends, recommend stocks, and these stocks in increase 12 to 13 times in just 10 years.

so let’s 2nd points

2. Does the management have the determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines has largely been exploited?

you see the first and second points have a difference that the 1st point says, companies have to be existing product market is large so for that in upcoming year sales is increasing.

So 2nd point says, ” what is the company realize or not when the market potential of the product ends.”

if they want to grow continuously, so they want to work on new products and new markets.

So those company has come true on the first point and 2nd point also, then we need this type of company. (15 points of the outstanding company)

if the company doesn’t have there plan and policy for developing a new product, this company gives you only on-time profits, up to that time the existing product has market potential.

Scientific research and development is the first focus of the company because they develop an old product that is good and develop new products also.

Those company tries to develop new products from the existing product line, this company is doing better than those company that develops unrelated product. If the unrelated product is successful so company occurred in a different new industry, so that has no link with its existing industry. (15 points of the outstanding company)

let’s start with 3rd point

3)How effective are the company’s R & D efforts in relation to its sizes?

If you divide R & D expenses into the annual sales, so you get how much a company spends a dollar sale of percentage on R & D, which means how much percentage they give to the R & D expense of total money.

You can compare this figure with the other company. but it’s misleading if one of the companies is doing an existing product to take the order and customize it and they show research expense, but not many people believe that this is R & D expense. (15 points of the outstanding company)

Other companies do for new product palate plant cost as production expenses or not show R & D expenses. So both situation figure is not comparable.

A research scientist is well-skilled, and the company has that expertise, in that other expert scientists work together in a team.

Research experts and product sales are both familiar with the problem or not. we have to find out this. if they are familiar then profits increase.

The research and production department has to be in close relation, then good and quality products will be developed.

So the Top management crash program increases the research cost. crash program those, in that research people work for those workers that is more important, in this time.

Most of the time crash program is not worth all these disruptions they cause.

So in a big company, they have a maximum problem, that is why the small company is not afraid of the big company for competition.

So many times government pressurize to do research, and companies also do research on defense research.

Defense research-related product information is how much benefits the investor. let’s see three situations.

1. The new weapon doesn’t have commercial use, but only work for military purpose and weapons write have government, in they can make a weapon from any other company by giving weapon writes and they develop the competition between the company and get from the cheaper company, that develop this product, so other company builds the product. so in this situation, investors have zero value for this crash program.
2. second, some weapon is developed through a very critically complex process, but manufacturers have learned it and develop also more difficult than this, time other companies try to develop a weapon, they face a problem, so the government has to come to those company that develops first, so there is not a competition between the company, so in this situation, they have some value to the investor. (15 points of the outstanding company)
3. As a like weapon, while the research team developing a weapon, they learn the new technique and principles that use in a commercial product of the company and improve it, and that is why the profits margin is increasing, then this type of crash program is most helpful to the company and in this situation investor has the great value.

so from government money, companies’ research teams learn the new principle and techniques, that apply to commercialize their business models, this is the reason for Texas Instruments and Ampex company success.

Market research is the important part, you have to see what the company is doing or not. If doing, so how big is the market, and what actually the customer need? Without doing market research, if a company develops the best product, that has zero value, they will be going zero or even cost also not make.

And also check company is spending money on research how long, you have to see for 10 years.  To make a new product to develop for the sales and profit rate increases. (15 points of the outstanding company)

let’s see the 4th point of outstanding company.

          4) Does the company have an above-average sales organization?

Making repeat sales from the old customer is the first benchmark of the success of the company. 

Most of the Investor’s focus is minimum on the sales efficiency, advertising, and distribution organization of the company. and maximum focus on product research finance etc.

Competitors and customers tell you the sales and marketing organization of the company.

Outstanding sales, product, and research three are extremely important for the company’s success.

