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Monday, September 11, 2006

The Ten Best Managed Companies In America

From 24/7 Wall St.

We set out to pick the ten best managed companies in America for the year that began June 2005 and ended June 2007. At this point virtually all companies have reported their June financials and filed their 10-Qs.

We looked only at companies with market capitalizations of over $1 billion. Most of the companies on the list are much larger. We looked at several financial measurements: return on invested, return on asset, return on equity, gross margins, sales growth over one, three and five years and operating income growth over the same period. To be fair, we made the comparisons within industries so we would not be comparing airlines with banks.

The other important aspect to our evaluation, and the most difficult, is picking companies where management mattered. In an industry where all companies are doing very well, good management may not be the single most important key to financial and stock market performance. In difficult industries strong management may save a company. We looked for a combination of excellent long-term strategic decisions and tactical expertise in areas like marketing, operations, or manufacturing.

The companies are not presented in any particularly order. The first company on the list is not considered better managed than the company presented in the sixth or seventh place. We will cover two companies each day for the week so that by Friday the full list of ten will have been posted.

1. Altria. Altria (MO) is a unique combination of smart long-term decisions, marketing excellence, and global manufacturing skills. As with all companies that do well, a little luck may have played a role. It is sometimes hard to remember when investors were so concerned about the lawsuits against big tobacco that Philip Morris stock dropped to $18 in early 2000. Of course, it now trades at about $83.

Philip Morris bought Kraft in 1988. It was an intelligent hedge against its tobacco risks. The price tag was $15 billion. Then Philip Morris bought Nabisco for $14.9 billion in 2000. Kraft is now worth $56 billion and the renamed Philip Morris, Altria, holds 85% of the shares.

Philip Morris fought and won the majority of the litigation against its cigarette sales. The liabilities could have run well into the billions of dollars, but legal expertise plus a bit of luck allowed the company to avoid the huge majority of its financial exposure. And, its purchase of Kraft, in many ways a hedge, turned out to be a great financial success.

Altria has been able to hold on to 50% of the tobacco market in the US, and substantial portions of the market in Europe, South America, and Japan. The Marlboro brand is one of the most valuable in the world. According to Morningstar it outsells the next ten domestic brands and next seven international brands combined. Philip Morris has done this in a market where it charges a premium for its tobacco brands and still handily beats discounted competitors. The margins on tobacco have stayed extraordinarily high. According to the Altria 10-Q, domestic tobacco operations made operating income of $1.301 billion on revenue of $4.785 billion in the quarter ending June 30. International tobacco operations had income of $2.139 billion on revenue of $12.310 billion for the same period.

A great portion of the company’s success is due to decisions made several years ago, but Altria has had the management capacity to continue taking advantage of them.

2. General Motors.(GM) Probably the most controversial choice on the list is the world’s largest car maker. But, the company has managed its way from a “dead man walking” status at the end of 2005, to a position where it is considered a viable, recovering manufacturer with improving financial prospects, better quality products, and a product line that should keep the company healthy as it evolves. The company’s stock, which traded at $18.33 late last year is now at almost $32.

GM has taken over $8 billion in annual operating costs out of the company. Management has also been relatively successful in creating a better working relationship with the UAW, its largest union. It appears that the big labor organization understands that it will have to make considerable concessions or watch the largest car company fall on even worse times.

Some investors would argue that GM’s management moves have been largely driven by Kirk Kerkorian who owns 9.9% of GM’s shares and is represented on the company’s board. That theory does not acknowledge the fact that the company began improving products and making costs cuts as its share of North American vehicles sales dropped. Mr. Kerkorian may have been less of a catalyst than is generally believed.

The company continues to take risks that may not be justified like its new 100,000 mile warranty program, but it is in the taking of risks to save the business that GM makes it on to our list. The company is willing to bet that its cars will hold up for an extraordinarily long time.

According to Thomson Financial estimates quoted in the Wall Street Journal, GM should earn $4.06 a share in fiscal 2006 and $4.91 in fiscal 07. Aside from improving earnings, the company has made the decision to sell a majority stake in its financial services arm to raise cash. The decision was criticized in some quarters, but it shows the lengths that GM management will go to in an effort shrink costs and become competitive.

GM is not out of the woods yet, but the actions of management over the last nine months are a good indication that the company will not only make it. It will prosper.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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