Bad Management Puts Companies in Peril

Today’s message begins as a standard compare/contrast essay, but ends with an investment tip. I know some readers will be tempted to skip to the tip, but I caution you, if you do you’ll miss some good stuff!

The story starts last Friday. Because my son had the day off from school, we got a jump on the vacationing hoards by driving up to Vermont on Thursday evening and skiing Mad River Glen on Friday.

Saturday we drove six miles south and skied Sugarbush – with a few thousand other people – and then drove home, marveling at the differences between the two.

Sugarbush, for starters, is a major destination resort. Not only does it have sixteen lifts and 111 trails, it also has snowmaking on 70% of its terrain.

Mad River Glen has just four lifts and 45 trails … and no snowmaking.

Many of Sugarbush’s “trails” are more like boulevards, groomed so well that a blind person could ski them by following another skier. It’s heaven for beginners and intermediates.

Most of Mad River Glen’s trails are so narrow and ungroomed that if you close your eyes for a second you end up in the trees. Expert skiers abound.

Mad River Glen has been ranked by Ski Magazine as the most challenging ski area on the East Coast of the United States. Its motto, which you may have seen on bumper stickers, is “Ski It If You Can.”

Sugarbush’s slogan is “Be Better Here.” And they’re not just talking skiing.

Sugarbush has condos, restaurants, lounges, a health club, pool and golf. It’s your standard four-season resort.

Mad River Glen has a little cafeteria line and a pub.

Sugarbush has a uniformed policeman patrolling the area where people leave their bags while they ski.

Mad River Glen has a guy in a plaid shirt and whiskers running the single-chair lift.

About that single chair. It’s one of only two still operating in the U.S. (The other is at Mt. Eyak in Alaska.)

Mad River Glen’s original lift, a marvel of engineering at the time, was completed and first run in 1948. Eventually, it got old and cranky, and had to be replaced.

But while 99 out of 100 areas would have taken out a loan and bought a spiffy new high-speed quad lift that would take ten times the number of skiers up the hill per hour, the powers that be at Mad River Glen simply raised $1.5 million and replaced the single with a copy of the old that’s just a smidge faster.

The benefit? It keeps traffic on the hill to a minimum. And that’s the way they want it at Mad River.

“They” in this case is the Mad River Glen Cooperative, a group of skiers who like things they way they were 10 or 20 years ago … or longer. Call them old hippies. Call them conservationists. They’re the owners of the ski area, and they’re preserving the legacy they love.

If you want, you can join the Mad River Glen Cooperative and have a say simply by buying a share. The current price is $2,000. This gets you a discount on lift tickets, too.

But no matter who you are, you can’t snowboard at Mad River Glen. Snowboarders aren’t allowed. They scrape the snow off the trails, they have a hard time riding that single chair, and the Cooperative just doesn’t want them.

Sugarbush, however, welcomes snowboarders … and anybody else with money … with open arms. For my son and me to ski Mad River Glen on Friday cost $70. To ski Sugarbush on Saturday cost us $138.

And where does that money go?

A lot, of course, goes to operating costs; I’m guessing there were more than 200 employees working at Sugarbush this weekend.

The remainder, the net, goes into the pockets of the ownership group, Summit Ventures, whose majority owner is Win Smith, a former VP at Merrill Lynch.

Since buying the resort in 2001, Smith has replaced and reconfigured some of the lifts, made further snowmaking improvements by adding low energy nozzles to the system, and most recently completed the $60 million Lincoln Peak Village, which includes condos, a hotel and a restaurant.

Now, I’m just guessing here, but the odds are that Summit Ventures has taken on some debt to accomplish this expansion. The co-op owners at Mad River Glen, by contrast, raised their own $1.5 million, and have no debt.

So the question today is whether the nationwide credit crunch has cut into the expected sales of condos in Sugarbush’s sparkling new development and thus the group’s ability to pay back its debt.

It’s more likely however — because all parties are aware that it was excessive debt that led to the downfall of the resort’s previous owner (Les Otten’s American Skiing Company) — that any debts owed by Summit are reasonable.

Anyway, thanks to Mother Nature’s bountiful snows in the East this year, cash flows at both ski areas appear quite healthy. As a lover of the sport, I hope they both prosper.

If I were returning to Sugarbush, I’d bring my snowboard and enjoy some high-speed cruising on smooth-and-steep Organgrinder.

But given a choice, I’d take my skis back to gnarly old-fashioned Mad River Glen and have another go at steep, bumpy, tree-strewn Fall Line.

When that will be however, I have no idea. Today’s Monday, and even though it’s President’s Day, I’m back at the office with all the hard-working Cabot employees.


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Now the investing segment, which is all about management.

Throughout the decades at Cabot, we’ve learned that one of the most valuable components of a growth company is the quality of its management. It takes excellent, innovative management to steer a fast-growing company down the highway of success.

Contrarily, bad management can wreck even the most promising company.

Today’s example is Zoltek (ZOLT), a company we’ve been keeping an eye on since 1996.

Zoltek is in the business of making carbon fiber, a space-age material used in sports equipment, wind turbine blades and car parts, and is working to drive the price of the material down so that new applications will embrace the stuff and global demand will mushroom.

We first latched onto this dream back in 1996, when we added ZOLT to the Cabot Market Letter’s Model Portfolio at a price of 16.

Sales and earnings were expanding rapidly back then, and CEO Zsolt Rumy was in the process of developing new factories in his native Hungary.

Eighteen months later, the stock hit 66!

But earnings began to slow, new markets failed to develop, and by 1999, the company was losing money! (We sold for a healthy profit in 1997.)

The stock bottomed at a buck in 2002, and the money-losing trend continued all the way through 2005.

But was Rumy replaced with a better manager? No, he owns 26% of the company! (Notice the name.)

Eventually the tide turned, in part because the wind turbine business provided significant new demand. Buyers began accumulating the stock again, and ZOLT was once again making a profit.

Last summer the stock got as high as 52, and earnings almost returned to their levels of 1998.

But then came last week’s report on fourth quarter results. The sad news: Zoltek had failed to meet analysts’ earnings estimates. Worse yet, the company hadn’t even achieved its own revenue projections!

The “excuse”: seasonal shutdowns in Europe and overlooked customer inventories.

In response to this disappointment, the stock plunged, on huge volume, from 33 to 26.

Well, they say a tiger can’t change its stripes, and it appears Zsolt Rumy is still guilty of either excessive optimism or just bad management. We don’t know, but we know enough to avoid the stock as long as he’s still in charge of the company.

Interestingly, the bad news contained in the earnings report was not news at all to some people. They’re the ones who helped push the stock down from 52 last summer to 33 before the earnings report.

These sellers knew the company’s growth was below expectations, and anyone who took time to look at the chart could read its message clearly.

Editor’s Note

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Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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