Here's the second set of readings, this time focused on companies and business in general. While it's always valuable and interesting to dig into company performance and outlook our little multi-part series on earnings puts another perspective on it (The Heart of the Matter: Profits vs Earnings ?,Have You Seen the Elephant ?: More on Earnings, Review the Bidding, Count the Cards: EPS Growth Rates). Or so we hope - the general economic and business environment matters enormously. As does the state of markets and credit which help determine outlooks and valuations. But at the end of the day the sine qua non, a Latin tag, meaning "that without which there is no other", is earnings. And trickery aside - and don't we have a lot of that is company performance. The sine qua non. Or to quote Harold Geneern:
"In business, words are words, explanations are explanations, promises are promises, but only performance is reality."
A bunch of last week's news certainly brings that home, the primary example being Merrill's giant writedowns. The questions you have to ask yourself boils down to what were they thinking ? Not just about the continued efforts by all parties to avoid marking to market but where were the banks fundamental skills in risk management ? Where was the CEO ? And the Board ? So as you skim over this week's readings think of it as due diligence on company's - what are they thinking and what does that mean for where they're going ?
The pointers start with three interesting more general articles. One on the rise in performance improvement consulting which is finally picking up and is yet another canary. The second on the level of effort most companies elicit from their employees - 1 in 5 will make an effort, the other 80% are just there to collect a paycheck for minimal effort (previous proposals are Aholes, Shirkers and Performance) where, to quote myself:
But, I'm more convinced than ever that good HR is a mandantory strategic performance requirement and excellent HR is a competitive differentiator.
The final general article is on the recovery of Scwab from it's post-bust near-death experience. Another case study in how deep revisions to the business model, innovation, customer value focus, painful cost controls and execution, along with good people policies, come together to re-vitalize a business.
All these themes, and questions, are illustrated in the sets of articles below. First is a set on the Finance and Banking Industry, starting with the admission that they knew the problems were coming but were too trapped in the "dance" to give up the greed. Which says a lot about strategic foresight and cojones doesn't it ?
Then there are some wonderful Greek Dramas, only in the real world, beginning to really play out:
- WMT (aging, mature business model and lack of innovation) vs Tesco in the US (adaptive, innovative, customer-focused)
- Detroit (ditto only compounded over decades of denial) vs emerging Asian markets and their need for small, affordable cars. Who'll figure out how to make those at a profit ? Whee !
- GE in China - if there's an old-line company which is re-factored itself into new lines of business and other geographies it's GE. A strategic opportunity for long-term investing though you may want to see what happens during the next few months.
- Apple vs MSFT - iPod, Leapord, etc. vs milking the mainstays. MSFT is still a big, decently run company. But stop to consider two things. First, none of it's new initiatives have taken off despite years of $B investments and in it's bread-n-butter operations it's still living off monopoly rents not excellent execution. Anybody who doubts that is invited to go back and compare Longhorn vs Vista. HINT: search on Microsoft and Code Red :) !
Stories on MOT, Verizon and Qualcom maintain the themes.
Business
Firms Seek Outside Guides For Help in Credit Crunch As credit markets tighten, U.S. companies are finding it increasingly difficult to ignore their operational weaknesses. And a growing number of them are turning to consultants that specialize in corporate restructuring. The Turnaround Management Association, which polled 190 turnaround, financial-advisory and consulting firms, says that six out of 10 respondents reported that inquiries, engagements and revenue have increased at least 10% in the past year. The surge marks the end of a years-long drought. The firms attribute the rise in inquiries to the difficulty companies have had obtaining money since the subprime-mortgage crisis hit. Most firms said clients were reporting increased difficulty getting refinancing or merger-and-acquisition financing. Turnaround firms say most of the inquiries they recently have received are from banks and lenders concerned about their borrowers. Bank-and-lender inquiries leapt to 70% this year from 57% in 2006, the TMA poll showed. The firms say they also are getting calls from attorneys, hedge funds and company managers. Lenders worried about their corporate borrowers turn to turnaround firms for a variety of services, such as developing strategies to improve operations of the distressed companies.
