October 13th, 1961: The results are in for the business that will have the highest relative outperformance in long-term value per-share returns in the Twentieth Century.
Are the roots of genius already visible? Is it clear why this company will go on to have one of the highest long-term relative Compound Annual Growth Rates (CAGRs) vs. its peers in American business history?
Henry Singleton’s Summary Stats:
1961 Sales $4,491,431
1961 Net Income $133,190
1961 Total Assets $3,730,811
1961 Shareholders’ Equity $2,476,781
1961 Average Shares Outstanding 519,550
Henry Singleton was an industrialist who mastered both capital and technology — the two forces that symbiotically propel humanity forward.[1] It is rare to find an individual who is exceptional at resource allocation in both of those domains. That’s why Henry was so special.
The company made $4.4mm of revenue and was profitable in its second year of operation. Consolidated net income was $133m which excludes a one-time gain of $40m (note the author uses m to represent mil meaning 1,000 not 1,000,000). The special tax credit of 75m indicates Teledyne was not profitable in 1960.
If we zoom forward to the twenty-first century, many young public companies, small or large, are not profitable even many years after becoming public. Cash is oxygen for a business: would you prefer to be a deep-sea diver who produces and can access oxygen cylinders whenever they’d like from home or one who has to ask strangers to donate them oxygen tanks each time they want to dive?
The public equity markets exist so that management teams can raise capital for their enterprises. However, Henry is showing us through his actions that sustainable businesses are built in such a way that they are sustainable extremely early on in their life cycle.
Later in the Teledyne story, Henry will report the consolidated annual operating results since 1961. However, such a presentation incorporates the results of businesses Teledyne acquired after 1961 as though Teledyne owned them in 1961.
That is anachronistic: as such, this bizstory will provide the operating results as they appeared in the Teledyne financial statements each year. In doing this, our intelligent investors can view the financial results as though they were potential investors back in the 1960s, 1970s, and 1980s.
Anyone can look back at historical annual reports and conclude an investment was a tap-in because one already knows the outcome. It’s much more valuable to interpret past business results as though they are being revealed now for the first time. Think of it this way: you are reading a novel without knowing the character arcs or culmination of the plot’s climax.
In 1961, when presenting the financial results, Henry chose to lead with his balance sheet; this demonstrates how integral physical assets were to the operation of Teledyne. This point will become more lucid the more we study Henry: he loved real estate of all types (both personally and professionally). In 2015, the Singleton family was ranked as the seventh largest landowner in the United States.1
Readers of our earlier articles are aware that the annual report is the combination of many small individual choices of the management team (or public relations firm) that produces the document. The more annual reports intelligent investors study, the more the subtler differences in format, presentation, and vocabulary stand out. In our anti-idea #6 post on Valvoline, we discussed how royalty companies often choose to lead with their balance sheet whereas most companies present their income statement first.
Note from the very start, Teledyne had a fiscally conservative balance sheet. This is evident by the fact that current assets were $2.3mm whilst total liabilities amounted to $1.25mm. When a company has more current assets than total liabilities this means it has more economic resources that it owns than what it owes.
To any potential buyer of Teledyne, in 1961, nearly $1mm could be knocked off the purchase price because the acquirer would instantly receive a metaphorical bank account with $1m. Of course, that’s an oversimplification as current asset line items have different liquidation values or cash may be restricted for specific uses like paying down debt. Nonetheless, that is a useful way to think about it.
Yet despite this fiscal conservatism, Henry staunchly invested in new areas of scientific and technological discovery:
“your company’s objective has been from the beginning to become a major developer and manufacturer of a broad line of electronic systems and equipments, and of the electronic instruments and components that go into such systems.”
He believed that there were two parts to supporting this objective:
“(1) the establishment of a profitable and expanding operating base, and (2) the assembly and effective utilization of a strong research and development organization.”2
In year one, Teledyne “invested more than $350,000” in R&D.3
Conventional wisdom in investing circles posits that value and growth are opposite ends of the investing spectrum. The “value” investors typically express this idea by criticizing growth investors like Cathie Wood whereas “growth” investors seem to deplore Benjamin Graham and likely refuse to read Security Analysis. Henry is particularly interesting because he demonstrates that fiscal conservatism and technological growth are not opposed but synonymous. The unifying principle behind both is doing more with less.
Your brazen and rather over-zealous author referenced Warren’s perspective on stock option compensation plans when he reached a final stage interview with a Series-B funded startup in early 2022. Total faceplant. All advice is context-dependent and Warren’s criticism of stock option compensation plans was directed toward CEO’s of S&P500 companies, not innovative start-ups.
For a young company, stock options are a useful tool to attract talent that might otherwise be swayed by bulge bracket salaries at larger firms. A pertinent reminder that “I don’t know, it depends” is often a statement of wisdom masked as ignorance. In 1961, stock options were granted at a price no less than 95% of the market price to select Teledyne team members.
In 1961, Teledyne acquired three businesses. Though Warren has frequently cited Henry & Teledyne throughout his career, Henry’s approach to acquisitions, and what happens after the company has been acquired, differs remarkably from the Berkshire (Hatha-)way of operating. Both are decentralized, but where Warren leaves his managers and business operations alone, Henry implemented a standardized financial reporting system and purposefully combined complementary business units to unlock greater value for shareholders.
1961 Acquisitions:
Amelco Inc
Mercury Transformer Corporation
Handley Inc
Palmer Instruments
Linair Engineering Inc
“The trimmer potentiometer business of Handley Inc. and the quartz crystal business of Palmer Instruments have been consolidated with the electronic components business of Linair in a separate building in Hawthorne, California under the name Teledyne Precision, Inc.”4
From the outset, Henry operated a tightly run ship whilst committing to significant R&D investments. In 1961, he aggressively grew Teledyne Inc. by acquiring various companies with different specialisms in the electronic components and systems industry and was not afraid to attract talent using stock options. Henry instantly combined various operations to form new entities under the Teledyne umbrella. A bold move for someone only in their second year of business. However, this was just the beginning of Henry’s bold escapades…
“100 Largest Land Owners in America” The Land Report (2015).
Henry Singleton, 1961 Teledyne Inc Annual Report (1961), pg. 3.
Singleton, 1961 Teledyne…, pg. 5.
Singleton, 1961 Teledyne…, pg. 4.