bizzXceleration: Performance, Value and Profit

Value at Risk: the Stakes in Business Analysis

Since '02, Wall Street Research Has Deteriorated It’s widely known on Wall Street that because research can no longer count on investment banking revenue, research is expected to pay its own way. Many of the big banks have responded, to put it bluntly, by running their research departments more cheaply, or not running them at all. Prudential Financial, which had a pretty good research arm, decided to shut it down entirely last summer. Many of the most talented analysts — and therefore the most expensive — have left the business. And the smart up-and-coming ones who saw the handwriting on the wall ran to the “buy side,” jumping into hedge funds, venture capital firms and private equity. Some ambitious analysts have tried to go the independent route, but nearly all of them will tell you it has been tough going. That has created a two-part dilemma. The first is that the quality of research on Wall Street these days, notwithstanding some great recent calls from the likes of Meredith Whitney of Oppenheimer and Richard Bove, an independent analyst, has deteriorated even further and is coming under greater pressure as more banks begin to outsource research functions. It may be true that analysts now put a lot more sell ratings on stocks than they used to, clearly a result of Mr. Spitzer’s settlement. But sell ratings are only a small part of the story. Analysts were never supposed to be just stock pickers. Ask any big institutional investor about what makes good research analysts and the answer is rarely the buy, sell or hold ratings. It is the information they can provide, the details they model and understanding the nuance of the executives. Those aspects of research don’t always end up in reports, but that’s what separates the good analysts from the not-so-good. The second problem — which is an even bigger one — is that it is hard to find good research on small companies. All the focus has moved to large companies where the big money is sloshing around. And that makes being a small public company a very difficult task, since nobody’s paying any attention to them.

Why Wall Street analysts are usually wrong Over the past week or two, the most attention-grabbing headline on Wall Street may have been Freddie Mac's (FRE, news, msgs) announcement that it had lost more than $800 million in the second quarter and that it would cut its third-quarter dividend by at least 80%. The earnings report caused a major stir for one obvious reason: The government-backed mortgage giant's woes were a clear signal that the housing and credit pain isn't over for financial companies. But the Freddie news also caught my attention for another reason: Freddie's $1.63-per-share loss for the quarter was more than four times what analysts had predicted. That means that, on average, the analysts charged with following the company's every move were off by about 300% in their forecasts. That huge difference shouldn't have come as a huge surprise. Though the Freddie example may be an extreme one, given that the continuing crisis in the financial sector has made estimating earnings a particularly hard task, it's far from the only time that analysts have been way, way off the mark. In fact, while they may by and large be well-meaning, intelligent, hard-working people, analysts simply don't get things right that often -- something that several of the gurus upon whom I base my investment strategies have pointed out.  And if you listen to what these Wall Street greats have to say when it comes to analyzing analysts, your portfolio can reap some benefits.

