bizzXceleration: Performance, Value and Profit

Earnings Realities

Don't Get Burned by Earnings Season Earnings season can sometimes seem like a colorful but meaningless show. How to sort through the noise. Earnings season is here again, leading many average investors scratching their heads as great money is made or lost based on numbers that fall short, or surpass estimates, by a penny or two. Good or bad earnings just might be the last thing a penny still can buy, in fact. But even though such news is always very exciting, the question remains how valuable or relevant it is for retail-level investors. This is not a game that many out of the industry truly understand. Quarterly earnings might surpass last year's figures, and even analysts' consensus estimates, but really, in the end, what does that mean? Does it really say anything about the long-term value of the stock? Does it tell you about their cash on hand, recent moves made by management or how they might even use their bailout money? No, of course not. Even more insidious is the general stench of corruption between analysts and those they cover that hovers over earnings. And if it's not corruption, it's incompetence. Most famously, analysts relentlessly cheered on the dot-com bubble of the late '90s, with just a handful of "sell" recommendations being offered, despite the fact that the market was headed for a spectacular crash. As noted by Kent Womack, at professor of finance at Dartmouth's Tuck School of business, by the late '90s "buy" recommendations outnumbered "sell" recommendations by at least 50-1. In many cases, such bizarre analyst shenanigans are still going on and are easy to find. For example, it would be hard to find a more dysfunctional firm than General Motors (GM). It's making a product fewer people want all the time, it's got enormous legacy costs, its chief executive just got marked-to-market by President Obama, its stock trades at less than a gallon of gas and it perpetually hovers near bankruptcy. But for all this, analysts have, somehow, a glimmer of hope that things aren't really that bad at GM. Thomson Reuters rates it "neutral" but not "underperform." This raises some juicy questions including, then what does rate "underperform?" Enron? WorldCom? A Pontiac Aztek? Standard & Poor's rates GM two stars. Again, if this is so, what could ever merit one star? Please tell me so I know to preserve it as something rare, like a four-leaf clover.

Market rally could trip over the bottom line It's the earnings, stupid. Optimism that the fortunes of financial companies like Citigroup were improving sparked a four-week rally beginning March 10 that drove the Standard & Poor's 500 index up 25 percent. But now investors will find out exactly how companies across all industries performed during the first three months of the year. Those quarterly results will determine whether the surge was the beginning of a bull market, or just a blip. After all, the market's last promising rally was derailed not by jobs data or an emergency federal bailout but by forecasts from companies that make everything from computer chips to tin cans to movies. The S&P 500 jumped 182 points, or 24 percent, to 934 between Nov. 20 and Jan. 6. The next day, technology bellwether Intel Corp., aluminum producer Alcoa Inc. and media giant Time Warner Inc. all issued grim earnings guidance. The S&P dropped 28 points, or 3 percent, that day and hasn't returned to its early January levels since. The current rally also began with a company announcement. This time, beleaguered and bailed out Citigroup Inc. said March 10 it was profitable for the first two months of the year. The S&P 500 gained 43 points, or 6 percent, that day to 719. The index closed Thursday at 857, and markets were closed on Good Friday. The S&P could rise more, and even turn positive for 2009, if earnings reports for the first quarter show a strengthening economy.

Earnings Recovery Could Take 20 Years Over the long haul, stocks track earnings (the 10% market return over the past century was composed of 2% real earnings growth, 3% inflation, 4% dividends, and 1% multiple expansion). It therefore makes sense to get a sense of how fast earnings are likely to recover once this depression ends. John Mauldin discussed this issue in his newsletter last week.  John still believes the recent rally is a suckers' rally and that we'll likely be working our way out of this hole for years. One reason for that pessimism is the conviction that earnings won't just snap back to pre-crash highs the way they have in  recent recessions. Why not? In short, because the peak earnings of 2007 were inflated by leverage (debt), and that leverage is now been stripped from the system.  Last time we went through an extended period of deleveraging, after the 1920s, it took 18 years for earnings to regain their old highs.  If this recovery mirrors the 1930s recovery, S&P 500 earnings won't regain their highs until 2025 or so. John also thinks that the current rally in the stock market will fail as soon as the stimulus bleeds off and the Bush tax cuts phase out next year: What is interesting is the divergence between the pre- and post-WWII periods. Our experience since 1945 is one of rather quick recoveries, averaging about 3-4 years until earnings rise above the old highs. The thicker black line shows a drop of 69.2% from peak earnings since 2007. Prior to World War II, it took 12-20 years for earnings to recover. Earnings are still dropping. As I will point out in the next few e-letters, we live in a world (not just the US) that is in a deep recession. There is massive deleveraging and deflation. The recovery is going to be quite slow, and that portends a slow recovery in earnings, which suggests protracted churning in the stock market. Even ignoring the disastrous 4^th quarter of 2008, what if earnings drop by 80% or more, which is quite possible? That means they have to rise by 400% to get back to new highs. That could take some time. Even if they could rise at an unlikely 24% a year, it would take six years to see new highs. Look at what a mountain corporate earnings must climb. Consumers are retrenching, and savings rates are likely to rise for at least 3-4 years, back to 7% or more, leaving consumer spending not at 70% of US GDP but closer to 63%. That will be a rather large adjustment, and will mean that a lot of productive capacity will have to be closed or allowed to lie in disuse for a long time. We just built too many strip malls and car factories and restaurants. It is going to take some adjustments.

