Foolish (with a capital "F") investors are a rare breed. We come in all shapes and sizes, from all different backgrounds, and many different locations, but all will agree that when it comes to picking a company to invest in, understanding the quality (or otherwise) of management is incredibly important.
With that in mind, the developments at Echo Entertainment Group Ltd (ASX: EGP) over the past week are a great reminder to investors of the profound effect that an unstable management team can have on a business.
What happened?
As my fellow foolish writer reported during the week, Echo's results for the six months to 31 December were "particularly uninspiring with reported net profit after tax affected to the tune of $15.5 million by one-off costs related to financing arrangements, a lower win rate in the VIP rebate business and the effect of new levies and charges imposed by government regulatory bodies".
"Gross normalised revenue declined 4.8% to $929.6 million while like-for-like normalised earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 11.1% to $221.7 million". Add to that the fact that the CEO resigned after only a year in charge to be replaced by the current CFO and you have a fairly disappointing results presentation.
The lesson
An analysis from the team at the Australian Financial Review noted that a number of major broking houses had grossly overestimated the earnings potential of the group prior to the result. This led to a 6% decline on the day of the result, which prompted the question of whether the broking firms had overestimated the quality of management.
Fund managers and foolish investors might have compared Echo's newly formed leadership team with that of rival Crown Resorts Ltd (ASX: CWN), which is run by the incredibly business savvy and opportunistic James Packer. While Mr Packer and his team have a history of quality investment decisions and operational performance, the Echo team has not yet proven this. The bullish analysis from brokers pointed to "the unrealised earnings potential of the casino operator" which invariably has not yet been realised by Echo's management team. Only time will tell if the new CEO can unlock the hidden shareholder value in Echo, but until it can demonstrate this through financial results the company's share price will likely tread water.
Foolish takeaway
Quality of management is an important factor to consider when assessing a company. Great management will be able to realise a better return on investment, higher earnings and deliver better returns for investors. Importantly though, quality management must also be matched by the quality of the business. As noted by Warren Buffett: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."