• Analysts' Profit Forecasts Missing More Than Ever: Chart of Day

With Buybacks, Look Before You Leap  Buying high and selling low: That sounds dumb. But call it a "share repurchase program" (or stock buyback), and people get excited. Stocks regularly jump up 3% to 6% on the announcement of a buyback, and it's easy to see why they should.Done right, buybacks are a boon. They reduce the number of shares outstanding, spreading the company's future profits over a smaller base -- thus increasing earnings per share. Over time, firms that repurchase their shares have beaten the market by about three percentage points a year. Unlike dividends, buybacks generate no tax bills for ongoing shareholders. Above all, share repurchases prevent cash from burning a hole in management's pocket. Long ago, Benjamin Graham pointed out a paradox: The better a company's executives are at managing its businesses, the worse they are likely to be at managing its cash. Great businesses produce piles of wampum -- and, to management, idle cash is the devil's workshop. All told, the companies in the Standard & Poor's 500-stock index have bought back shares valued at more than a half-trillion dollars' worth of their shares in the past year.Unfortunately, firms don't always buy stock back when it is cheap. In fact, you would have an easier time teaching a platypus to play the clavichord than getting a manager to admit his stock is overpriced. Every three months, Duke University economist John Graham surveys hundreds of chief financial officers. During the week of March 13, 2000, the absolute peak of the market bubble, 82% of finance chiefs said their shares were cheap, with only 3.4% saying their stock was "overvalued." More recently, buybacks hit their all-time quarterly high of $171.9 billion in September 2007, just before the Dow crested at 14000. Mistimed buybacks can be deadly. In 2006 and 2007, Washington Mutual spent $6.5 billion on buybacks. In January 2007, with the stock at 43.73 per share, chief executive Kerry Killinger called the repurchase program "a superior use of capital." Also in 2006 and 2007, Wachovia sank $5.7 billion into buybacks at an average price of more than 54. Citigroup spent $8.3 billion to repurchase stock in 2006 and 2007 at share prices of about 50. In April 2008, all three banks were so capital-starved that they had to raise cash by selling shares for a fraction of what they had recently paid for them -- WaMu at 8.75, Wachovia at 24, Citi at 25.27 a share. Another warning: Contrary to popular belief, buying back stock isn't like canceling a postage stamp. Rather than being "retired," most repurchased shares sit in the corporate treasury -- and they can be yanked back out for just about any reason.

Value Investors Cut Losses  Value investors are known for buying low and selling high, but some big-name mutual-fund managers who thought they bought low are now selling far lower and are posting big losses because of the credit crisis. So Legg Mason's Bill Miller, John Rogers at Ariel Investments and Oakmark's Bill Nygren and other value managers are unloading some traditional holdings that have disappointed. "The sudden downside moves are something I've never seen before" and are difficult "to research and predict," says Mr. Rogers, Ariel's chairman. According to fund tracker Morningstar Inc., large-stock value funds are down 11.8% overall this year, worse than the market. The Standard & Poor's 500-stock index's total return is off 10.2%. Value managers customarily favor stocks trading well below what the managers figure to be their true value. Trouble is, the values they have assigned to several financial companies have been far off the mark, thanks to inflated assessments of loan portfolios and other investments.Macroeconomic factors such as the rate of home-price declines are crucial for determining the value of the loans on banks' and brokerage houses' books. But this is unfamiliar territory for many value managers because they don't usually base investment decisions on big-picture economic trends. 

5 bargain stocks and 4 duds With the coming anniversary of my 50 Best portfolio, let's preview some choice stocks and a few I'm likely to drop. Hint: Some major oil, banking and aircraft companies aren't doing so hot. The goal, as I put it then, was to compile a list of stocks that truly deserved the often too easily bestowed moniker of blue chip. To make the list, a stock had to have:

• Truly outstanding opportunities for global growth over the next five or 10 years.
• A competitive edge that would allow the company to seize the lion's share of that global opportunity.

Notice there's nothing in that formula that accounts for the ebbs and flows of a sector's popularity or in the market's fortunes as a whole. When I pick the 50 best stocks each year and decide which stocks to drop, I'm not looking at sector momentum or trying to guess the direction of economic trends over the next year or five years.

Key Issues and Changes

Manufacturing woes persist Manufacturing conditions in the mid-Atlantic region were negative for the ninth straight month, although there was some improvement in August, according to a report issued Thursday. The poll indicated that two-thirds of manufacturing firms blame cost pressures as a major cause for the overall weakness, but they believe growth will return in the next six months. Future indicators of new orders and shipments increased, and more firms expected to add employees than expected to cut staff, according to the survey. As for more current readings on the economy, new orders were weaker in August. The employment index, which is based on the number of firms hiring and those cutting back their workforce, among other factors, was still slightly negative at minus 1.1. But this reading also improved from the previous report. Sending goods overseas has become a stronger percentage of sales among the firms surveyed, with 51% of those polled saying exports have increased.

