David Schwartz, who passed away last weekend, was one of the good guys.
The company he and his wife, Alice, founded in their garage many years ago is a clinical diagnostics and life science products maker called Bio-Rad Labs, which readers may recall from a few years back when its “mad cow” disease test was suddenly in demand after a limited but frightening outbreak of that brain-wasting disease in North America.
Mad cow test aside, Bio-Rad happens to be one of those off-the-radar public companies that does nothing the way Wall Street’s Finest like to see things done when it comes to “increasing shareholder value.”
For one thing, it has a Class A/B stock structure that gives the family control in a way that most Wall Street analysts, who have never run anything in their lives more complicated than an espresso machine, find exasperating, since it has (presumably) prevented the company from being taken over for a short-term profit—long-term potential be damned.
For another, Bio-Rad doesn’t issue scads of stock options to senior executives, which means it doesn’t have to toss money down a rat-hole buying shares back at silly prices, which is what most companies do when they are “enhancing shareholder value” via share buybacks that should actually be labeled “enhancing our senior executives’ value.”
(In 10 years, Bio-Rad’s fully diluted share count has risen only 15.5%. At the other extreme, Life Technologies, which swims in the same pool as Bio-Rad but plays the Wall Street game like a shark, has seen its fully diluted share count rise 75% in the same time frame.)
A third thing Bio-Rad does that has never endeared it to Wall Street’s Finest is not managing its quarterly earnings to hit Wall Street forecasts. Its average “earnings surprise” over 5 years has been 21.3%, according to my Bloomberg, while the aforementioned Life Technologies’ “earnings surprise” is a P/E-enhancing 11.6%. (GE, the King of Managing to Quarterly Earnings, has a 4.4% average surprise.)
There are many more things Bio-Rad does that don’t march to the mantra of “enhancing shareholder value” sung by Wall Street’s Finest (and by way too many public company CEOs), like building a real business without worrying about what analysts worry about.
Notwithstanding the Class A/B structure, the lack of share buybacks, the non-smooth earnings stream, and big piles of cash that build up on the balance sheet and then leave when an attractive acquisition comes along (an acquisition which may or may not be “immediately accretive”—another slogan in the “enhancing shareholder value” toolkit of trite sayings), Alice and David built, from a standing start, a diagnostics and life science company with 7,000 employees generating $2 billion of revenue, carrying an enterprise value of $3 billion, without ever having to cater to the whims of Wall Street’s Finest.
How, exactly, did they accomplish this? One of many examples comes in the following story.
After the North American “mad cow” outbreak occurred, Bio-Rad was suddenly facing a windfall from its test, so I visited the company to get an update on its long-term plans from the CEO (David and Alice's son, Norm Schwartz), and the CFO (Christine Tsingos). David sat in with us, wearing his usual bolo tie and occasionally interjecting in his affable way.
When the mad cow issue came up, however, David took over the conversation.
Now, he could have hyped his stock using the mad cow disease as a launching pad. He could have, like many other CEOs in his shoes might have, pretended it was the beginning of up-and-to-the-right growth for Bio-Rad that would get me and other investors excited. He could have easily pumped his stock and made himself a lot richer in the short-run.
But he didn’t.
Instead, he took a piece of paper and drew a line that looked like the normal distribution of a standard deviation. “The mad cow revenue will climb like this,” he told me, tracing the upward curve of the line. “Then it’ll peak and then fall off, like this. Meantime, we’ll use the money to invest in other things for the long term.”
And that’s exactly what happened.
And it’s exactly what they did.
And it worked for everyone involved.
David Schwartz was one of the very, very good guys.
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011) Available now at Amazon.com
© 2012 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.