Weekly Reader 4Nov07: Business & Companies
Now we get down to putting some rubber on the road - what have the businesses who generate a lot of this news actually been doing. And again it's been an interesting week. Before reviewing the news let me point to some prior postings that should be interesting and define the filter we use to select and analyze these folks.
- First, as a reminder of why business performance is critically important we'll point to the multi-part set of postings on Earnings and outlooks, which starts with Review the Bidding, Count the Cards: EPS Growth Rates
- Then we'll point to what we think is an interesting and valuable little piece of work on how one might go about analyzing a company, or an industry for that matter. A general set of questions to investigate if you like:Think Like a Private Equity Guy ? No, Think Like An Owner !
- And also point to the last entry in a longer-running set of posts on Home Depot that builds up a picture and ends up being a pretty good test case for the approach: Performance Re-visited: Another Trip to HD's Woodshed
With those tools in mind let's talk about the listings in our ReadFest below. First we've brought up to the front two very interesting articles that nicely complement our approach. One is TheStreet's look at the correlation between payroll and performance in MLB - which by and large turns out to be none. It turns out that working harder and harder but not very smart doesn't yield a very good payoff. On the other hand if you're a big team in a wealthy market who runs both a smart team AND a smart business then things can get pretty rosey indeed (if you think I'm thinking of the SOX you'd be right). Another view that kinda converges on a similar conclusion is an interesting column from Jim Jubak pointing that there's no corner of the market that's currently under-valued and many that are very much over-valued, e.g. emerging markets which are definitely bubblicious. He suggests that the only pockets of mis-priced opportunity are companies with good growth prospects beyond the next 12-18 months, i.e. over the event-horizon of the market. Sounds Buffet-like to me and leads to the question of how to analyze those opportunities. To which we point to the toolkit we're building in the above links.
Next in the Business section are a few general articles that may talk about specific companies but also say something about bigger issues. At the end of the 90s four representative name companies were Cisco, Schwab, Wal-Mart and Dell who were taken to represent the mark by which everyone else should be measured. Well all four hit more than major turbulence after the bust as their core business models, strategies and operational execution came under major pressures to adapt. WMT has only recently admitted that it needs to start doing some new thinking but continues to run itself, as the company it was, reasonably well. Dell's admitted - involuntarily to be sure - that there were major problems but is still thrashing around violently looking for new directions. BtW - if you think selling brightly colored boxes into WMT is the answer let me ask you how well will their supposedly unbeatable new age processes adapt to the Retail channel ?
On the other hand both Schwab and Cisco went thru deep, soul-wrenching adjustments and innovations. Last week we pointed to an excellent article on Schwab and this week there's an even better one on Cisco. That one is really worth wading thru if your interested in telecom, tech or businesses that are smart and hard-nosed enough to really change things over. Even in the face of their own culture.
Two other general articles point to the Pharma and Oil industries. The latter is seeing a major structural shift to what looks like a permanent supply/demand imbalance as long as the BRICs keep booming. But they have serious problems nonetheless. The Pharma industry on the other hand is between a rock and a hard place because their basic business model is built around a drug development process that isn't working well, is increasingly expensive and non-productive and the need to change both their R&D and their go-to-market operations. The word is OUCH.
No suprise that Merrill makes the reading list and for similar reasons. It turns out it wasn't all about hubris and unmanaged risk chasing for return. It had and has something to do with not building up your basic capabilities. Other news covers Chrysler, Lenovo (who's another good example of adaptation and innovation) and Alcatel-Lucent (who's very definitely NOT).
Happy reading.