UK retail risks meltdown in next 10 years - report Rising costs and depressed demand could reshape Britain's retail industry over the next 10 years, with bankruptcies and job losses set to rise as companies struggle to adapt, a report showed on Friday. The cost of running a retail business is set to explode over the next decade as tighter environmental regulations, higher energy prices and more expensive supply chains create a sustained period of inflation, according to the ActiveResilience Retail Risks report by Verdict Consulting. Verdict estimates retail cost inflation could rise to 9 percent or more over the next 10 years, from 4 percent now. At the same time, it believes consumer demand will slow, with retail spending growth moderating to 2.6 percent in the 2010s from 6 percent in the 1990s. "Managing a simultaneous increase in costs and a slowdown in demand will be extremely challenging," Verdict said. "Over the medium term the number of retail bankruptcies and job losses will increase steadily as players adapt to the new retail reality."

China set to trump US in manufacturing China is set to overtake the United States next year as the world's largest producer of manufactured goods, four years earlier than expected, as a result of the rapidly weakening U.S. economy. The great leap is revealed in forecasts for the Financial Times by Global Insight, an economics consultancy based in Boston. According to the estimates, next year China will account for 17% of manufacturing value-added output, while the United States will make 16%. In 2007, the United States was still easily in the top slot and accounted for a fifth of the total. China was second, with 13.2%. John Engler, president of the National Association of Manufacturers, a trade group based in Washington, D.C., played down the effect of the projections. It was inevitable that China would take over on account of its size, Engler said. "This should be a wholesome development for the U.S., for it promises both political stability for the world's largest country and continuing opportunities for the U.S. to export to, and invest in, the world's fastest-growing economy," said Engler, a former Republican governor of Michigan. As recently as last year, Global Insight economists predicted that the United States would retain the top position until 2013, but a large downward revision in likely output this year and next is expected to cause the U.S. to slip more quickly than had been expected. The data underline the surge of China's manufacturing-led economy of the past 20 years. In 1990, before economic reforms began to work, it accounted for a meager 3% of global manufacturing. Manufacturing accounted for just 17.5% of global gross domestic product in 2007, but much activity in the considerably larger area of services -- for instance, in retailing, distribution, transport and communications -- depends on it.

China: Cheap no more Once the epicenter of low-cost manufacturing, China is becoming an increasingly expensive place to do business, thanks to a series of sweeping mandates introduced to pacify discontented Chinese citizens and global critics. This month's Olympics will be a coming out party 10 years in the making. Aware that the world is watching, China has intensified its efforts to clean up its domestic affairs by enacting stricter environmental and labor controls, increasing its land and commodity prices, and slashing the export-tax rebates that helped create the country's giant trade surplus. Environmentalists, economists and labor watchdogs praise these initiatives as critical steps in the right direction for both China and the global economy. But coupled with the falling dollar and the rising yuan, these movements have put the pinch on many small U.S. outsourcers struggling to keep up with China's rapid changes.

Eye On China As China rapidly evolves into a more service-oriented economy, U.S. manufacturers need to adjust their China strategy to remain competitive. China's manufacturing industry is going through a period that can best be described as evolutionary, according to Bradley Feuling, CEO of Shanghai-based Kong and Allan, a supply chain consulting firm. Many Chinese manufacturing companies, he explains, were launched when the Chinese government began offering a value-added tax (VAT) credit reimbursement to encourage exports. A year ago, however, China reduced or eliminated the VAT export rebates for some industries. As a result, though you don't hear it reported much in the United States, some Chinese manufacturers are operating now at a loss, and many have been severely impacted. "A number of manufacturers and industries in China are facing very difficult times," Feuling states. "Competition has grown to a point where each manufacturer has a very small piece of a huge pie. Gaining market share means consolidation and acquisition, yet few operations have the cash to invest in purchasing other companies." The majority of owner-operated companies are unwilling to sell to other local companies, though some will sell ownership to foreign buyers for the cash inflow, he says.

