Monday, September 21, 2015

General Radio and the K System

The future is filled with robots and drones and all sorts of people-replacing machines, and one wonders where all the replaced people are going to find work.  A new system is going to be needed - not just a tweeking of the present system but a complete rethinking of everything, from the bottom up.

Melville Eastham, who founded General Radio exactly 100 years ago, wondered about this very question in the early thirties. He and his partner, Henry Shaw, were impressed by the paternalistic philosophy Eastham had seen at a visit to the Carl Zeiss works in Jena, Germany. Ernst Abbe had bought out the Zeiss family in 1888, then gave the entire Company to a foundation with a the following charter:

To cultivate the branches of precise technical industry of Jena (optics and optical glass); to fulfill higher social duties than personal proprietors would permanently guarantee; to take part in organizations and measures designed for the public good; and to provide permanent solicitude for the economic security of the Zeiss Works  and particularly for the further development of the  industrial labor organization  as a source of substance for a large number of people, and to better the personal and economic rights of those people.

Now, neither Eastham nor Shaw was a card-carrying socialist.  Both were capitalists to the core, and so, while they gave a large portion of their equity, Ernst Abbe style, to the Genradco Trust, they designed a salary system that would allow the Company to shrink expenses (this was the 1930s, remember) without shrinking the workforce:  the K System.

The K System was brilliant. The higher-salaried employees, typically engineers and managers, would see their salaries move up and down depending on “K”, a factor that depended on the relationship between sales and orders  to quotas.  K could move in a range between 0.5 and 1.5. (Overages or shortfalls would be banked.) Thus, in bad times, the salaries could be halved, and in fact, K, when launched in 1933, did start at 0.5, but the next month it climbed to 0.6, and it hit 0.95 in January, 1934.

Two refinements were important: First, one was invited, not ordered, to be on “K.” Second, the quota was rigged so that if sales and orders were right on target, K would be 1.1.  Years later, an invitation to be “on K’ would be coupled with admission to the stock-bonus pool.  No one who was invited to be on the K Plan ever declined the offer. 

Amazingly, the Company not only navigated the Great Depression without a single layoff, but, when a local bank failed, it made employees whole, on the basis that the employees were depositors at the bank because the Company banked there.

There is much more to the paternalistic ways of General Radio – medical visits, services provided by the Genradco Trust, Company-paid life insurance (in 1919!), subsidized cafeteria, etc. Of course, the Company had a sound business plan, a stream of MIT engineers to hire, corps of gifted people. The Company lasted 86 years, from its founding in 1915 until it was bought by Teradyne in 2001.

Much more about this remarkable Company can be found in The General Radio Story, a book available from

Wednesday, July 15, 2015

Stock Talk - China's bid for Micron (cont'd)

Yesterday we talked about a Chinese firm's bid for Micron. We've read further on the subject and have concluded that this is not a serious offer but a trial balloon. For one thing, it is much too low, and if the rules of the acquisition game demand a starting low bid, this one is foolish.

Then what does China have in mind? Here's one guess: It's the opening salvo in an attempt to wrest semiconductor technology from the U.S. A lot of this technology is now in Asia, but not enough to tilt the scales. Take semiconductor equipment. Applied Materials is king of the hill, and its attempt to merge with Tokyo Electron was scotched last year because of likely hostility from the U.S. government (on antitrust, not security grounds). Then there's KLA and Teradyne and several other medium-sized companies that possess critical technology.

Let's suppose China made overtures to several of these companies. Then the U.S. would be left with a conundrum: Do we stiff them all, declaring economic warfare on China and inviting retaliation? Or do we succumb meekly? Globalism is a game we're not good at, despite President Obama's efforts in Cuba and Iran.

Watch the stocks of the U.S. semiconductor and equipment companies closely in coming weeks. And watch Advantest, a Japanese equipment company that has been beaten down lately, for signs of buying. If the Chinese are trying to corner the market in semiconductor technology, the equipment manufacturers' stocks are where their fingerprints should be visible.

Of course, the folks in Washington may prefer economic warfare to diplomacy. As the presidential campaign heats up, expect a bitter battle between the hawks and doves. It should make interesting reading - if it weren't so doggone serious.

Tuesday, July 14, 2015

Stock Talk - China's Bid to Buy Micron

A bombshell burst upon the market today, A Chinese company declared its intention to buy Micron, a large U.S. semiconductor manufacturer and one of the world leaders in memories, including flash chips. Of course there will be security hurdles to handle, and this government will presumably object, citing the strategic importance of semiconductor devices. Chances of a successful merger must be regarded as a 50-50 proposition at best.

As a song from Shenandoah goes, "I've heard it all before." Decades ago, it was Japanese companies that were the threat. I was on a industry committee in Washington charged with manning the ramparts. I was also on the Board of Directors of SEMI, a trade organization for the Semiconductor Equipment and Materials industry, and the subject of many meetings in Washington and Silicon Valley was "What do we do to protect our leadership in semiconductors?"

