Managing Director and Director,
Chieftain Capital Management It is unwise to give earnings guidance in the
sort of market we’re now in, say two directors
of Chieftain Capital, unless you’re in an
absolutely stable, steady business.
At Chieftain, we think of ourselves as owning businesses, not owning stocks – more like a private equity firm than a hedge fund. We are investors with a concentrated portfolio and we do no short-term trading.
We focus on high-quality companies with strong competitive positions, predictable cash flows and good growth prospects. In our research, we are trying to understand what companies will look like three to five years out, and we are looking for businesses that have a demonstrated ability to invest capital wisely and generate attractive returns for their shareholders.
So as long-term investors, what are we looking for from companies? Even now, we are doing what we have always done, which is to try to discern the good companies from the bad. We seek to answer a number of questions: why is the company’s product or service superior to others’ offerings? What drives the company’s competitive advantage? What are the company’s margins, free cash flow and projected growth rate likely to be in three years?
That said, the current environment has required some modifications to our approach. We must ask ourselves how the future might be unlike the past. For some companies, the game has truly changed and the strong performance of the past five years will never be repeated – even after the current downturn has passed.
We also must focus on liquidity and balance sheet issues at a time like this. We obviously want to make sure we understand companies’ near-term debt maturities and any other near-term liabilities. In this environment, companies need to plan for the worst, and we want to make sure they can fund their obligations. Given the erosion of the value of pension assets, we also want to understand how a company’s pension expense will change and what the impact will be on the company’s cash flow statement – will they have to make a large contribution to the plan?