'Hey, boss, show me you care'
Only one in five workers worldwide is willing to expend extra effort on the job, according to a study that says the top reason for disengagement isn't money, but senior management's sincerity and caring. Only 21% of workers worldwide are "engaged" -- that's human-resource-speak for ready to expend some extra effort at work -- while 38% are either disenchanted or disengaged, according to a new survey. The survey found 21% of workers worldwide are engaged, and another 41% are "enrolled," which means they're on the road to engagement…More than 80% of the engaged employees say they contribute to the quality of company products, services and customer satisfaction, while only 40% of disengaged workers agree. Engagement helps retention too: About 50% of engaged employees say they have no plans to leave their company versus 15% of the disengaged. In a separate study, Towers Perrin assessed data on 40 global companies over a three-year period, measuring employee engagement at a certain point and then looking at the companies' financial results over the ensuing three years. Companies with highly motivated workers enjoyed a 3.7% increase in operating margins and a 2% rise in net profits, while companies with a lower level of worker commitment saw both measures decrease slightly.
Learning new tricks The old business model of attracting new customers through cheaper transactions over the Internet didn't completely disappear. But the firm's management did shift gears in a rather dramatic fashion. The result was a much leaner and diversified company. For example, at its peak in early 2003, Schwab had a payroll of around 27,000 employees and operated about 400 branch offices. Today, that's down to around 300 branches and a payroll of 13,000. Besides retail investors, the company's focuses on roughly three million 401(k) plan participants it serves in one way or another. At the same time, Schwab's management team has built what it believes is the largest network of independent advisers. The firm services accounts and refers more sophisticated planning work to its roster of 5,500-plus outside financial advisers. Schwab's revenue from investment management-related fees at third quarter's end was 47% of the total, almost double what they were just a few years ago. In the late '90s, about 60% of the firm's revenue came from transaction-based business. Through the third quarter, such trading-related revenue was down to some 17% of the total.
Companies
Bankers: We saw credit crisis coming The world's biggest bankers said Sunday their greed made them powerless to prevent the train wreck in credit markets, even though they recognized that markets weren't pricing the risk of subprime default appropriately. Despite their warnings, Deutsche Bank and Citibank have been forced to write off billions as the value of their portfolios of complex structured securities tied to subprime loans have plunged. The banks knew the dangers of buying and selling securities that were untethered to reality, but had to keep buying and selling them because of the pressure to keep profits growing, the bankers said.
Bankers' Ranks to Be Thinned By Bloodletting to Come Some day over the next few weeks, Wall Street executives are going to meet to make some bad decisions. They are going to decide to batten down the hatches, trim away the dead wood, button up for the battle ahead -- use whatever tired cliche you want. They sure will. Some people at these meetings are going to be asked to ``pursue other opportunities.'' The people who report to them are simply going to be fired. As you probably have heard, the financial industry has had a pretty nice few years. This isn't shaping up to be one of them. This is the year of subprime mortgages and structured investment vehicles and, at least for some firms, such as Bank of America, big losses on certain kinds of investments. Some firms have already made cutbacks, but so far, they have been pretty minor. What happens next is that the top brass meets and decides which businesses have been profitable and which businesses have not, and decide where they are going to spend their money. Then they cut jobs, and in some cases, entire departments. Entire departments? Whole lines of business? Those are the bad decisions.
Merrill Reports First Loss Since 2001 After $7.9 Billion Subprime Charge Merrill Lynch & Co. reported its first quarterly loss in six years after a larger-than-forecast $7.9 billion of writedowns for subprime mortgages and asset- backed bonds, the most by any Wall Street firm. Merrill's failure to meet its own projection shows how Chief Executive Officer Stanley O'Neal misjudged the severity of the decline in the credit markets since July, after late mortgage payments from borrowers with poor credit histories surged. The charge is the biggest in the firm's 93-year history and the first major setback in O'Neal's five-year tenure. Stan's still the man, but for how long? Merrill board will show chairman-CEO O'Neal the door, predicts David Weidner. Merrill's O'Neal losing appeal Hard-hitting management style made Merrill Lynch Chief Executive Stan O'Neal a lot of enemies.
o Merrill Lynch CEO Stan O'Neal Under Pressure to Resign After Record Loss Stan O'Neal is facing pressure to abandon his post as chairman and chief executive officer of Merrill Lynch & Co. after misjudging the contraction in credit markets and posting the firm's biggest-ever quarterly loss. Merrill's directors met yesterday to discuss his potential departure and may make a decision this weekend, the Wall Street Journal reported, citing people familiar with the matter. The New York Times said O'Neal discussed a possible merger with Wachovia Corp., angering his board. CNBC reported that he told friends he'll probably be out of a job this weekend. Merrill surged the most in five years in New York trading yesterday on speculation O'Neal, 56, will be ousted and the world's largest brokerage will become a takeover target.
