A couple days ago we provided a quick tally of companies we’ve talked about in the blog, separating them into "good" and "not so good" categories. Our friend Mark Graban at the Lean Blog commented back wondering about the stock performance of each group. He had previously looked at a similar situation when he analyzed the stock performance of companies that had won the Shingo Prize. Let’s just say they had less-than-stellar results.
I actually had looked at the stock performance of both groups, and wasn’t impressed. In 2006 the average stock price return of the "good" companies was just over 10%, and the average return on the "not so good" was 2%. Not necessarily a statistically relevant difference, and in any case they both returned less than the Dow. However there are several issues impacting this analysis:
- Only a subset of the companies in each category are publicly traded. As Bill often points out, private companies have a better chance of achieving real lean as they can focus on the long term without being beholdened to traditional short-term minded shareholders.
- In some cases a company on the "not so good" list was there because of a poor decision that had yet to impact the company. For example, NCR and Whirlpool are laying off tens of thousands of years of knowledge just so they can hire back the same number of people with only weeks of knowledge… for a couple bucks cheaper at an offshore facility. However both companies are currently profitable, and Wall Street is rewarding the short-term cost cutting (at least by traditional financial standards) without taking into account the long-term indirect financial impact.
- In a couple cases we have individual plants that are either making positive or negative lean-oriented decisions, while their parent corporation is going in the opposite direction. The stock price wouldn’t immediately show this.
The bottom line is we can’t use that particular list of companies as a "lean investment portfolio." But that doesn’t mean there can’t be one. If I had to pick some publicly-traded companies that have a solid company-wide lean program, I’d probably choose the following. I’ve included their 2006 return, which is pure stock price and doesn’t include dividend yield and such.
- Toyota (TM) — 26.9%
- Danaher (DHR) — 29.1%
- Parker-Hannifin (PH) — 16.4%
- Caterpillar (CAT) — 6.0%
- Cummins (CMI) — 30.8%
- Wabtech (WAB) — 12.7%
- Boeing (BA) — 26.4%
- Raytheon (RTN) — 31.9%
Almost all of those beat the Dow in 2006. But there are still some issues… for example, Boeing is reaping the benefits of Airbus incompetence. Perhaps that is a reflection on lean in direct and indirect ways, but there are obviously market forces at work (not to mention shareholder perception, etc.) that have nothing to do with lean.
Any thoughts? Companies that should be added or removed, or additional criteria? Companies committed to lean that aren’t in manufacturing?
And I guess I should give some disclosure and CYA: I do own shares in about half of those companies, however I am by no means a professional stock analyst. Do your own due diligence, past performance does not predict future performance, I’m not recommending any of those stocks, investing in stocks can be risky and you can lose your entire investment, I have no insider information on any of them so for all I know any one of them is just about to tank due to some scandal, etc. etc. etc.
Jon W says
Interesting. One place you might want to look is at the attendee list for the last Lean Accounting Summit. Companies that send people to such an event almost have to be serious about real lean. I know Cat and Cummins were there. How about Deere?
John Hunter says
I would add Tesco (I do own some shares). My 10 stocks for 10 years post – http://management.curiouscatblog.net/2006/12/11/10-stocks-for-10-years-update-2/ – includes Tesco and Toyota and others that might not be lean like (Google, Cisco and Petro China). I suppose Amazon, from that list, might also be a lean candidate (I also have DELL which declined quite a bit the last2 years). I looked most closely at DHR but thought it looked a little too pricey. I am waiting personally too – that might be a mistake, we will see.
Eric says
Medtronic has some strong programs at many plants, but I’m not sure about corporatewide. Just about every company especially in manufacturing claims to have a corporate lean program but we know most are just for show. Google and Amazon are interesting and I think Kevin once wrote about Google. Cisco is a problem as at least a few years ago they subscribed to the Welch-ian strategy of killing the bottom 10% of their employees each year – not lean. Dell should be but had some missteps recently. Intel could have been but they benchmarked themselves against inferior competitors and decided to bring themselves down to that level. I sometimes question the depth of Boeing’s program as they love to outsource but a lot of that is politically-driven. They at least understand lean better than most. HON furniture had a good program but their stock hasn’t done well lately. Interesting topic.
