NAOS News & Insights



October 31, 2017

Cuffelinks | What we Look for on Company Site Visits

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By Robert Miller | Portfolio Manager at NAOS Asset Management

Research procedures combine both qualitative and quantitative processes and the company site visit is particularly important as part of the qualitative assessment. A picture can tell a thousand words and a site visit can be much more effective than watching a company presentation.

A company site visit can reveal much more

Here are a few of the things we look for during a company site visit:

1. Describe the business in one sentence

We adopt the old adage that if we can’t explain an investment in a sentence then it is not for us. Site visits should be a valuable way to understand a company’s operations and gauge the current business environment.

It’s crucial when speaking with our investors to explain exactly what we are investing in, particularly given our investee companies tend to be lesser known by the broader community. If we spend a day with a company and walk away without a clear understanding of their operations, it is generally thrown in the ‘too hard basket’.

I recall an investor day where we discovered the company had built up numerous divisions across competing product offerings.  What had started out as a simple business was now a complex conglomerate. Following a number of ad hoc acquisitions, they had created a completely different culture. It became a confused message from the company with too many people talking about different areas of operations. Since our visit, this particular company is looking to restructure and has been discredited by the market.

2. Look for activity

Looking for the ‘pulse’ of an operation is essential regardless of whether we are visiting an office, a factory or construction site. We focus more on what we see as the business grinds away rather than what we are told. Are all the sales staff busy? Are there a lot of empty seats? Is the machinery working? Are the shelves full? Are there a lot of trucks driving in and out? These could be key factors underpinning the company earnings 12 months down the track.

We have counted the number of times an activity occurred to do the rough maths on whether the company is delivering on its market outlook. More obvious signs are delays resulting in the slowing of the sales process, for example, visiting a logistics company headquarters where there is a complete lack of activity or empty trucks being deployed.

At a recent agricultural site visit, we could see that a company’s operations were working efficiently. Commodity throughput was strong, the team members were working well together and a steady stream of semi-trailers were moving in and out. The site visit played a part in forming our investment thesis and we became shareholders.

3. Understanding company morale

Typically, site visits are conducted by company CEOs to show investors their operations. Something you will not get a feel for in a boardroom meeting is how employees behave towards the CEO. It can be more of an art than a science, but it is always a great sign when the CEO knows everybody’s name and shows and receives respect from other staff members. Body language can be a telling factor. If we notice anything which makes us question the ability of a CEO to generate a successful culture, we will reconsider our investment decision.

We place a strong emphasis on management quality. During a visit to an interstate company site, it was obvious the CEO did not have the respect of his colleagues. We flew home, reassessed our investment and sold out. On the flip side, we visited a retirement living home where the CEO knew the residents and was happy to talk to Mrs Jones or Mr Smith about what they were having for lunch and how their grandkids were going. This company has grown its share price by more than five times over the past five years.

4. Detecting a gravy train

In listed companies, management’s key role is to act in the best interest of shareholders so it is crucial management act responsibly with the capital entrusted to them. It is easy to disguise spending in the income statement reported to the market. We look out for things like the types of cars in the carpark or we sneak a peek at the CEOs office. Excessive spending will influence our view of the company.

An example was an unprofitable local micro-cap which had an extravagantly-sized office and boardroom filled with expensive furniture when the company came close to bankruptcy shortly after our site visit.

Site visits are an essential aspect of our investment process which endeavours to find quality companies to be held for the long term.


Read further insights by Robert Miller on Five Ways to Avoid the 'Value Trap' 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Cuffelinks Published 25 October 2017

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