These are dangerous days for Qantas as fuel prices soar, offshore outsourcing
sparks industrial unrest, and terrorism clouds travel forecasts. But Qantas has
something every company desires: a highly regarded chief executive. Five years
into the top job, Geoff Dixon cushions the airline from reality. Dixon, it is said, has done wonders in what
should be a dog of a business.

The airline business has little in its favour, yet Dixon makes the sun shine and investors largely
ignore the negative signals accumulating for Qantas, focusing instead on the
sterling job Dixon has done with a difficult assignment.

Is Dixon that good? The stock has quietly slipped
from about $4.00 to $3.20 since February. Yet Dixon remains broadly supported in the market.
Many believe Qantas remains a good long-term investment as a global stock on
the ASX.

A closer look at the numbers shows that Qantas has lifted profits from $419
million to $760 million a year during Dixon’s tenure. But Qantas under Dixon had accumulated borrowings, additional
share capital and retained profits of $5.5 billion. On the $5.5 billion that Dixon accumulated, Qantas earned an additional
$110 million last year. Had he put the money into a bank account earning interest
of 5.75% he’d have made $136 million.

Dixon is good, but he’s not that good. In fact,
it’s fair to say that were it not for the boon of franked dividends, many
investors would have sold out of Qantas by now.

If investing was all about numbers it would be very easy indeed. The best
companies would have the best numbers; the best numbers would instantly
indicate the best stocks. A computer program could solve the mysteries of
sharemarket investing.

But it’s not like that. Companies are run by highly persuasive, impressive and
often charismatic people such as Geoff Dixon. Any analysis of listed company
numbers will always be highly influenced by the cult of leadership.
Unfortunately, the numbers don’t speak for themselves. The chief executive gets
to interpret the company numbers first and that makes all the difference.

To try and divine the true dynamics of sharemarket companies, we have to find
the numbers that tell us most about management ability and fuse that
intelligence with informed character assessment.

It’s the lure of charisma that makes the market overrate or underrate stocks.
Big names like Dixon – achieving a return on equity (ROE) of 15% – get overrated. Names
that barely register on the radar, such as Dick McIlwain at Unitab (ROE 95%) or
Alan Wilson at Reece (ROE 31%), get underrated. Getting the numbers on a
company is good; getting “the number” on a CEO is better still.

The full story is up on the Eureka Report website here.

Peter Fray

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