Thu, 10 Nov 2011
These three exemplary managers have widened their firms' economic moats and created real value for shareholders over the years.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.
As the leaves begin to change here in Chicago, our thoughts turn to the 2011 CEO of the Year.
I'm here today with Paul Larson--he is the editor of Morningstar StockInvestor--to see who our nominees are for the 2011 award.
Paul, thanks for joining me.
Paul Larson: Thanks for having me.
Glaser: So, first off, what is this award? What are you looking for, what is the rest of the team looking for, when you're giving out the CEO of the Year?
Larson: Well, really our team is looking for a CEO that adds intrinsic value to the company. Whether this is from widening the economic moat or actually adding value through growing the earnings and the cash flow and doing appropriate capital allocation. Those are the primary things that we're looking for.
Glaser: So, it's really not a race of who grew the stock price the most during the year. It's who is really creating that value.
Larson: Exactly. Because CEOs can engage in destructive behavior to try to get the stock price up, but we really prefer those that are really focused on the business, and again, adding intrinsic value.
Glaser: So, who were some previous recipients?
Larson: Last year we had Alan Mulally of Ford, a company that operates in a very difficult industry, but he's done a fantastic job steering the company through some difficult times.
A couple of years before that, we also had Warren Buffett as one of our winners, and a long line of previous winners that had or have created, frankly, wide-moat firms.
Glaser: So, looking at this year, who are the three nominees? Who is the first one?
Larson: One is John Pinkerton, and this is perhaps the one that is least known. He is the CEO of a company called Range Resources, which is primarily a natural gas company.
And what he has done is, he has taken this relatively small E&P company and really focused heavily on a new play that has worked out fantastically--the Marcellus shale, which is in the Appalachian in the eastern part of the country--and really built an enormous acreage position there well before anyone else saw the potential of the play.
This is a stock that has gone up roughly twenty-fold over the last decade, and this is despite the fact that natural gas is at a relatively low price. So, it's gone up twenty-fold, and not just because commodity prices have worked out well for the company. This is because the management team has done such a good job of really allocating resources correctly.
Glaser: How about the second nominee?
Larson: The second nominee is one that is very well known, Jeff Bezos of Amazon.com. And he has been the CEO for nearly a decade and a half now, which is kind of hard to believe. I still envision him from back in the dotcom days when he was quite a bit younger, and basically doing the same thing. But he's created a retailing behemoth, a company that really continues to change retail in some very profound ways. This is no longer just an online bookstore. It's truly become a destination site, and it is a company that we think has a wide economic moat. It survived the .com crash just fine, and it is really doing some exciting things today.
Glaser: Who's the final nominee?
Larson: The final nominee is Jim Sinegal, and he is one of the founders and longtime CEO of Costco, and this is an interesting company because they've managed to add value for all stakeholders, not just shareholders, although shareholders have certainly benefited quite handsomely from his leadership. But when I say all stakeholders, when you look at what the average employee actually earns at Costco, it's quite handsome compensation for a typical retail worker. It's no surprise that their employee turnover is so incredibly low. The typical Walmart has about five times the employee turnover that the typical Costco has.
Meanwhile, despite paying their employees quite well, they are a low-cost producer for their customers, which is something that is kind of hard to do. When you're paying [employees so well], you'd think that you'd have to charge your customers higher prices in order to pay for it, but they've managed to balance both things quite well.
And, of course, for shareholders, the business model is quite sound; they've expanded very handsomely over the last couple of decades. They're now engaging in international expansion, an area that we think is ripe for growth, and Sinegal has been there the whole time
Glaser: It certainly sound like some interesting picks. When will we find out who the winner is?
Larson: We will be announcing the winner live on CNBC, sometime in early January.
Glaser: We're looking forward to it. Thanks, Paul.
Glaser: For Morningstar, I'm Jeremy Glaser.