Wanted: Senior-Level Job, Junior Title, Pay Companies are combining a mid-level position with a more junior one -- then advertising it as a junior slot and offering a lower salary in the latest series of changes firms are making to adjust to a weak economy. Some job hunters have been encountering a new kind of downsizing: companies that aren't eliminating positions entirely, but are combining a mid-level position with a more junior one -- then advertising it as a junior slot and offering a lower salary. In other cases, more-senior persons are being hired, only to find that they are charged with handling both their own work and the tasks that once fell to subordinates. It's just the latest in a series of changes companies are making to adjust to a weak economy. Earlier this year, companies initiated buyouts of senior executives with big salaries. Some firms have downgraded full-time employees to part-time status, and others have adopted a consolidated workweek in an attempt to reduce office costs, says John Challenger, CEO of Chicago-based outplacement firm Challenger, Gray & Christmas.

Saturday Interview: A Hotel’s Secret: Treat the Guests Like Guests LUXURY hotels vie for bragging rights to the best amenities and the most awards, hoping that these assure repeat visits, higher occupancy rates and increased room rates. But top hoteliers contend that the real secret to success is providing the best “guest experience.” That often translates to how a staff member caters to a guest’s needs, which, in turn, depends on how well the staff member is trained. Training and staff development are increasingly important not just to make guests happy, however. Keeping staff members happy and loyal has become a concern in an industry where turnover rates are about 50 percent for nonmanagement positions and 25 percent for management — among the highest of any industry, according to J. Bruce Tracey, associate professor of management at the School of Hotel Administration at Cornell. Alan J. Fuerstman, the chief executive of Montage Hotels and Resorts, could be one of those bragging hoteliers. Montage Laguna Beach, the company’s flagship property, has won a variety of awards and accolades since opening in 2003 in Southern California. Mr. Fuerstman was named the 2007 Resort Executive of the Year by hospitality industry leaders at the 2008 Resort Management Conference last spring. In an interview, Mr. Fuerstman emphasized staff training and retention, a subject that especially interests him as he prepares to open a new Montage in Beverly Hills in November.Q. When you roll out a brand based on the success of one property, how do you make sure that what was unique and distinctive with one doesn’t become a cookie cutter by the third or fourth? A. You’re right to be concerned. And while we are proud of our Laguna Beach property’s Craftsman architecture, the local original plein-air art we showcase, the tranquil setting perched above the Pacific Ocean, even our green-conscious sustainability program, the most important thing we’ll export around the world is the Montage culture of gracious but humble service. It’s those emotional connections between guests and staff and the depth of this culture that unify the Montage brand.

Looking to the Future

CEO Solutions & Risks: CEOs are getting back to basics, like a strong balance sheet, according to an annual CEO survey from the New York Stock Exchange. Leigh Abrams, of Drew Industries; Trudy Sullivan, of Talbots; and Daniel Amos, of Aflac, participated in the survey and discuss the results.

Wells Fargo cracks the whip When, in the heady markets of 2005 and 2006, Mr Stumpf was staring down a different kind of barrel, he chose a similarly prudent route for the fifth largest bank in the US. Faced with deciding whether to follow Wells’ rivals in selling lucrative securitised debt and subprime loans with few strings attached, Mr Stumpf and Dick Kovacevich, his long-time mentor who hand-picked him as successor in June last year, concluded the high risks did not justify the potentially high rewards. Choosing not to follow an apparently successful industry trend is tough for any management team, but for Mr Stumpf and his colleagues the difficulties were compounded by the knowledge that the boom was taking place right in their core markets. As one of the country’s top two mortgage originators and distributors, Wells knew that steering clear of subprime and securitised lending would mean ceding valuable business to more aggressive competitors. “You can imagine the pressure on us. We were the number one mortgage originator and we had to give up market share and earnings,” Mr Stumpf says. “[But] it is more difficult to attend a party and leave before the trouble starts than not to attend the party at all. Part of my job here is to make sure we don’t attend parties that make no sense.” With his laid-back delivery and penchant for catchy metaphors – traits he shares with Warren Buffett, his occasional bridge opponent and Wells’ largest shareholder – the 54-year-old Mr Stumpf makes Wells’ escape from the crisis sound easy. The reality is that the lender’s bold counter-cyclical call saved the company from the worst US housing bust since the Great Depression.