Jon Miller says
This has been a subject of interest for me ever since I got into Lean. The trouble with stock prices is that they go up or down based on the expected future earnings. While I understand the logic, there is often a lot in how those numbers are derived that is neither fact-based nor honestly having anything to do with how good a company is or is becoming.
Barry "aka the Hillbilly" says
This is an interesting topic.
I believe that companies employing the Toyota Production System will survive longer within their Industry.
But that does not mean that a Company’s business may be a good one. Because of the level of competition, the business may not support good margins of profit.
I am not sure what Toyota’s net profit margins have been over the last 50 years, perhaps better than 8-12 % ???? However, there are probably many businesses that have better margins. The difference is the nature of the Business itself.
Warren Buffett has said that he has no idea which Chemical, Car, or Airplane Manufacturer is going to be the best in 10 years. However, he was fairly certain the Snickers Bar was going to be the best selling Candy in 10 years, just as it has been.
In other words, Candy may be a better business than Automobile Manufacturing, etc., He places a premium on businesses with trustworthy management, predictable growth, and long term stability. The trick is to buy those businesses not at a premium, but at a discount.
Warren has stated many times that he has never met a person who could predict the direction of the stock market short term. The short-term thinkers should perhaps just take their money to the Casino.
He gave a series of talks in 1999 before the Dot Bomb implosion. Previously, he had rarely commented on the direction of the Market. He simply stated that there was no way the returns in the next ten years would match those of the last. Warren noted that that value is destroyed, not created when a company loses money over its lifetime. More importantly, he talked about how many of the breakthroughs of the 20th century had failed to reward investors. I believe he specifically talked about Aviation and Automobiles. He noted that many of those companies no longer existed.
I think that since Taiichi Ono said it took Toyota over 10 years to implement the system, we should judge other companies performance over a long period of time.
Invest in Companies where you understand the business, you trust their leadership, and you believe they are serious adopters of the Toyota Production System.
Over the long term they should reward the patient investor.
Josef says
Eric commented:
“Just about every company especially in manufacturing claims to have a corporate lean program but we know most are just for show. ”
At least for Caterpillar, I know from own experience, that he is partly right, I used to work for CAT.
I have definitely seen many “looking lean” elements, especially in manufacturing and logistics operations, but the company is not “being lean”.
SixSigma? CAT has a huge Six Sigma programm running for years, with thousands of full-time blackbelts accross all business units. Unfortunately, many of these blackbelts became one, because they did their previous jobs so poorly, that management did not know what else to do with them. Interestingly, the positions of many people did not get filled again, after those people were moved to become full-time blackbelts and yet nobody really missed them… now, what does this say about the value-add of that person?
Respect for people? Cat has splendid programs for training, succession planning and personal carreer development. In reality, I participated in training, that I neither needed nor have asked for, whereas succession and carreer decisions were made between managers behind the back of the respective employees. And yes, Cat is also firing hourly workers, if their jobs become redundant.
Long term focus? There was training in Europe (200 bugs travel cost) cancelled at the end of the fiscal year, in order to help make the year-end figures. The same training was then taken early next year in the States (1000 bugs travel cost). And the office assistant could not buy copy paper at the end of year as well for the same reason. So we kept steeling paper from each other until January.
Focus on value added activities? “A budget is a budget is a budget” is a common statement at CAT. That means, if You have a budget, You can spend it, regardless, whether it makes sense or not. Otherwise, if You need money for a good purpose, but have not budgeted for it, You just won´t get it. This includes budgets for staffing as well.
I don´t want to be too negative, there is many good sides as well, and the operations are pretty lean, but just as for many other companies, management is lightyears behind.
Regards,
Josef