Friday, July 30, 2010

CEO compensation

In my opinion the CEO should be purely compensated for increasing the intrinsic value of the company over long periods and for producing reasonable risk adjusted returns. In most cases this is hard to measure but quantitatively free cash flow growth measurement is as close as you can get to measuring increased intrinsic value.Ofcourse this is not the only criteria.In certain types of industries brand name recognition/reputation is as important. I recently found the best example of CEO comepsation while looking through proxy of O.I. Corporation ticker symbol OICO.

Mr. Lancaster. For 2010 and subsequent years while he is actively employed by the Company and in addition to his Base Salary as defined in his employment agreement, Mr. Lancaster will be eligible to earn a cash bonus equal to 10% of Free Cash Flow in excess of $3,000,000 annually, as adjusted by a charge of 15% on any Incremental Investment Capital (defined below). The charge for investment capital shall be applied annually year-over-year but shall be pro-rated based upon the month in which the invested capital is contributed by the Company. “Free Cash Flow” refers to the Company’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”), less capital expenditures. “Incremental Investment Capital” refers to capital invested subsequent to January 1, 2010 pursuant to approval of the Company’s Investment Committee for strategic initiatives, such as the acquisition of a business or product line. The Committee has the discretion to exclude certain one time events such as the sale of assets from Cash Flows and to provide a discretionary bonus in addition to the Free Cash Flow based incentive. The revised Plan does not provide for an award of options to purchase shares of the Company’s common stock; however Mr. Lancaster remains eligible to receive an option to purchase up to 25,000 shares of the Company’s common stock as noted below.

Portfolio Update July,2010

I will be updating my total portfolio,monthly transactions and returns here every month in this format.

Munger Quotes

"You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there’s no precise numbering you can put to these factors. You know they’re important, but you don’t have the numbers. Well practically everybody (1) overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that." - Charlie Munger

"Never wrestle with a pig, for if you do, you will both get dirty, but the pig will enjoy it." - Charlie Munger

"Many of you probably don’t remember what happened after the South Sea Bubble, which caused an enormous financial contraction, and a lot of pain. They banned publicly traded stock in England for decades. Parliament passed a law that said you can have a partnership with a few partners, but you can’t have publicly traded stock. And, by the way, England continued to grow without publicly traded stock. The people who are in the business of prospering because there’s a lot of stock being traded in casino-like frenzy wouldn’t like this example if they studied it enough. It didn’t ruin England to have a long period when they didn’t have publicly traded shares.


Looks like a good value lets find out if its a trap :)

  • As of 07/30/2010 the stock has fallen 56% from its high.
  • Cash = $140 M = 7.7$/share
  • Market Cap = 300M = 17.19/share
  • FCF for 2009 = 30, 2008 = 22,2007 = 12.5
  • Has had tremendous growth in the past.
  • Does out of clinic blood evaluation and suggests treatments.Currently oncologists are being squeezed. They are being paid the same amount even though costs are rising and hence they are looking to reduce expenses. Also uninsured patients are increasing. Besides that competition ins increasing as described below.
  • CEO pay

  • CEO has most of her options issued at striker price of 1.24 so she does not have the same incentive as the other stock holders in stock going up. Also equity compensation is only 20% of her total pay.

The company is expanding significantly
“Our operational capacity is growing as we continue to build our franchise, currently with 90 sales representatives in the field and 43 hematopathologists on staff with Cartesian Medical Group. We believe we have assembled the largest group of hematopathologists on one laboratory campus in the U.S.,” said Sam Riccitelli, Genoptix EVP and COO. “With the completion of our laboratory expansion earlier this month and our customer service center this fall, we will have the infrastructure in place to aggressively pursue our growth strategies through 2013.”
Performance Outlook
Genoptix is reaffirming guidance for the full-year 2010 with revenue expected to be approximately $210 million and full-year gross margins in the mid- to high-fiftieth percentile.

Operating margins for 2010 are expected to be in the high teens as a percentage of revenue, with net income of approximately $22 million and diluted EPS of approximately $1.20 on 18.3 million shares. This assumes a tax rate of approximately 46% for the year.
Based on continued infrastructure expansion and implementation of its strategic plan, the Company projects capital expenditures of approximately $30 million for the full-year 2010, including approximately $22 million in new facilities expansion costs and $8 million in maintenance capital.

  • Basically the company is continuing to expand into 2010 as per their initial plans without taking into consideration the changed game rules. In my opinion evolution teaches us that the best chances of survival are not for those who are the strongest or fastest or cleverest but for those who are willing and able to adapt to the changing environment. This company does not seem to know this and hence I believe the business troubles might be more than temporary.
  • Bottom line: My guess is company needs 8-10 M$ for maintenance.Assuming its able to hold onto its 20M$ per year net income forecast forever I would be willing to pay 10*10+140 = 240 Million for this company which is equal to 13.7$/share.But you must revaluate this price if you think that 20M$/year is not achievable mainly for competitive reasons.

Notes from Snowball

-> Warren Buffett made mistakes in buying bad businesses but his success lies in quickly learning and adapting from the environment.
->His purchase of Berkshire and department stores taught him this
" Time is a friend of wonderful business, the enemy of mediocre. You might think this principle is obvious,but I had to learn it the hard way.Its far better to buy a wonderful company at a fair price than a fair company at a wonderful price.Now we look for first class businesses accompanied by first class managements. Good jockeys will do well on good horses but not on broken-down nags"

First Post

I should have started this blog long time ago. Its very important to organize your thoughts in a structured way so that it allows you to model and weight all the available information correctly. This provides a framework to reach a conclusion with a high probability to be accurate. Here I would be saving all the recent noteworthy articles I am reading,summary of my thoughts on individual stocks I am valuing and miscallaneous investment related articles. I hope this turns into a mental diary of my investing experience and along the way help others to take advantage of my work.