Innovation vs. Status Quo in Hollywood  The book posits that much of the history of technical progress consists of the struggle between the innovators who want to move forward and the preservationists who want to protect the status quo. While this pattern repeats itself throughout the evolution of the cinema, a more nuanced view of history emerges from reading Kirsner's detailed chronicle. As compelling as are Kirsner's tales of resistance to change at every turn, one can think of examples where a new invention -- such as the Steadicam camera stabilization device -- was adopted by Hollywood filmmakers without much turmoil. The true enemy of progress may not be fear of technological change per se but, rather, the apprehension of undermining a successful business model. It's often more about the way the money flows than the particular technologies used in movie production and distribution. While the motion picture industry provides a wealth of examples of this tension between technological progress and business stasis, as Kirsner points out, this conflict is not unique to the movie business: "Although it may have a slightly higher glam factor than, say, the insurance business, Hollywood is a perfect case study for the way that any big, successful, well-established industry responds to new ideas." Indeed, one can think of many other industries with similar aversions to technological change -- from manufacturers of photographic film refusing to recognize the impact of digital photography, to the recording industry fighting against digital distribution of music. But the motion picture industry is a particularly revealing case study. A myriad of technologies sustains the creation and distribution of movies. Yet the economics of the motion picture industry make it particularly reticent to try new things. The amount of money riding on each major studio release tends to tilt the scales in favor of those who want to preserve the status quo. The fear that a new technology will upset the (very profitable) apple cart runs throughout Kirsner's book, which spans the entire history of the cinema -- from its origins in the late 19th century up to the present.

Steelmakers Develop New Iron Recipes  Faced with environmental demands and rising costs, some steel companies are reformulating the centuries-old recipe for making the iron used to fabricate steel. Companies in Europe, Australia and North America have developed processes that skip a high-polluting step in iron's creation, and they are finding steelmakers in Asia and Africa that are willing to gamble on the innovation. But South Korea's Posco, the world's third-largest steelmaker, has moved even further from the traditional iron-making blast furnace. Steel is usually made by refining iron in three steps. First, iron ore and coal are heated into materials -- sinter and coke, respectively -- that can bind easily. Then, they're thrown together in a hot furnace where they combine to become pig iron. Finally, the pig iron is melted further and mixed with other materials into a liquid form of steel, which is then cast in forms or rolls. Posco and Siemens-VAI had planned to build a small demonstration plant using the Corex process, but they decided to take an additional step. While the Corex process can use cheap fine coal, the Finex process uses both fine coal and fine iron ore, making it more cost effective. Pursuing the new approach was "the second biggest risk Posco has taken," says Posco's president, Chung Joon-yang, adding that the biggest was the decision to start the company in the late 1960s, when South Korea was still an agrarian backwater. Posco began working with Siemens-VAI on the Finex concept in 1993. Back then, Posco executives were focusing on the long-term prospect of competition from countries like China, whose economies were rising in South Korea's wake. They realized that the labor and other cost advantages Posco had as it was growing in the 1970s and 1980s wouldn't last. "We could go two ways. One was to look for totally new businesses. The second one was to go for new technology," Mr. Chung says. "We decided to look at alternative processes."

Cases, Companies, Industries

Freddie, Fannie Failure Could Be World `Catastrophe,' Yu Says A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank. ``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.'' Freddie and Fannie shares touched 20-year lows yesterday on speculation that a government bailout will leave the stocks worthless.

