The Curious Investor

Using ROIC to Find Stocks with Great Management: AutoZone, Yahoo, Google

Honestly, I think the Seeking Alpha editors might have been a little bit misleading with my title. This post was more meant as a tutorial using three case studies to examine how management decisions with capital allocation can create or destroy shareholder value. It wasn't an explicit recommendation for any particular stock. In fact, there's only one in there that I would recommend personally.

On the note of AZO, I did a quick check and you are correct there's a significant amount of debt on the balance sheet that was ostensibly used to buy back stock given that cap ex has not increased significantly for over 5 years. This, however, is an interesting corollary to the capital allocation decision that I didn't touch on and I think I may write about it in the future. I don't necessarily believe that debt hurts a mature business more than a growing one. Obviously, that's provided the debt is layered on at the right levels and that the Company is managed with cash flow in mind.


On Feb 10 04:20 PM User 354632 wrote:

> Be careful on AZO--they've certainly bought back stock, but with
> tons of extra debt. This company is highly leveraged; as we've seen
> with other companies, financial leverage is fine as long as the company
> is steady or growing--but if it suffers a decline, watch out!

Using ROIC to Find Stocks with Great Management: AutoZone, Yahoo, Google

Very interesting point there. I think that's well reflected in how short term Yahoo's "high" ROIC years were. Obviously, as a shareholder, you'd prefer management to invest capital in organic growth which provides returns through sustained scale (as Google seems to have done so far) as opposed to one-off investments which generate return but only at the point of divestiture (as Yahoo did through stock investments in Google).


On Feb 10 09:24 AM Pj568 wrote:

> Yahoo's big net income years were realized as a result of selling
> off its Google stock recognizing large gains.