Analyzing Labor and Productivity

 | Sep 04, 2013 | 10:00 AM EDT
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In honor of the Labor Day weekend we just celebrated, I want to expand on the concept of sales per employee, which I  first touched last week while focusing on the restaurant industry.

Sales per employee is an important factor at which to look when analyzing companies because this number offers meaningful insight into the nature of the business. The sales per employee reflects the productivity of each employee, naturally. More sales being generated by each employee means more value being created (for society) by those employees.

In businesses in which sales per employee are high, there is plenty of cushion to reward employees monetarily and still provide strong returns to capital owners. Where individual "value add" is low, companies must employee armies of people to deliver the product, creating more challenging execution and management issues.

The table below shows a selection of mid-and large-cap companies sorted by sales/employee. You will immediately notice that the list sorts itself out by industry. Not surprisingly, highly capital-intensive-businesses, especially in energy, have high sales/employee. Most of the value is created by the huge refineries and other plants built over the years.

In contrast, the companies at the end of the list need a lot of people to deliver product. Not surprisingly, they are in more service-intensive and low-price point industries, especially retail, restaurants and the like. Consider H&R Block (HRB) for example: They need a lot of people to do tax returns every spring, and each person can only do so many in a day. When a business is not scalable, it can only grow with more hiring, and that will limit the margin expansion potential.

The key here is to uncover the gems that rely on intellectual property in some fashion. These companies create high value per employee not from consuming a lot of capital, but from the high value of the work effort. Apple (AAPL) was always that sort of company, and they would probably look even better on this list if they didn't have so many retail store employees.

Capital management is another high IP business, as Och-Ziff (OZM) shows here. Netflix (NFLX) is notable because it has reached the point of attractive scalability; they do not need to balloon the workforce to sign up millions of subscribers.

This list is but a sample of the names you can analyze, of course. As you work through business models, be sure to add sales per employee as a key indicator to study in understanding the business.

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