Riding the money train High energy prices have started to put a dent in corporate profits. But surprisingly, one industry that relies heavily on oil has not been hurt: the railroads. Most of the nation's top railroad companies have chugged along with strong sales and earnings increases in 2008, their results stoked by rising demand for transporting food and coal. Investors have shown their appreciation: Even as much of the market has been thrown off track by the stalling economy this year, the four rail companies in the Dow Jones transportation average - Burlington Northern Santa Fe, CSX (CSX, Fortune 500), Norfolk Southern (NSC, Fortune 500), and Union Pacific (UNP, Fortune 500) - have seen their stock prices pick up steam with an average 29% increase through Aug. 18. Surging global demand for commodities has helped lead to increased shipments of corn, soybeans, and coal in recent months. And despite that slowing economy, which has hurt sales of some of the consumer goods that railroads transport, growth should be fairly robust for the remainder of this year and 2009. According to estimates from Thomson Reuters, the four big U.S. railroads are expected to report an average sales increase of nearly 16% in the second half of 2008, and 8% next year. There's no mystery to the railroads' success: It costs less to transport goods by rail than by truck, especially when fuel costs are high. According to the American Association of Railroads, trains can move a ton of freight 431 miles on one gallon of diesel - about three times as far as a truck can. To be sure, the railroads have had to grapple with high oil prices too. But they have been able to pass along much of the higher fuel costs to customers. Burlington Northern engineered a $400 million fuel surcharge that offset most of the $474 million more in fuel expenses that it paid in the second quarter, compared with a year ago. Simply put, railroads are one of the few industries that enjoy pricing power, because even with the surcharges, they are more cost-effective than the competition.

FedEx Downshifts While harboring hopes the U.S. economy will turn around and fuel prices will start to level off, FedEx is positioning itself for what company officials say is an altered industry landscape. Frederick W. Smith, FedEx chairman, president and chief executive officer, said in the wake of the company's first quarterly loss in several years that FedEx is rethinking its foundation express operations and even the way it gears up for international traffic. "FedEx Express has not bought a unit of capacity for the domestic express business in years and years and years," Smith told investment analysts in a conference call on the company's earnings. Instead, Smith said, the world's largest air express operator is looking at a new era of air shipping that includes still lighter reliance on aircraft for shorter hauls and a focus on fitting the domestic network into a global supply chain. That is where increasingly savvy customers, he said, are cutting back on premium services and streamlining. "The network in the United States has been expanded basically to move inland international traffic," Smith said. "Increasingly in the international market the movement of goods by air will be in smaller lots and door-to-door express movements rather than in the large consolidations that marked the industry structure several years ago." FedEx has benefited from the broad industry trends in recent years, gaining express parcel business as shippers have broken down larger consignments and taking on ground package and trucking volume in its growing surface divisions as cost-conscious shippers have traded down in mode. But domestic express volume has been flat at best in recent years and now Smith acknowledges that the ideal target for air express is the international shipper rather than the domestic business. "We've built a network of regional (operations) and what those regional operations allow us to increasingly do is to fly across the oceans and then drive on the other side," said Smith. "We have not been adding capacity for the domestic express market for many years."