AIG may take $9.8 billion subprime hit American International Group could take a $9.8 billion hit from its exposure to subprime mortgages, Friedman, Billings, Ramsey analyst Bijan Moazami estimated on Thursday. The write-downs will be big, but manageable for one of the world's largest insurers with $104 billion in shareholders equity and the ability to generate third-quarter earnings of $4.4 billion, the analyst wrote in a note to clients. Merrill Lynch's surprise $8 billion, subprime-related write-down this week has sparked fresh concerns about the impact of this summer's credit crisis on financial-services companies. AIG has the largest subprime exposure of any insurers he covers, Moazami noted. Shares of the company fell 3.2% to $61.79 on Thursday amid speculation it could be hit by big write-downs. Spokesman Chris Winans said the company doesn't comment on market rumors.
Buybacks, dividends in store for Wal-Mart Wal-Mart Stores Inc., facing slowing U.S. sales, may benefit from further trimming its U.S. store and square footage growth, and using the saved capital to buy back shares or pay dividends, analysts said. Ahead of its two-day analyst meeting that begins Tuesday, analysts and investors said the world's largest retailer, which already scaled back its supercenter store growth plan, can use some additional cutbacks. Wal-Mart in June said it will increase U.S. square footage growth by about 4% to 5% for fiscal years 2008 and 2009 and lowered its capital spending forecast to $15.5 billion from $17 billion. Same-store sales at U.S. Wal-Mart stores in the first 35 weeks of the year rose 0.8% this year, compared with 2.5% last year after the retailer failed to lure higher-income shoppers with more upscale apparel and home furnishing products, analysts said. The retailer last week cut prices on 15,000 additional items, 20% more than last year, as it said it plans to be more aggressive with price cuts heading into the holidays, many retailers' biggest sales and profit period.
· Wal-Mart's woeful sales tale With its U.S. sales growth expected to slow further over the next three years, Wal-Mart executives told analysts Tuesday that the retailer will open fewer stores at home and instead boost its expansion overseas. Wal-Mart's chief financial officer Tom Schoewe said the world's largest retailer expects overall sales to grow about 9 percent this year, slower than last year's increase of 11.7 percent. More important, Schoewe said Wal-Mart's sales growth will further slow, to between 5 and 8 percent growth over the next two years.
Tesco Takes On U.S. Shoppers The British retail giant is bringing its concept of midsize, urban grocery stores to the Southwest. After all the research, can it succeed stateside? It's a big gamble, even for Tesco, which books $86 billion a year in revenue. The company, the largest retailer in Britain and among the largest supermarket chains in the world, already has announced 122 planned store locations in Phoenix, Las Vegas, and Southern California. It has committed to invest $2 billion over the next five years on the venture. Here's what Tesco has let out so far. Fresh & Easy stores will each be 10,000 square feet—roughly four times the size of a typical convenience store and one-third as large as a traditional supermarket. This mimics the format of the chain's highly successful Tesco Metro outlets in Britain, which dot the country in urban locations too small to support a full-size supermarket. Taking cues from consumers who said they were overwhelmed by choices, Fresh & Easy will offer an edited assortment of items—everything from freshly bottled fruit juices to detergent—at prices lower than convenience stores. At the center of each outlet will be a space called Kitchen Table, where customers can sample products. The company hopes to keep prices low by selling big volumes of those few chosen items and relying on trusted suppliers, some of which it brought from Britain to the U.S. To lower distribution costs, Tesco is clustering its stores in urban markets that it can supply quickly from a giant new distribution center it has built in Riverside, Calif., about an hour's drive east of Los Angeles.
Small Cars, Big Potential for Asian Makers Small, low-cost cars have abruptly become the next frontier for the global auto industry, after almost 20 years in which major car makers dismissed such vehicles as a low-profit afterthought. As gas prices keep rising, consumer tastes around the world are shifting toward smaller, more fuel-efficient cars. In the U.S., drivers are trading in gas-guzzling SUVs like the Nissan Armada for smaller models like the subcompact Honda Fit. In developing markets, where sales are exploding, first-time drivers are starting out with the smallest, cheapest cars. Global demand for small cars is expected to grow by 30% to 27 million vehicles by 2013, with the growth coming mostly from developing markets, according to auto research firm CSM Worldwide Inc. Demand for big SUVs during that time is expected to drop 4%, to 10 million vehicles.
