3 Companies Soaring with Efficiency

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Net Income per Employee or NIPE (sometimes called revenue per employee) is a company’s net income divided by the number of employees.  I like to compare it to the efficiency of the workforce in generating real monetary results.  It is not as mainstream a metric as other popular indicators like market cap, P/E ratios, or EPS, and is often not mentioned at all unless you do the calculation yourself, but I think it can offer further insight as to where the company is today and where it can go in the future.  The NIPE value can often show that you don’t need tens of thousands of employees or careless expansion in order to compete with the big players in the same industry when it comes to striving towards efficiency. 

Boston Beer Co

With only 840 employees on the full-time payroll, Boston Beer Co (NYSE: SAM), famous for their Sam Adams brand of beer, produced a net income in 2011 of over $66 million.  Doing the math you reach a NIPE of $78,571.  By comparison, Anheuser-Busch who has 116,278 employees and generated $7.959 billion in net income in 2011, and considered “The King of Beers”, has a NIPE of $68,448.  

What started as a creation in early 1985 by founder and Chairman Jim Koch, SAM is only starting to catch up as a stock in recent years, and in terms of sales in 2011, it is now the largest American-owned beer maker.  What I like about SAM (other than their beer) is that they take pride in creating a quality product and realize that slow and steady wins the race.  Much like other successful companies outside their industry, they take pride in inventing new products year-round, take chances on using different ingredients, and set the standard of what it means to be a premier craft beer company. 

In the past decade, net income has gone from just over $2 million for the December 2002 quarter to nearly $20 million in the latest quarter.  This nearly ten-fold increase in net income has helped the share price soar over 615% in the same time frame.  Even with this rise in share price, the market cap for the company is only $1.46 billion compared to $141 billion for Anheuser-Busch.  What I’m saying is that SAM has plenty of room to move higher in share price.

In my opinion, SAM should be the prototype model for any company of any industry.  Employees have strong input to the creation of new products resulting in high morale and the CEO is very much in touch with the workforce.  CEO Jim Koch has stated that you will never see him on the hit reality show Undercover Boss because at some point during the year, he works directly with nearly everyone in the company.  As a company they are aware that next year should be the focus instead of celebrating today.  They maintain two years supply for essential hop varieties in order to limit the risk of an unexpected reduction in supply like in 2008, in addition to contracts for other necessary ingredients like wheat and barley through 2013.  By taking these steps to secure ingredients at the lowest prices possible, they are able to see gross profit per barrel increase to $117.73 from $113.38 despite increases in commodity prices and consequently costs of goods sold.  They are essentially staying ahead of the price curve because the beer they eventually produce a year or two from now will be using ingredients based on today’s commodity costs. 

<img src="http://media.ycharts.com/charts/6535232fafcf43d396563679e97ea0e1.png" />

SAM Net Income Quarterly data by YCharts


Ranked in the top 3 on many ‘Best Small Companies in the USA’ charts that uses sales, sales growth, EPS growth, and price change for small net income companies, SolarWinds (NYSE: SWI) is just getting started as a stock after completing its IPO in early 2009.  SWI has nothing to do with solar energy which is a good thing given that solar stocks for the most part have declined the past few years.  SWI is a developer and marketer of network, applications, virtualization, and storage management software – basically IT.  They are relatively new to the market and even after soaring over 300% since their 2009 IPO, they only have about a $4 billion market cap – relatively small in the software and technology sector.

What is impressive is their low 628 employees producing $62.4 million in net income for the company in 2011.  This results in a NIPE of $99,363.  Matching SWI up with another big-time company involved in IT as well as numerous other computer services, IBM has an NIPE of just $36,586, given their 433,362 employees producing $15.8 billion in net income in 2011.

SWI has a lot going for it.  Unlike most businesses, they were profitable in their first year of business.  SWI is also heavily involved in acquisitions.  To date, Neon Software, ipMonitor Corp, Tek-Tools Inc., TriGeo Network Security, DameWare, DNS Enterprise, and Hyper9 are some of SWI’s strategic acquisitions.  According to their last earnings report, they expect to continue to acquire additional companies and integrate them into the business.  Even with the cost of these acquisitions over recent years, SWI currently enjoys a net profit margin of 31.4% which is over twice that of IBM.  Additionally, net income has over doubled from 2009’s $29.5 million.

I believe SWI has a lot more room to grow as a stock at the pace they are at.  As they continue to acquire domestically and globally, net income should continue to increase.  Revenue from foreign subsidiaries increased year-over-year to 22.2% up from 21.3% of total revenue.  Perhaps a decade from now, SWI can make the top 3 on most ‘Best Large Companies in the USA’ charts.   

<img src="http://media.ycharts.com/charts/781b692d2345af54da9f3f3ae024febf.png" />

SWI Total Return Price data by YCharts

B&G Foods

B&G Foods (NYSE: BGS) has only 739 full-time employees that produced $50.2 million in net income in 2011 for an NIPE of $67,929.  What is more amazing is that in 2009, the net income was only $17.4 million. General Mills on the other hand has 35,000 employees that made $1.6 billion in 2011 for an NIPE of $44,780.

BGS operates in a single industry segment and who manufacture, sell, and distribute a diverse portfolio of shelf-stable foods across the US, Canada, and Puerto Rico.  Products include hot cereals, fruit spreads, canned meats and beans, spices, seasonings, hot sauces, syrup, salad dressings among others under brands that include Cream of Wheat, Joan of Arc, Mrs. Dash, Regina, and of course B&G. 

Over the past 5 years, the stock price has gone up nearly 170% and that doesn’t include the 4% dividend that it consistently pays quarterly.  For the third quarter of 2012, net sales increased 15.9% and gross profit increased 33.4%, both year-over-year.  According to the earnings report, this huge jump in gross profit is attributable to pricing gains and a sales mix shift to higher margin products.  I believe the wounded economy has helped out companies like BGS because people are deciding to eat in more, and while doing so, would prefer to add some spice, seasonings, and other flavors.  This is proven in the earnings report as net sales in Las Palmas, Maple Grove Farms of Vermont, Ortega, Ac’cent, and B&M products increased by 15.9%, 5.0%, 1.2%, 8.7%, and 7.5%, respectively.  Cream of Wheat on the other hand, a product that cannot be more bland and plain if you ask me, dropped in sales by 5.8%. 

<img src="http://media.ycharts.com/charts/567f6964b829bf8ef3d6a665532f9d09.png" />

BGS Total Return Price data by YCharts

Power of Efficiency

In engineering, and in particular, thermodynamics and power generation, there is an upper limit to efficiency – 1.0 or 100%.  An engine cannot be greater than 100% because that would go against the very basis that output energy cannot exceed input energy – also known as conservation of energy.  However, when it comes to businesses, there is no limit to the NIPE.  In business, synergy occurs where the whole (entire workforce) is greater than the sum of its parts (individual employees).  This is proven by the current NIPE leader Apple who’s NIPE has grown significantly in recent years to $579,167 with 72,000 employees generating $41.7 billion in net income in 2011.  NIPE also gives insight as to why businesses struggle to grow and makes outsiders sometimes question the purpose of laying off large numbers of the workforce as a means to ‘improve’ the company.  How does only laying people become the sole solution if the NIPE was low, declining, or even negative?  This is especially true when trying to locate growth stocks.  A company like Wal-Mart generated $15.7 billion in net income in 2011 but they also have 2.2 million employees on the payroll.  Would you rather seek growth stocks for your portfolio of companies that have an NIPE of just $7,136 like Wal-Mart or would you rather locate companies that have steadily increased production, employees, and consequently net sales over several years like Boston Beer? 

mikecart1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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