BA, American and Iberia Sign Deal British Airways PLC, American Airlines and Spain's Iberia SA said Thursday they have signed a revenue-sharing deal that -- if approved by regulators -- will see the trio set prices and share seat capacity on trans-Atlantic flights. The airlines said that they planned to file for worldwide antitrust immunity from U.S. authorities for the deal later Thursday. They will also notify European regulatory authorities. The agreement is the closest alliance the trio can form under strict U.S. airline ownership laws that all but rule out a full merger. Rival carrier Virgin Atlantic Airways has already made a pre-emptive strike against the proposal, claiming it will seriously damage competitiveness of the lucrative trans-Atlantic route and increase fares for passengers. However, BA chief executive officer Willie Walsh argued that customers would benefit from improved connections and flight schedules. He added that current high ticket prices were being driven by surging oil prices, and discounted claims that fares would rise as a result of the deal.Walsh also said that closer cooperation will also help the airlines cut costs in the current difficult economic conditions. The antitrust filing to the U.S. Department of Transportation includes the trio's fellow oneworld alliance members Finnair and Royal Jordanian. BA and AMR Corp.'s American have failed in the past to win an exemption from U.S. competition laws to work more closely together because of their dominance at London's Heathrow, where the pair have more than half the capacity to and from the U.S. However, Walsh argued that the competitive situation has changed since the "open skies" agreement between the U.S. and the European Union came into force in March, allowing airlines to fly to and from any point in the U.S. and any point in the EU. Walsh said that he did not expect regulators to again insist that the carriers give up landing and takeoff slots at Heathrow -- as they did in 2002 when the pair sought antitrust immunity -- and said he was confident the deal would pass muster.

The End of Aviation Early signs of an aviation apocalypse are already upon us. As oil prices flirt with $130 per barrel and the dollar struggles, airlines are paying nearly 80 percent more for fuel than they did a year ago. Twenty-five airlines have gone belly-up this year--three to four times the usual yearly rate. Major carriers like American, Northwest, and United, still reeling from the industry downturn after September 11, go barely a month without announcing layoffs and capacity cuts. And it gets worse from there. Despite recent fluctuations, a growing number of economists are bracing for oil to hit or surpass $200 per barrel in a few years, and most industry analysts agree with Douglas Runte, of RBS Greenwich Capital, who told The Wall Street Journal in June, "Many airline business models cease to work at $135-a-barrel oil prices." After all, most airlines barely figured out how to be profitable in a world of low fuel costs. Jeff Rubin, chief economist of Canadian investment bank CIBC World Markets, has predicted that gasoline will hit $7 per gallon by 2010, forcing some 10 million cars in the United States off the road. If that happens, he told me, "You're going to see an even bigger exit in the airline industry." Maybe the gloomy futurists have a point after all, and mass aviation could be coming to an end. No longer would air travel be like the Internet or television--a cheap technology available to virtually anyone, shaping our world in countless little ways. If that happened, the result would mean more than just the end of easy weekend jaunts to Bermuda or annual Christmas visits home. It could mean major shifts in the economy, changes in immigration patterns across the world, and perhaps even a remapping of the planet as we know it.

Deere's Earnings, Forecast Fall Short of Analysts' Estimates; Shares Slide -- Deere & Co., the world's largest maker of farm equipment, reported third-quarter earnings that missed analysts' estimates on higher raw material costs and said fourth-quarter profit will be below projections. The shares fell in early New York trading. Higher prices for tractors and combines weren't enough to offset a $140 million increase in costs for steel and other materials from a year earlier. The worst U.S. housing slump in at least 17 years triggered a 7 percent decline in construction revenue and a 38 percent drop in profit, to $93 million. The company now projects construction sales may fall as much as 5 percent this year, compared with a May forecast of down as much as 3 percent. ``They missed consensus because of somewhat weaker volumes and costs,'' said Eli Lustgarten, an analyst with Longbow Securities in Independence, Ohio, who rates the stock ``neutral.'' ``Their material costs were up, research & development expenses are going up and the tax rate was a bit higher too.''