General Motors Takes Sales Lead Over Toyota on Growth Outside of the U.S. General Motors Corp. outsold Toyota Motor Corp. in the first nine months of the year, buoyed by sales outside the U.S., in the battle to extend its 76-year reign as the world's largest carmaker. GM sold 7.06 million vehicles through September, taking a lead of 10,000 units over Toyota's 7.05 million, the two companies said in separate statements. At the end of the first half, Toyota led by 39,000 vehicles. Toyota's sales in the U.S., its largest overseas market, dropped each month of the third quarter, the longest stretch of declines since 1995. Detroit-based GM won customers in Brazil, Russia and China, boosting sales by 4 percent in the quarter.
Crash of Frontline, Overseas Shipholding, Teekay Nears on Freight-Oil Gap The record increase in oil prices and the unprecedented number of new tankers transporting crude is a stock market crash waiting to happen. That, at least, is the growing consensus among analysts who say the widening gap between West Texas Intermediate crude and the rate for supertankers shipping Middle East oil to Asia means industry titans Frontline Ltd., Overseas Shipholding Group Inc. and Teekay Corp. have unsustainable valuations. The Bloomberg Tanker Index has risen 19 percent in the past two years, even as freight rates sank 38 percent. The price of marine fuel, the biggest cost for shipowners, has advanced 73 percent to a peak of $446.50 a metric ton and the number of ships available is near a record.
China buys GE's 'green' push In China, GE (Charts, Fortune 500) appears to be making headway: The country is now one of the company's largest foreign markets, with $5.4 billion in revenues last year, a nearly fourfold increase since 2001. GE has 12,000 employees in China, including about 1,200 who work in a research and development center in Shanghai. It has 23 joint ventures with Chinese firms; last year, just to pick one example, the company opened its first wind turbine assembly plant, in the city of Shenyang. GE has been especially successful at selling Ecomagination jet engines, locomotives and wind turbines, said Bertamini.
Apple's wireless land grabThe iPhone maker's most audacious move is a possible end-run around wireless operators, including partner AT&T. The touch (yes, it is a lowercase "t") and other devices like it could spell trouble for big wireless operators, including Apple's exclusive iPhone partner in the U.S, AT&T (Charts, Fortune 500). In the short term, the touch provides consumers with what I would argue are the best parts of the iPhone (the touch screen, the music player and the Web browser) without requiring the consumer to sign up for a two-year service contract with AT&T. AT&T, of course, makes its money from such contracts. The iPod touch lacks the ability to make and receive phone calls, but plenty of people are content to carry a separate cell phone for voice calls. Indeed, the touch would certainly appeal to wireless customers who aren't inclined to get an iPhone because they have service contracts with AT&T competitors. The Wi-Fi capabilities built into the touch - and other devices such as Nokia's N95 and Samsung's T409 - in the long run could end up bypassing wireless phone networks altogether. How? If a user downloads ringtones or searches the web on a Wi-Fi network, he or she is not consuming minutes on the carriers' data networks, which phone companies are spending billions to build. Sure, the Wi-Fi connection usually is "fixed," which means the consumer isn't able to connect to the 'Net while walking around. But a lot of iPhone customers, for example, have expressed frustration with AT&T's data network, and prefer to surf their iPhones on Wi-Fi anyway.
· Apple Shares Advance After Jobs Reports Record Mac Sales, Holiday Forecast Apple Inc. shares rose after Chief Executive Officer Steve Jobs delivered a 67 percent jump in fourth-quarter profit, topping analysts' estimates, on record Macintosh computer sales and growing iPod and iPhone demand.
Leopard: Faster, Easier Than Vista The Mac is on a roll. Apple Inc.'s perennially praised but slow-selling Macintosh computers have surged in popularity in the past few years, with sales growing much faster than the overall PC market, especially in the U.S. By some measures, Mac laptops are now approaching a 20% share of U.S. noncorporate sales, up from the low single digits where they once seemed stuck. There are several reasons for this, including the security problems in the dominant Windows platform from Microsoft; spillover from Apple's blistering success with its iPod music players; the fact that Macs can now run Windows programs; and Apple's highly successful chain of company-owned retail stores. But another key factor has been the Mac operating system, called OS X, which came out in 2001. It has proved to be as powerful and versatile for mainstream consumers as Windows, yet easier to use and more secure. And Apple has upgraded OS X far more rapidly than Microsoft Inc. has upgraded Windows, bringing out major new releases roughly every 18 months, while Microsoft struggled for more than five years to produce the latest Windows iteration, Vista, which came out in January.
