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"Panasonic tells how a typical Japanese multinational learned to restructure itself according to this flexible "American" approach while preserving some essential Japanese attributes. Panasonic is the main brand name for Matsushita Electric Industrial Company; author Francis McInerney consulted for Matsushita's American subsidiary in the late 1990s—when the firm's troubles became most apparent."
Tech sector not so deadly if you separate the wheat from the chaff
The Globe and Mail, November 3, 2007
Brian Milner
If you had told survivors of the tech wreck that seven years later technology stocks would come to be viewed as a safe haven from the turbulent winds swirling through the markets, they would have called the men in white coats and told them to bring a straitjacket.
Yet that is precisely what has been happening, as investors have flocked to the sector - not only because of tech's typical allure of heady growth but because other investments look increasingly dicey in a volatile environment.
One look at the Nasdaq 100 tells the tale. This index of Nasdaq's biggest non-financial companies has leaped more than 25 per cent since early January. And it wasn't because of the likes of such non-tech constituents as Bed Bath & Beyond.
The tech component of the S&P 500 jumped 7.1 per cent in October. By contrast, energy rose only 1 per cent despite record oil prices, and financial services, a traditional haven in periods of low interest rates, fell 2 per cent.
Tech's charge obviously has been led by such market darlings as Apple, Google and Canada's own Research In Motion. But investors have been coming back in droves to just about every segment of the industry - from computer hardware to systems and application software. The reason: healthy earnings, good growth prospects and freedom from the credit and debt woes that plague so many financial and consumer stocks.
The problem with all this is that techs are not utilities and that it doesn't take much to derail equities fuelled by momentum. A miss on earnings, a slightly reduced profit forecast or a glitch in the product or distribution pipeline and a company can get trampled in the stampede for the exits.
So is the crowd crazy to be rushing into tech? After all, it's easy to understand why investors would pour into oil or other commodities when demand is high and supplies are tight. Even a producer that is badly run is going to make money. But tech is a different story.
"Selling technology to companies and consumers is a very refined business. You better know what you're doing," says Francis McInerney, managing director of North River Ventures in New York.
He knows from first-hand experience what happens when they don't know what they're doing and what he says can give us insight as to whether Apple or Google are overvalued today.
First some background. For nearly 20 years, he was a telecom consultant who astutely predicted that the telecom bubble would burst. But it didn't do him or his clients any good. "It's great to be right, but if you've got no customers left, who cares?"
Several years before that cataclysmic turn of events, Mr. McInerney had begun examining why certain companies do so much better than others with seemingly similar advantages. He has come up with 220 of what he calls "navigation rules" to measure corporate performance and prospects.
But while other analysts were focusing on such items as cash flow, price-earnings multiples, return on equity, R&D spending and even number of patents, he zeroed on one key gauge that sets apart every supercharged success story -- how fast companies turn sales into cash. It's a simple way of assessing how efficient they are at managing working capital.
Those that do it best -- and no one does it better than Apple, Mr. McInerney asserts -- get more accurate and faster information from their customers. They can afford to take more risks and they are more likely to sustain profits.
Put simply, his equation for what he calls cash velocity takes days of sales in receivables, adds them to days of inventory and subtracts accounts payable turnover.
Fortunate followers of his methodology have done well (including Panasonic, which hired him to help steer it through a massive restructuring). Investors knew to pile into Apple well before it headed into the stratosphere. They knew that Cisco, Intel and British Telecom made the cut, but they should be wary of Microsoft and stay clear of such former stars as Dell.
By his reckoning, Google is still attractive, even at more than $700 and with a P/E of 55. Why? Because it would take Microsoft a decade to close the cash velocity gap opened by Google.
So maybe the crowd isn't so crazy after all.
He says of his approach: "It doesn't say: 'Suspend your judgment.' All it says is that we have to look at the financials a little more carefully than we have in the past."
Strangely, this Canadian expatriate has not yet subjected RIM to his analysis. "It's very unpatriotic of me, isn't it? I feel remiss." We'll have to get back to him on that one.
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