I remember one meeting when an assistant secretary of defense argued that the fate of the free world depended on our cooperation in depriving the USSR of our test systems.

"They can't even make light bulbs, let alone 64K memories," I said, "because their economic system is so screwed up. You guys should be hoping that they don't catch on to capitalism."

The Chinese, capitalists to their fingernails, have figured it out, and they are coming after us in ways the Russians and the Japanese never learned. What chance has the U.S., with 4% of the world's population, have to compete in the long haul? Information flows instantly, especially via social media, and the days of "keeping secrets" are gone forever.

Let's say the politicians are successful in convincing the Chinese that they would be better off developing their own memory technology and leaving Micron alone. How long do you think it would be before the Chinese find ways of throttling U.S. companies seeking to sell in China?

It's a tough world out there, and our only hope is a dash of what Kissinger called triangular diplomacy. We must make up our minds: Do we want to make nice with Russia or China? With a partnership with either, we have a chance.

As we enter the presidential campaign, the candidates should consider the alternatives.

Monday, July 13, 2015

Stock Talk - New Tech vs Old Tech

One of the more interesting competitions going on these days is the battle being waged for investors' dollars by old-tech companies (Microsoft, Intel, Texas Instruments, etc) and new-tech shooting stars (GoPro, Facebook, Fitbit, etc). It should be obvious that the new companies are almost all in the software or social media area, while "old tech" patrols the corridors of semiconductors and the "things" of technology. There are exceptions, of course, but that will do for a start.

This may be a false competition. If you talk about hardware, you have to talk about China. The other day I had a close-up look at a drone made by a Chinese company, DJI. Considering the technology and (especially) the price, it's hard to see how any U.S. company could compete. But in software, where facility with the English language is often important, U.S. companies are the leaders. Companies that combine hardware and software skills (Apple) are especially powerful.

There was a time when U.S. companies like Digital Equipment, IBM, and Hewlett-Packard were supreme, but those days are gone. Books could be written (and have been) about the causes of their collapse, but where is it written that the U.S., with 4% of the world's population, must have the lion's share of technology?

Back to the old-tech/new-tech competition. It is up to old-tech companies to adapt; that's obvious. Those that pull it off (the new CEO at Microsoft looks promising) will do well. H-P, on the other hand, has not found its way. Certainly the hiring of outsiders as CEOs at H-P is dispiriting.

Semiconductors, the heart of all the gadgets we know and love so well, are a question mark. If one were a betting man, one would say that the equipment to make semiconductors and the chips themselves themselves will move to Asia, and the best the U.S. leaders (Applied Materials, KLA-Tencor, etc) can hope for are partnerships with Asian forms. Of course, that takes political leadership, and if the Washington gurus insist on taking a "muscular" line with both China and Russia, all bets are off.

I will say more about the high-tech market in future posts.

Monday, May 11, 2015

Stock Talk - Acquisitions

If you're looking for a pretty good bearish indicator, consider the company making an expensive (the more expensive, the better) acquisition. This is especially true in the high-tech sector. My boss for many years, a bona fide entrepreneur and CEO, used to say that, in high tech, the odds were 10-to-1 against, and I've never seen any evidence that he was wrong. At the present time, CEOs of companies holding a lot of cash are particularly vulnerable. All that cash is yielding little or nothing, and analysts are always egging them to "do something," because that gets the company's name in the papers and generates lots of commissions for the deal-makers. Moreover, a lot of insiders will get wealthy, because acquisitions are always made at a premium to the market, and a spike in the acquired company's stock price will follow the announcement. So the reaction of analysts is almost always positive, because the M and A (mergers and acquisitions) business is considered exciting.

So there's time to sell or short the stock of the acquiring company - maybe weeks or months. What happens then, all too often, is that (a) the acquired company's key employees move on, (b) the acquiring company finds bugs in the acquired company's profit and loss reports or balance sheet, (c) the owners, once the lock-up period is over, dump their stock, (d) a major customer, for one reason or another, doesn't like the combination, or (e) the synergies that were touted as reasons for the acquisition aren't there. There are other potential problems, but you get the idea: The brokers who were selling the deal were overplaying the benefits and underplaying the pitfalls.

There are some acquisitions that make sense. My friend didn't say the odds were 10-0; he said the odds were 10-1. Every now and then a company will acquire a winner. But in investing, the odds are stacked against acquisitions, once the buzz dies down. Instead, bet on companies that use their money to fund new projects internally

Sunday, April 19, 2015

Stock Talk - Netflix

Netflix stock sells for $571 a share, well over 100 times what analysts expect the Company to earn next year – and over triple what you could have bought it for two years ago.  The Company is valued at over $34 billion today, and some people believe it will go much higher in the coming months.