General & Special
Money Doesn't Count for Much in Baseball But here's the great thing about baseball, at least recently. Funny things seem to happen when people get to the playoffs. Money doesn't count for as much as you think. Call it Steinbrenner's Law. Since 2001, Yankees boss George Steinbrenner has spent a staggering $1.2 billion on his team's payroll in a desperate, and so far unsuccessful, bid to win yet another championship. Here at TheStreet.com, we're always looking at returns on investment. So we've run the numbers for all postseason series -- including division, league and championship -- since 2001, and compared them to team salary data. The bottom line? There is little correlation, if any, between payroll and playoff success. The team with the higher payroll beat the team with the lower payroll in 113 games. But the team with the lower payroll won ... 112. And more than half of all series, 53%, were won by the teams with the lower payrolls. More than half. Maybe this has been an atypical period. After all, in the 90s the big-spending Yankees dominated the titles. But you'd think things would be getting more professional as time went on, and spending on players would become more efficient. It is, after all, four years since the publication of Michael Lewis' seminal Moneyball, which touched on this very subject. The reality is that a small number of franchises typically dominate the money in baseball. And over the past seven years, only once -- in 2004 -- has a member of that plutocracy happened to carry home the prize. Usually it has been a team in the financial second tier.
3 cheap stocks for a pricey market Everything -- the global big caps of the Dow Jones Industrial Average ($INDU), oil and gold stocks, Chinese and Indian stocks -- seems expensive right now. There aren't any obvious bargains in a world where stock markets from Mumbai, India, to New York are trading at historic highs. Forget about a sectorwide approach, either, because the few sectors that are trading at depressed prices -- home builders and financials -- are too toxic to touch. And adding to the problem is that the screening tools bargain hunters usually use -- price-to-book value, for example -- are wildly misleading right now. What's a bargain hunter to do, especially now that the Federal Reserve is heavily hinting that Halloween's cut in interest rates might be the last for 2007? Dig deeper, I say. The stock market is always misvaluing something. Right now that something is growth that's more than six to 12 months away. Current sky-high valuations make the majority of investors with money in the market nervous. Not nervous enough to sell but nervous enough to have an exit strategy and timetable in mind. Almost nobody wants to bet on earnings growth much further out than the November 2008 elections, just before the Federal Reserve starts to raise interest rates again to support the dollar and quash resurgent inflation. That creates some intriguing bargains for investors willing to look that far ahead and with the patience and fortitude to ride out any rough patches between now and then.
Business
Cisco's display of strength Cisco fell hard, went through a wrenching period of reinvention, and is now stronger than it has ever been. But it's just one part of Chambers' strategy to ensure that as video, voice, and data converge on the Internet and at the same time go mobile, Cisco is selling one-click solutions that tie it all together. "Unified communications" is the buzzword for the fast-growing corporate piece of this puzzle - a piece that Microsoft also wants. But Cisco's ambitions don't stop there. In "the next big market transition," which Chambers believes is fast unfolding, the Internet will become the delivery medium of all communications - and eventually everything from security systems and entertainment to health care and education. Think of the company from its IPO in 1990 to 2000 as Cisco 1.0, and the company from 2001 to 2006 as Cisco 2.0. Cisco 1.0 was a two-hit wonder: It sold routers and switches to FORTUNE 500 companies and made rapid-fire acquisitions to scoop up technology it needed. Cisco 2.0 built a more diversified customer base (cable companies, telcos, smaller businesses along with the big boys) and a much broader range of products, many of which it developed internally - IP telephones, data storage, digital media, and, to use a favored Chambers-ism, "end-to-end-architected solutions" (which sounds like "Indian-architected solutions" when he says it). Version 1.0 was a "plumbing" company called Cisco Systems and invisible to the public beyond its high-wattage stock; in the 2.0 phase it dropped the "Systems" and became just Cisco…
Microsoft and GE: not old & in the way Big blue-chip companies like General Electric and Microsoft do many things well, but showing up on lists of the hottest brands is typically not one of them. Yet these two lumbering giants both made their way onto brand consultancy Landor Associates' annual Breakaway Brands ranking - a comprehensive survey that measures consumer sizzle over a three-year period. Microsoft's rise in brand stature is due to several factors, experts say. Releasing more consumer-friendly products like its game console Xbox give it cachet that office-related brands like PowerPoint and Word, however dominant, just don't deliver. General Electric's improvement is attributable almost entirely to its environmental efforts. The company's highly visible "ecomagination" campaign aims to more than double its annual research budget for cleaner technologies - like energy-efficient refrigerators and wind turbines from $700 million in 2005 to $1.5 billion in 2010. Last year those research efforts generated $12 billion in revenues from 45 products and services.
