In this edition of Notes from the MIAM Research Desk we continue to focus on why our interactions with companies’ management are so crucial to our research process. In particular, we will discuss an example of how management’s clarifications of ambiguous information provide us an information advantage about that company.
In our last letter, we described our experience discussing domestic steel fabrication capacity with management of Fluor Corporation (FLR) and how it deepened our understanding of Gulf Island Fabrication, Inc. (GIFI)’s fabrication yard. During calls with senior management, we rarely ask questions about the company’s financial results. It’s not necessary in most cases. The financial results are publicly available, and we perform our own analysis internally as both individuals and collectively as a research team in order to digest the numbers. What we ask management during our calls is to explain the space between the numbers: the trends, the causal relationships, the outliers, and the human components of the business. We also ask questions about detailed aspects of financial accounting and reporting to better understand any inconsistencies we find during our review and note changes in the format in which the company reports.
For example, our research team recently had a video call with Callon Petroleum Company (CPE) and asked about the difference between the amounts shown on the balance sheet for accounts payable and accrued liabilities and the amount shown on the cash flow statement for the same items. The change in the balance sheet number from the prior quarter should have tied out with the reported use of cash for the current quarter. CPE didn’t have an immediate answer to our question during the call and had to discuss the issue internally before responding to our question after the call with a detailed written answer. The discrepancy that we noticed between the two numbers was minute as a percent of revenues and a relatively insignificant component our valuation methodology. However, our longstanding understanding of the company and how it reports its results allows us to drill down on the most miniscule issues. To respect management’s time, our aim is to only ask questions that cannot be found in companies’ published materials or could not be understood easily through outside sources. Our ongoing (often longstanding) relationship with companies’ senior management and our thoughtful questions to them provides us the credibility to receive thoughtful answers, even when it requires additional work on behalf of management or their teams. The willingness to give us thoughtful answers and spend additional time discussing issues beyond the scope of their own companies is a testament to the structure of our research process, the time spent by each of our team members to analyze companies prior to calls, and the track record MIAM has built over years of interacting with companies’ senior management.
The concentrated structure of the equity and fixed-income strategies enables our research team to turn over every stone on both portfolio companies and new ideas. The information advantage gained is through speaking with senior management is critical to our analysis, gives us the ability make sensible qualitative-based adjustments to quantitative data, and allows us to pursue our never-ending curiosity about companies for the betterment of our clients.
As always, please reach out to MIAM if you have questions or would like to discuss any particular companies or ideas.
 We are mindful of companies’ obligations under Regulation FD, 17 CFR 240, et seq., and do not ask for information beyond what has already been disclosed to the public. Instead, we ask for clarification of reported but ambiguous results, guidance, infographics, or comments.
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