There’s a reason for that nosebleed-high valuation. Netflix is revolutionizing the way we watch television. It is run by a bona fide visionary, Reed Hastings, and it is growing by leaps and bounds, especially overseas. Every hour I stream a movie or TV series on Netflix is an hour I do not watch conventional TV – and on many evenings I don’t watch cable TV or the networks at all.  These are the evenings I settle back for a good movie like Shirley Valentine or The First Position or Quartet or an episode of two of a TV series, courtesy of Netflix. 

The old guard is aware of what’s happening. A few days ago Verizon announced that it will soon unbundle channels for its FIOS customers.  Comcast and Time-Warner Cable, which have been milking their bundles for years, see the writing on the wall. And there will be more revolutionaries to come, as companies like Amazon and Apple are not likely to let Netflix have the disruptive technology without competition.

Still, first movers have an edge, and Netflix is running fast. The Company’s catalog of movies and in-house miniseries is growing fast, and I marvel at how much Netflix’s “content” has grown in quantity and quality.

Still, the valuation is now very high by any standards. If you think Netflix will continue its march on the living rooms of the world, you may want to buy a few shares. But for conservative investors like this one, I will continue to watch from the sidelines

Thursday, April 02, 2015

Stock Talk - 8

This is the time when annual reports fill up your mailboxes. Almost all of them wind up in the waste basket without being read, the ballots along with them. This is a mistake. I say this not because I wrote more than 30 of them, but because they say so much about the company and its business, probably more of value than you will find anywhere else. Long gone are the days when the CEO simply boasted about being "well positioned for the future" - and little else. Today, the company lawyers and accountants sweat over every word, making sure that every syllable is accurate to a fault. We live in the age of transparency - and lawsuits.

So, the next time you receive an annual report, junk the ballot if you must, but read the President's letter, and read every word of what is said about the organizational changes, the competitive landscape, and especially the profit and loss statement and balance sheet, comparing them with the year-earlier numbers. If you have time, you might scan the biographies of the nominees for the directors, but these are not essential, nor are the compensation tables. The state of business is what you should be most interested in, and you should be able to get a clear picture of this with less than a hour's reading. It helps if the company is in a business you know something about (e.g., retail food or clothing).

If your portfolio is not worth an hour of your time, you should put your money in the bank or in good mutual funds, and leave the reading to professional analysts.

Monday, March 30, 2015

Stock Talk - 7

A long time ago, I was mentored by a wonderful man at General Radio. Like most of the executives at GR, he had a engineering degree from MIT, and he was a very literary, very well read gentleman. He was active in the stock market, and I listened carefully to the pearls of wisdom he would cast. He had two portfolios, one designed to generate dividends, one designed to generate capital gains. And he noticed a curious thing: The dividend portfolio regularly outperformed the trading portfolio, even without considering the dividends! Of course, that may have been a sign of the times (the fifties), but dividend-paying companies tend to be stronger financially, and these are times that try one's balance sheets.

These days I have two portfolios, one designed for trading, one designed for current yield, and they exhibit the same results that my mentor found in the fifties. Of course that may be because I'm a lousy trader, but I think there's something more basic going on.

Lately, oil stocks have been plummeting, and that hurts returns from these stocks, which are heavy dividend payers. But there's an offset: Utilities tend to use lots of oil, and these stocks, also heavy dividend payers, benefit. Besides, the year is early, and it's too soon to declare dividend-payers a loser.

Focusing on dividend-paying stocks needn't mean giving up excitement. Even Apple pays a dividend. It's only 1.5 percent, but that's a lot more than you'll get on a CD from your local bank, and Apple is, to put it mildly, solvent. And Apple may well raise the dividend in the future.

So my thought for the day is this: Favor dividend payers. Check the dividend, and then look at the consensus estimate for earnings in the coming year. The lower the dividend as a percentage of the consensus, the better.

Tuesday, January 20, 2015

The State of the Union

President Obama has just finished his 2015 State of the Union address, and here are my reactions:
We have in Barack Obama the best orator since FDR.  He's a masterful speech-giver and also an expert speech-writer, for it is obvious to me that he at least guided and probably wrote much of the speech. (I know whereof I speak, since I have written and delivered dozens of speeches.) There was precious little to complain about. It was a trifle long, and the barbs at Russia and China did not go well with the over-all pacifist spirit of the speech. And the reference to the person in the balcony (a "typical" person who just happens to illustrate his point) has become a staple of SOTU speeches in recent years, and it is getting a bit tired.

Of course, the President made only passing reference to the "loopholes" he would close to pay for all the goodies he was promising. And the percentage of the world's wealth controlled by the top one percent of the world's population (a subtext of the rhetoric these days) neglects to mention that the world's population includes billions of people who live in Asia and Africa - people beyond the reach of the President's policies (and who need the jobs President Obama wants to bring back to the U.S.).

But these are minor quibbles. Let's give President Obama his due: He gives a helluva speech. There is no one in either major party who is in his league.