For example, Dow Chemical Company: This company is very famous for outstanding research but people don’t know about their salesperson. The company is taking care of scientists as well as salespeople and give both special training and give some attention to salesman like research scientist. (15 points of the outstanding company)

Another example, IBM company: In this company salesman is spending 1/3 time of his job is on training. If any company’s sales organization is not strong but they have good at research and product, this like company gives you only time profits.

let’s see the 5th point of an outstanding company

         5) Does the company have a worthwhile profit margin?

From an investor’s point of view is that if sales value is when only if profit growth increases so without profit, sales growth is useless.

Industry profit margins and companies’ profit margins compare each other and we have to invest in those companies that have a maximum profit margin.

Marginal companies, those companies that have minimum margin, we don’t have to invest in that, you can only invest when companies business is changing fundamentally, and that causes profit increases and this profit is compulsory, so this company is leaving the marginal company category. (15 points of the outstanding company)

If big companies’ profit margin is minimum so maybe happen if this is temporary. so maybe happen their profit they use for research and sales promotion for some time. So this situation is more attractive.

If all industry is doing well, so all companies’ margin is maximum and in marginal companies, the profit margin is more percentage increase, and that is why profit growth is maximum compared to those companies that profit margin is maximum.

So after some time or in bad time come the marginal companies’ profit margin falls down very fast.

let’s see 6th points of outstanding companies

         6) What is the company doing to maintain or improve profit margin?

The Company’s success does not depend on how much margin at buying time they depend on, or what profit margin in the future. (15 points of the outstanding company)

Wages and salary costs increase year by year also cost increases as Raw material and supply costs. Some companies increase product prices to maintain the cost of wages and raw materials. Because they have the demand of that product or competitor increases product price more than that price, but it is the temporary company seeing the demand company increases the production capacity and demand is not like that then margin in minimum.

Some companies smartly minimize costs, like accounting and book handling, and transportation costs.

From this smartly we can minimize cost or cost-cutting, so this is not happening in one right way. So the investor has to focus on what the company does for cost-cutting and margin improvement, and this confirms by talking to the top executives.

So those companies doing good at cost-cutting they will do in the future also.

        6) Does the company have outstanding labor and personal relations?

If regular strikes happen in the company and carry on for a long time, then this affects on badly on production department.

If those companies have a Labor turnover maximum, then avoid this company because training new employees that increase the cost.

Those companies have no labor union, they usually have good relationships if the union is present but have mutual respect with management. If strikes do not happen in a company, it does not mean relation is good.

Companies’ labor turnover is relative to the company of some industry or in some area, so their relationship is how much good is important.

If the company is doing mass hiring and mass firing, so this is not a good sign from the company or investor’s point of view also. (15 points of the outstanding company)

Those companies are good companies, they settle grievances quickly and make above-average profits and above-average salaries paid to the employees, and applicants have a maximum list in that company to take the job.

If companies profit is coming by paying below-average salaries, means a serious problem is coming soon in the company.

8) Does the company have outstanding executive relations?

executives give the right direction to the company and they have a big responsibility and they have maximum stress level.

top-level executives’ stay in the company is mandatory and stay gives the maximum to the company, so these types of relationships are present in the company.

The company has a like culture, in that promotion is given on an abilities basis, not favoritism or not on nepotism. (15 points of the outstanding company)

The salary industry is that much from outsider selection when inside people are not capable of the post. An investor can learn about it easily by chatting with a few executives scattered at different levels of responsibility

9) Does the company have a depth to its management?

This means the company can delight in responsibility and authority. That means not like a one-man army

A small company can do better in one-man leadership, but sometimes one turn comes like the size of a company is not small and one-man leadership can’t handle all company.

So we learn from the 8th point that is necessary to know about to develop the management dept. means have to believe in the junior also. (15 points of the outstanding company)

The senior executives have to give some adequate authority to the junior for completing work if they don’t do that, if they are absent then the company faces two many problems.

Management has to listen to employee suggestions by giving up his ego, so whatever it be that may be criticism of current management policy.

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10) How good are the company’s cost analysis and accounting controls?

