Researching Ubiquity Networks Is A Pleasure

This is my last blog post for the foreseeable future so that I can devote more time to a research project: in-depth interviews of directors, former directors, major shareholders, and management of ten companies that combine high five year profitability, low debt and low capital expenditure requirements.

I selected those ten from 200 companies with the follow characteristics:

• market cap of over $5 million
• top five percent of all US-traded companies in terms of five year return on equity
• top five percent in terms of financial strength as measured by debt in relation to equity, interest coverage by operating income and balance sheet liquidity

from there, I sorted by capital expenditure requirement in relation to cash flow. Low capital expenditure requirements can indicate both competitive advantage and high quality of earnings. Finally, I sorted by price in relation to earnings, earnings growth and free cash flow.

Ubiquity Networks (UBNT) immediately stood out in this preliminary analysis. As I've been digging into the company, which I haven't yet gotten to the point of recommending, it has repeatedly occurred to me what a pleasure it is to study.

The company has a five year return on capital of 38% and a return on equity of 53%. Cash exceeds debt by a ratio in excess of three to one. Last year it repurchased $50 million of its own stock and has approved a similar level of share repurchases this year.

CEO Compensation Including Salary, Stock Options, etc. Versus Insider Ownership

• most companies pay their senior executive millions of dollars a year, and management and the board of directors own minimal stock. The lavish compensation often bears little relationship to company performance or shareholder returns
• Ubiquity's CEO takes no salary and receives no stock options. He owns just under 70% of the company

Ubiquiti's CEO is an entrepreneur (rather than a bureaucrat). Click here to read an article written by the CEO's blog, including a post from a month ago about developing the company's product line.

Here's a video of the founder talking about the founding and culture of Ubiquiti when he introduced himself to fans of the NBA team the Memphis Grizzlies, which he purchased.

I have also noticed an extraordinary level of board turnover. I need to look into that, try to talk to some former directors as well as management. And there have been a number of sales of stock by insiders, not including the CEO. The company is regarded suspiciously by many analysts for a variety of unorthodox practices including minimal administrative, maximum R&D staffing. 

Based on reviews and comments I've read, the company seems to have an unusually devoted customer base, bordering on extreme. 

In terms of quality, Ubiquiti seems to be an exceptional company, and a pleasure to research. I've identified ten companies which appear to have similar characteristics and look forward to publishing the results over the next few months.

This publication is in its early days. I don't yet have many subscribers. I've decided to change the name of the publication from Master Investor Portfolio Insight to Quality Company Analysis in recognition of the emphasis of this research on quality above all else. And of course, companies like Ubiquiti tend to be held by Master Investors. For example:

• Akre Capital Management
• Disciplined Growth Investors (by the way, the founder of DGI wrote an excellent book on investing entitled Benjamin Graham And The Power of Growth Stocks by Frederick K. Martin)
• Renaissance Technologies