Drug giants face worst growth in 4 decades A closely-watched forecast of drug industry revenue growth released today projects that sales in 2008 will expand at their slowest pace in more than four decades. The reason: A combination of virtually empty Big Pharma product pipelines and increasing price competition from inexpensive generic drugs. The drug business has been in the doldrums for a few years now. But the outlook for 2008 is particularly worrisome. The biggest problem is that many of the largest drugmakers … are seeing their largest-selling medicines lose patent protection between 2006 and 2012. At the same time, those companies possess pipelines of future products that are either nearly empty or filled with drugs whose potential sales won't fill the hole left by those going off patent. To prepare for the hard times, a number of the largest drugmakers have recently announced staff reductions and other austerity measures. Many companies are rethinking their approach to sales and marketing - which is where the bulk of the layoffs are taking place. Companies are convinced that their armies of door-to-door sales representatives are becoming a less effective way to communicate with doctors.
Wanted: Oil workers Retiring baby boomers, roaring global economy and focus on information technology are leading to a labor shortage that could squeeze supply. In the next three or four years, there's expected to be a 30 to 40 percent shortage of technical and professional oil workers in the Untied States. Over a quarter of the industry's highly skilled employees - petroleum engineers, process engineers, geologists, geophysicists and the like - are eligible for retirement in two years. Worldwide, the industry's "people deficit" is expected to reach up to 15 percent by 2010. But oil has its own problems. During the 1980s, low crude prices forced layoffs throughout the industry. Around the same time, students formerly drawn to basic sciences such as mathematics, chemistry and engineering were enticed into a new, sexier field: Information technology. So now, projects to find and bring new oil to market are delayed as oil firms compete with one another for workers with the competence to bring new, often challenging fields into production. It also means new, less experienced people are designing projects, and errors can be made in the design process that take time to correct before the facility can become operational.
Companies
Merrill Lynch Needs A Plan (And A New Leader) Merrill Lynch is a company in search of a strategy as much as it is a leader. For the last decade, the big brokerage firm has thrown its full weight into a number of big ideas only to pull back its horns significantly when things didn't work out. Five years ago, Stanley O'Neal, ousted as chief executive this morning, led the company through a massive retrenchment of 20% of the firm's worldwide employees and a wholesale retreat from the brokerage business outside the U.S. O'Neal, then president, said the changes, which included billions of dollars in charges, recognized that Merrill's efforts to dominate retail brokerage on a global scale had been pulled off too quickly and went too far. Since then, Merrill has vacillated between wanting a big presence in fixed income and commodities to pulling back, and then flooding back into the space. It piled into derivatives in the last couple of years, seeing an opportunity to stake a big claim. It piled into subprime mortgages last year at the peak of the housing market, buying lender First Franklin in December from National City for $1.3 billion.
· Help wanted: Merrill Lynch CEO Only one or two people in the financial world are qualified to run the banking giant, but really - who would want it?Taking on the top job at Merrill Lynch could turn an executive into a Wall Street legend, but it also has the potential to ruin anyone who takes the CEO post from the just-departed Stanley O'Neal. That stark choice may be one of the reasons Merrill hasn't lined up anyone just yet to lead the firm out of the crisis sparked by large losses from junk mortgages. In essence, then, Merrill needs someone who can do three things with the CDO mess: Take the right amount of losses, no matter how large that number is; set up strong risk controls across the company, and; be able to communicate quickly and convincingly what is happening when fresh upsets occur, as they almost always do when a company is working its way through a crisis.
