Monday, July 20, 2009

2009 CEO Letter Award

The award (so far) goes to Howard Solomon of Forest Laboratories (FRX) in the company's 2009 Annual Report. If I could type fast enough to post it here, I would. Very rarely is a CEO's letter more than a puff marketing piece. Solomon's letter gives you a window into the company's soul.

Why is FRX different than other drug companies? He tells you.
What drives the company's decisions? He tells you.
How will value be created for shareholders? He tells you.

Read it. It is a rare shareholder letter; one that is worth your time.

OK... I can't help it. Here is one particularly good quote regarding the motivation of many company leaders.
"And that lust for size, the playground of so many executives, and the emoluments of size, which has so often characterized industry in the United States and all over the world, is a significant cause of the worldwide economic disaster we are currently suffering: banks, investment firms, corporations, expanding into uncontrollable dimensions and not knowing what they are acquiring in their expansion; mergers and acquisitions resulting in bloated payrolls and factories and geography. And with it, the misplaced assumptions that management, motivation, competence and employee commitment and performance, on which real value ultimately depends, would just happen as a result of greater and greater size.

In fact, in so many cases just the opposite is true. That kind of growth, that is too rapid, often based on mergers and acquisitions with their inevitable dilution and operational disruption and internal rivalries, and rapid operational expansion at a rate that can't be managed, and all of it often depending on accumulated debt, and overvalued, sometimes grossly overvalued, goodwill which sooner or later has to be adjusted, rarely ultimately benefits either employees or shareholders."
Solomon won't win any awards for syntax, but he's setting the right tone at Forest Labs. The contrast between Forest and its peers could not be clearer. If only more investors realized it.

My assumptions about this company are anything but misplaced.


  1. If the fellow's prescient, then the stocks to watch for are ones with declining revenues but increasing margins. I haven't bumped into one yet, but I'll keep my eye peeled.

  2. Sarcasm aside... Must a company have revenue growth to be undervalued? Why does Seth Klarman, author of Margin of Safety, have 10% of his fund in PDLI? The company is a cash flow story and it will cease to exist in less than 6 years when its patents disappear?

    Better read your Ben Graham. A company with a $7 billion market value, no debt, $3.4 billion in cash, and the cash flow characteristics of FRX can indeed be vastly undervalued without stair-step increases in revenue.

    All things being equal, I'd love to see revenue growth at FRX. But it is not a panacea. There have been plenty of company's with revenue growth that have gone bankrupt. And sales growth can actually be a drag on a company's intrinsic value.

    Buffett has spoken often on this point.

    In any case, I'm sorry you disagree with my assessment of Forest Labs. That's what makes a market!

  3. Except for the most recent quarter, what declining revenue are you referring to?