General Electric's Reorganization Resurrects GE Capital  At least one of the new divisions to emerge out of General Electric Co.'s recent reshuffling likely has something of a nostalgic ring to it: GE Capital. Among other changes, the conglomerate's reorganization stitches the biggest pieces of GE Capital back together again, six years after Chief Executive Jeff Immelt broke apart the sprawling financial-services unit. Mr. Immelt, who was less than a year into his tenure at the helm, said at the time that he wanted to increase oversight and transparency at GE's myriad financial businesses. But now GE says the latest move will create efficiencies and make it simpler to continue shedding slower-growing finance operations and redeploy the proceeds elsewhere in the finance sector. GE also contends that the move will provide investors with an easier way to view the company's overall finance-related businesses, at a time when concerns about the financial-services industry have rattled Wall Street. GE's financing businesses accounted for about 41% of the company's $46.9 billion in second-quarter revenue and nearly half its earnings. GE Re-organized Divisional Revenue chart

Immelt sees big GE China push General Electric's chairman Jeff Immelt says the company expects its business in China to double by 2010 to $10 billion a year, in a bright spot for GE after the U.S. credit crisis forced it to cut this year's earnings forecast. Immelt said Monday GE (GE, Fortune 500) expects China's efforts to improve energy efficiency and clean up its environment to drive 15% to 20% annual sales growth for GE's clean-energy technology. He said GE also should benefit from heavy spending on other infrastructure for fast-expanding Chinese cities. GE says it has generated $1.7 billion in revenues from the Olympics -- $700 million in sales of power and other equipment for sports venues, and $700 million in advertising for its NBC television network, the U.S. broadcaster for the games.

Merck Vioxx Study Was Done to Boost Sales, Not Science, Researchers Say Merck & Co.'s marketing department devised a study on the painkiller Vioxx to persuade 600 doctors involved in the trial to prescribe the drug and recommend it to their peers, researchers say. Their conclusions are based on 100 internal company memos and reports about the study known as Advantage obtained from lawsuits against Whitehouse Station, New Jersey-based Merck over heart risks tied to Vioxx, now withdrawn. The trial of 5,557 patients started in 1999, just as Vioxx was cleared for sale, according to the Annals of Internal Medicine report. The study, which tested the drug's safety in the stomach, was primarily crafted by Merck's marketing department to get doctors to prescribe Vioxx, the researchers wrote. The report provides some of the first evidence of what is thought to be a widespread practice: recruiting doctors for a study to boost their confidence in a new drug and get them to promote it to colleagues, they said. The Advantage study ``was marketing masquerading as science,'' said lead author Kevin Hill, of Harvard Medical School in Boston, in an Aug. 15 telephone interview. ``They went about this in a very analytic way, picking doctors who would be most influential, who will talk to other doctors and recommend Vioxx to them, and thus increase prescriptions in the area, planting the seeds of additional Vioxx use.''

As U.S. Drug Companies Ail, Indian Firms Stand to Thrive  Indian pharmaceutical companies are getting a lift from woes afflicting their American counterparts. Some analysts say this could make several midsize Indian drug stocks worth examining amid the global market turmoil. Desperate to cut costs as patent expirations outpace new product offerings, the U.S. pharmaceutical industry is increasingly outsourcing drug development and manufacturing to India and China. That's not all. The U.S. financial crisis and economic slowdown have helped weaken the rupee as foreign investors have pulled the equivalent of billions of dollars out of Indian stocks. That has had the unintended side effect of benefiting India's larger pharmaceutical companies -- which rely heavily on U.S. sales for rapid growth -- by making their exports less expensive.Mr. Agarwal says that neither U.S. drug makers nor banks are expected to rebound soon, so Indian pharmaceutical companies should continue to see strong revenue and earnings growth -- at least in the short term.

Previous Posts on Business Performance

Talkin Profits: Economic Outlook, Earnings, Business Performance ?

From 500K to 5K Feet: Retail Sales to Retailer Performances

Back to Bizzness: Escalating Troubles for Auto Industry

Pits, Pendulums and Perils: LEH, FNM, FRE and Other Walking Wounded

A Smidge of Prescience, a Tun of Hurt: Finance Industry Issues Review

Tech Trends I (Readings): Big Picture to Key Players

Tech Trends II (Analysis): What're the Drivers and Outlooks

Tech Trends III: Dell Earnings to Bandwidth to Content Wars