Selecting A Company To Invest In
( Originally Published 1939 )
IF the investor has carefully investigated the industrial field that he wishes to invest in, his next step, after having decided the avenue he wishes to travel, is that of selecting the company.
While the selection of the company imposes many considerations upon the investor, nevertheless, the barometers or measuring rods of the past can be used with greater accuracy than in the first instance, that of selecting the industry.
The size of a company does not necessarily reflect the stronger, the safer, or the most attractive, either for earnings or appreciation of its stock. During the years of the depression some of the smaller companies fared a great deal better than did their large competitors.
This might be attributed to the larger companies being geared to mass production, and anything which interferes with maximum production may prevent them from operating economically.
The safest course, however, is to select a company and deter-mine its relative position in the field of industry it occupies. The factors, in determining this, must necessarily lie in its assets, its sales in dollars, its sales in units, and its net income.
Let's take for example two companies in an exclusive field, manufacturing, for instance, compass motors. One company aver-aged seventy-five percent of the assets, sixty-five percent of the dollar sales, sixty-five percent of the total units sold, and sixty-five percent of the profits.
The other company, with only twenty-five percent of the assets, thirty-five percent of the dollar sales, thirty-five percent of the units sold, made thirty-five percent of the income.
The comparison is thus obvious. The smaller company, with only twenty-five percent of the assets, averaged at the ratio of twenty percent more in income, as against the larger company which had seventy-five percent of the assets and sixty-five percent of the business.
The selection of the company also entails the question of policy. Are the officials constantly on the alert to meet what may prove to be a serious competitive problem? Do they have a research department which is constantly striving to effect more economical methods of operations?
Many companies who have originally started out to manufacture, say compass-motors, have, through their research departments, attained eminence in other fields. A number of oil and petroleum companies are outstanding examples of this. Such companies have not only improved their methods of production through their research departments, but have also found many other uses for their present product. Equally important is the fact that they have developed new products.
Any number of companies, including Westinghouse, General Electric, General Motors, Timken Bearings, Goodyear Tire, Standard Oil, duPont, Aluminum Company and others, have greatly expanded their business and increased their earnings, due to the varied uses their research departments have found for their pro-ducts, and the development of new ones.
General Electric's research department has created and contributed any number of items to their production activities, including motion picture machines, electric refrigeration, etc. Westing-house has given us the electric eye; and Remington Rand the noiseless typewriter.
One of the most outstanding examples of research is the cot-ton industry. For every 500 pounds of cotton ginned, there is about 900 pounds of cotton seed. A few years back, this seed was practically worthless, except for soil cultivation and cow feed. Today it is a different story. The mechanical alchemy produced by research experts, now utilize parts of the cotton seed in horse collars, house roofing, blotting paper, cheese crackers, salad oils and dynamite.
As you listen to your favorite phonograph record, or witness America's sweetheart flashed on the screen, you can be assured that the humble cotton seed is playing an important part in both the record and the film. Or it may be that you're playing baseball with a ball stuffed with cotton seed, or eating a butter substitute, or sardines, packed in its oil.
Another example of research is the Masonite plant in Mississippi. According to the Geographical Magazine, "a young man of restless mind, apprentice of Edison, was impressed by sawmill discards of slabs, edgings, and sawdust, as well as useless trees on marginal lands. He fed waste woodchips into a metal `gun' made from a piece of shafting, heated the sealed-up mixture by gasoline torches, exploded it by dislocating a pin with a hammer blow, and compressed the fibre in an old letter press, just to see what would happen."
What ultimately happened was the vast Masonite plant which employs a thousand men, and buys five hundred cords of peeled young pine each day, from which a million square feet of knot-less "wood-board" is shipped every twenty-four hours.
That first steel gun, which they now keep in a safe, fired an industrial shot which is seen, if not heard, around the world; in grainless fronts of Tokyo shops, in kitchen jungles of Malay posts, in a new office building in Milan, in Park Avenue pent houses, billiard tables, in ocean steamship corridors, in Hollywood movie sets, and speedboat hulls of many harbors.
Thus the importance of research departments become paramount, in order to keep abreast of competition, and add new products to aid in the internal quest of income.
No less important, however, is the research efforts as they pertain to the sales department. This department must stay constantly in tune with the consumer, anticipating changes in taste, etc.
The rapid changes made manifest by economic conditions, and the twentieth century social life, keep them constantly on the alert. For instance, the victrola of yesterday quickly surrendered to the radio, and the old-style, storage battery radio was abandoned for the electric type which would operate on either alternating or direct current. Who can predict what will happen within a few years in the radio-television field?
The sales department must constantly seek ways and means to increase the number of units sold, and a cheaper means of selling such units, in order that the net income may grow increasingly larger, and the price of the product increasingly more attractive through competitive prices.