· Merrill board: Too late to the game Merrill Lynch's board of directors was instrumental in removing Stanley O'Neal from the CEO and chairman posts after the brokerage reported $7.9 billion of bond losses in its third quarter. But the board may have missed earlier opportunities to keep O'Neal in check. Several board members, including Alberto Cribiore, now the company's interim chairman, sat on committees that were supposed to help prevent Merrill from taking the sort of outsized risks that led to the losses. While board members from outside Merrill probably won't end up taking as much blame as O'Neal and other senior Merrill executives for the losses, the board's role is coming under scrutiny. That's because two board committees had the power to step in and object as Merrill became dangerously overexposed to collateralized debt obligations - the complex debt securities that were the source for most of the third quarter losses and which, according to analysts, could produce another $4 billion of losses in the fourth quarter.
Chrysler restructures, thousands of jobs cut Chrysler LLC began laying off thousands of salaried workers Wednesday as part of an effort to slash costs in the company's new era of private ownership, a spokesman said. The cuts won't end there. On Thursday, Chrysler planned to announce the elimination of third shifts at the Toledo North plant in Ohio and the Belvidere plant in Illinois in the first quarter of 2008, according to two congressional aides with knowledge of the announcement. They spoke on condition of anonymity because they were not authorized to speak publicly. A compact Chrysler Now private auto manufacturer to slash as many as 10,000 further hourly jobs as well as 1,000 salaried positions and four models. Deal Journal: Cerberus's Striptease
· Chrysler reshuffling begins: 4 models scrapped It wasn't just jobs that Chrysler LLC cut on Thursday. The automaker knocked out some cars as well. Chrysler announced that it will stop production of four Dodge and Chrysler models: the Dodge Magnum, Chrysler Pacifica, the Chrysler Crossfire and the PT Cruiser Convertible. The moves come as the troubled automaker, recently acquired by a private equity firm, is embarking on a major reorganization. Chrysler also said Thursday that it would eliminate some shifts from five of its North American assembly plants and cut 8,500 to 10,000 hourly jobs by 2009. The cancellation of the four models is the first major product move by Chrysler since James Press, formerly Toyota's top American executive, joined the company in September. Press is now in charge of Chrysler's North American product strategy.
Lenovo celebrates 177% profit spike Lenovo Group, the world's No. 3 personal computer maker, said Thursday its profits in the latest quarter jumped 177 percent as it captured a bigger share of the global market following a restructuring. Earnings for the fiscal second quarter were $105.3 million, the Beijing-based company said. That was up from $37.9 million for the same period a year earlier. Revenues rose almost 20 percent to $4.4 billion. Lenovo is no longer just a company within the Chinese market, it is a worldwide company," Chairman Yang Yuanqing told reporters at a press conference in Hong Kong to announce the results. The company said it believed it had been successful in building the Lenovo brand and would stop using the IBM logo, two years ahead of schedule.
Alcatel-Lucent Will Deepen Job Cuts After Third Straight Quarterly Loss Alcatel-Lucent SA, the world's biggest maker of telecommunications equipment, will cut a further 4,000 jobs and Chief Financial Officer Jean-Pascal Beaufret will resign after the company reported a third straight quarterly loss and reduced its sales forecast. The elimination of another 5 percent of the workforce will help save 400 million euros ($577 million) by the end of 2009, Paris-based Alcatel-Lucent said in an e-mailed statement today. The company in February had said it would cut 12,500 workers, with planned savings of 1.7 billion euros. Alcatel-Lucent shares have lost 39 percent this year, the worst performance in France's CAC 40 Index, as the combination of Alcatel SA and Lucent Technologies Inc. failed to create a more formidable competitor to Ericsson AB. Before February, Chief Executive Officer Patricia Russo targeted job cuts of 9,000. Can Pat Russo save Alcatel-Lucent?