Microsoft's mainstays pay the bills Video games and Facebook aside, the real meat in higher earnings from the company are in the stalwart Windows and Office products. Microsoft on Thursday reported results that included a 24% increase in quarterly revenue to $4.1 billion for its client unit, which includes Vista, the latest iteration of its Widows operating system software. It also reported 21% growth to $4.1 billion in revenue for its business division, which includes its Office suite of software applications for things such as word processing and spreadsheets. Such impressive growth from relatively staid products came amid a flurry of headlines about the company's newer, edgier businesses. Microsoft's entertainment and devices unit, which includes its Xbox video games, did post a 91% increase in sales, though its total still came in at $1.9 billion. Microsoft also made big news by winning a partnership to sell advertising for Facebook Inc. earlier this week, though the company's online services unit continued to report a quarterly loss, with losses expected through the end of the fiscal year. And while games and online services certainly figure heavily in Microsoft's future, Windows and Office also seem poised to continue to post their own strong growth, analysts say.
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Motorola's Zander May Buy Time With Return to Profit Motorola Inc. Chief Executive Officer Ed Zander may have bought more time for a turnaround after firing 10 percent of his workforce and introducing a successor to the Razr handset. Motorola, the biggest mobile-phone maker in the U.S., probably will report its first profit in three quarters tomorrow after losing $209 million in the first half. The Schaumburg, Illinois-based company earned $49.9 million, or 3 cents a share, in the third quarter, down 95 percent from a year earlier, according to a Bloomberg survey of analysts. A return to profitability may give Zander another nine months to show he can produce a successful handset line to go with the cost cuts, said Tony Carbone, an analyst at RCM Capital Management in San Francisco. Investor Carl Icahn wants Zander's resignation if the phone unit doesn't recover by year's end. ``They're putting a tourniquet on the wound by cutting expenses,'' said Carbone, whose firm oversees $100 billion including Motorola shares. ``The longer-lasting solution of new products takes hold by the middle of next year.'' Motorola Reports First Profit in Three Quarters, Forecasts Higher Earnings
Verizon's FiOS Challenges Cable's Clout After years of promises, Verizon Communications Inc. is making significant headway with its $18 billion effort to roll out television and faster Internet service, posing a difficult new competitive threat for the cable industry. Two years after launching its FiOS service, Verizon has signed up half a million TV subscribers and, as of the second quarter, was adding 2,600 customers per business day, the company says. In the parts of the Dallas area where FiOS service is offered, a quarter of households are taking it, Verizon estimates. FiOS uses fiber optics to deliver television, faster Internet services and phone. Like similar cable packages it typically costs a little under $100 a month for all three services. Cable systems use fiber-optics in their networks as well but depend on coaxial cables to get the service into homes. The FiOS network has far more capacity for high definition TV channels, online games and downloading and uploading files. It also offers a few premium features that cable companies don't offer, like digital video recorders that can pipe recordings to different TVs in the house. On a national level, FiOS promises to change the balance of power among cable, telephone and satellite TV companies over which one can offer consumers the most attractive combinations of the latest TV, phone and high-speed Internet services. Until recently, cable companies were winning. They have about a 54% share of the high-speed Internet market and were much faster in breaking into phone service than phone companies were in offering TV. About 12 million of the roughly 90 million households that can get phone service from their cable operators subscribe to that service.
Qualcomm Has Plan to Widen Web Access Qualcomm Inc. today is announcing new chips to let laptop computers use multiple cellular data services, hoping to outflank a high-profile alternative called WiMAX. The cellular services are proving popular among laptop users who want to stay connected wherever they go. But there is a hitch. Many carriers built their networks on a technology called GSM, or global system for mobile communications. They typically use a technology for delivering data that is known by yet another acronym -- HSPA, for high-speed packet access. Another camp of carriers use code division multiple access, or CDMA, a technology pushed by Qualcomm, and favor an associated data network dubbed EV-DO, for evolution, data-only. The two kinds of networks aren't compatible. So laptop-computer makers hoping to offer long-range Internet access now have to buy two kinds of chips to support each service. Consumers typically choose one technology and one service provider and have to stick with them. Qualcomm, of San Diego, says its new Gobi chips can use either EV-DO or HSPA and their variants. That means PC makers can build laptops that can tap into the Internet virtually anywhere, says Sanjay Jha, Qualcomm's chief operating officer and president of its chip division.
notice that after a couple of quarters of "how-to-fixup-HD" articles the summer to date is primarily about buybacks, finacings and deteriorating sales with a little buyout thrown in to flavor the buyback. On the surface you'd have to ask yourself is this HD just being coy, preserving competitive information while it explores those options or is the lack of information a lack of action ?
each of the major improvement factors, status and assessment/ comments plus grade where possible. The data's from late summer and/or early Sept.