If a company can not break down its overall cost with sufficient accuracy and detail, to show the cost of each small step in its operation then it won’t have outstanding success for a long period of time.

If management doesn’t figure out the how much cost of the product, they can’t decide on the right pricing. if you ask the management, they will give you detail of the balance sheet, but not have important detail, but have detail inaccuracy. (15 points of the outstanding company)

But investors don’t verify numbers on their own.

If company management understands the cost analysis and control and others they have above average, then in this field they also are above average.

11) Are there other aspects of the business somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

In short, the company has some competitive advantage. for example in a retail business, need real estate expertise important. if any company can take better leasing property than the other competition means, they have this competitive advantage.

So in this company insurance costs is an important factor, if any company has insurance costs less than 35% of other competitors so this is the competitive advantage of the company.

If any company has some process of patent and product means they have this competitive advantage, but if the company is dependent on the patent for maintaining a profit margin, so this is a weakness because patents have an expiry date and they will expire. (15 points of the outstanding company)

A durable competitive advantage needs to beat the competitor. Manufacturing knows about the sales and service organization and customer goodwill is more important.

So patents are important for small and young companies, if not then big company copy their product and sell them on the big distribution network.

Leadership in engineering is the fundamental source of protection instead of the patent.

12) Does the company have a short-range or long-range outlook in regard to profits?

Some companies do business-like, they need profits today and some companies do not focus on today’s profits instead of that they focus on goodwill, because in long term, over the year, have maximum profits.

The company has treated customers and suppliers, in a form that we know, for example, if suppliers take an unexpected expense to deliver the product, and the company pays the supplier maximum than the contract so this company thinking in the long term. (15 points of the outstanding company)

If a company works to satisfy the customer to take special effects challenge, so they fix and compulsory customer, and they sacrifice short-term profit and think in long-term get overall maximum profits.

Investors have to buy a long-term range outlook.

13) In the foreseeable future will the growth of the company require sufficient equity financing so that a large number of shares then outstanding will largely cancel the existing shareholder’s benefits from this anticipated growth?

means, In a company when growth happens in the future, that company has to issue equity, and because of this, those growth benefits have to the existing shareholder not getting in.

The author says typical investment books most of the space given to this discussion is what is the capital structure.

So these things did not deserve these points. In the author’s opinion, the intelligent investor does not buy only stocks(15 points of the outstanding company) because they are cheap. ( opposite to the benjamin graham philosophy)

The Author says, very less company is only that come true on the 14th point and that companies we need this company easily get debt and easy to raise equity.

If investors think, companies’ growth visualize in the future, and companies’ cash and debt up to a limit of prudence have happened then is good.

After that company issues the equity for further growth, At that time the profit increases and the stock price also, but not sufficient cash and borrowing for growth, as we visualize, so this dilutes the earnings of the current share and we have to find out how much is dilution or after dilution is also attractive.

If the company is true on the 14th point but not good on this point then the investor can be bought, providing companies management if not poor. (15 points of the outstanding company)

If another company is good for financial in cash position but not good on other 14th points then do not buy, just because they are easy.

14) Does the management talk freely to investors about its affairs when things are going well but calm up when troubles and disappointment occur?

Even the best-run companies face unexpected difficulties, become it is the nature of business(lose money on research and profits pause)

But management has to be read by with plan, and how they escape from this situation. if they stop talking means, they don’t have a plan, to escape from the situation

So this investor has to stay away from those who hide the bad news from the investor.

last points, let’ see

15) Does the company have a management of unquestionable integrity?

Companies management is very close to the companies asset, and this asset can have been a different method to use badly.

For personal use companies’ assets can be used and give the contract of the supplier to the relatives.

Give relatives maximum salary, for them, they can issues stocks option. (15 points of the outstanding company)

So stay away from this is only one way is, our investment gives only good management, that limit.

If a company is good on 14th points but not good on this, then don’t put money on this company.