Consumer Caution Puts Profit Margins at Risk Here are some things that happened in the 10 years before this recession started in late 2007: Consumer spending rose 75%, but disposable personal income rose 69%. The domestic profits of nonfinancial companies rose 114% and their share of gross domestic product, a proxy for profit margins, went from 6% to 7.7%. The profits boom had at least something to do with the way spending outpaced income. Employee costs are most companies' biggest expense. Since what U.S. companies at large paid workers didn't keep up with what those workers were spending, more of that spending flowed to the bottom line. The reason that spending was able to rise more than income, of course, is that Americans were running down their savings and running up debt. Between 1997 and 2007, the savings rate fell from an already low 3.7% to 0.4% and household liabilities as a percentage of household financial assets rose to 18.6% from 14.8%. After all that has happened over the past year, both consumers' ability and desire to use debt to fuel spending have been reduced. The initial stages of economic recovery, whenever that occurs, likely will see a flurry of spending as people restock their cupboards. But after that they will probably move on to restocking their diminished savings. If that happens, the U.S. is in for an extended period where household spending increases more slowly than household income. And that will squeeze profit margins. Or at least it will squeeze profits at companies that depend on U.S. consumers. Many companies will try to preserve margins by stepping up efforts to sell their wares elsewhere. Businesses around the world may be about to face more competition from their American counterparts.

Principles, Performance, Challenges

Unveiling the Darker Side of Companies and How Change Can Prevent Collapse  Knowledge@Emory: What was your understanding of why such successful businesses fail? Sheth: I never thought that good companies fail. But my research of 12 years shows that companies are not destroyed by competition, they destroy themselves. Many economists talk about capitalism as a constructive destruction. What that means is that the forces of competition will create new competitors who are smarter and do better. However, my research suggests that successful companies destroy themselves. This is because on the road to success many companies unknowingly inherit bad habits. The Self-Destructive Habits of Good Companies looks at the dark side of companies. Knowledge@Emory: What did you find were the causes for the failure of once highly successful companies? Sheth: I found that there are seven major bad habits that cause companies that were once highly successful to subsequently fail. The bad habits are in no particular order, none carries more weight than another. Some of them are more universal, common across cultures and countries and not limited to America. The first bad habit is denial, in particular, the denial of new realities in business such as the emergence of new technology, the new reality of customer wants and ignoring globalization. Sheth: Another bad habit is arrogance. As companies become successful, they think they are bigger than life and above everyone else. For instance, they ignore laws and ethical boundaries and become abusive to customers, employees and suppliers. Other signs that a company is self-destructive is complacency. This rests on three pillars: your success in the past, your belief that the future is predictable, and your assumption that scale will protect you against any setback. There’s no better example of this than Ma Bell. The only thing better than a monopoly is a government-regulated monopoly. But there’s a downside: It’s hard not to get fat and lazy. Thanks to its monopoly-bred complacency, AT&T had difficulty competing after it was forced to break up on 1984. How do you wake up the company? Reengineer to eliminate waste and curb inefficiency.

In Praise of Pessimists Imagine for a moment you're in a building that's filled with smoke, and you read reports from the outside world that says the structure is on fire and the worst is yet to come. Would you prepare for the coming flames, or would you look all around you and say "what fire?" Chances are very good you'd get the hell out of that building. Now, imagine you run a major corporation and are reading reports from the International Monetary Fund that say the global recession is worse than anyone could have predicted. What's your reaction? Will you take significant steps to deal with the crisis, or will you look at the numbers and scoff? According to a new survey conducted in March and released Tuesday by the Boston Consulting Group, the companies that are paying the most heed to dire economic predictions are leaders in their respective industries while lower-tier players prefer to see the situation with a more optimistic attitude. But in this case, at this time, blind optimism doesn't pay off. What is it about the companies on the lower end, the ones who aren't heeding the economic warnings? Are they plain dumb?  "They are not dumb," the study's two authors, David Rhodes and Daniel Stelter, wrote in an email response to Portfolio.com. The pair described the reaction from these companies as being closer to denial. "Since the 1980s or even longer, we have not experienced such a severe recession. Managers, like all human beings, are basing their decisions on experience. This time we all run the risk of being surprised when we face a new situation. In other words, they are basing their 2009 projections on their 2008 experience and typically while they may expect a 'U' shaped recession, they hope and plan for a 'V'. And many believe that their own companies will outperform." To avoid falling into this perception trap, the authors lay out 10 actions to beat the downturn. The most important piece of advice in their eyes: "Taking the risks associated with a downturn very seriously: if they do this, they will then prepare very early and seriously and they will be on top of both their cost base and their cash position. Part of this means managing for cash, as cash is scarce and expensive."

• Collateral Damage Part 6: Underestimating the Crisis Astonishingly, companies are still underestimating the size and scope of the economic crisis. They are generally too optimistic about their own performance and believe that they have taken sufficient steps to respond to the crisis. They often tend to be too inward looking in their forecasts, relying on their own 2008 experience rather than fully assessing the changing external environment: managers do not like to create or accept negative plans. Consequently, although taking action, companies have not adopted the steps either to protect themselves from the worst effects of the downturn or to prepare for the upturn. Companies that were the first to feel the effects of the crisis are busy fighting fires, while those that have not yet been affected are still scouting for opportunities and have not invested in getting prepared.
• Valuation Advantage: How Investors Want Companies to Respond to the Downturn BCG’s investor survey suggests that the downturn is creating a major sea change in investor perspectives and priorities. During the past two decades, when the global economy was growing rapidly, many investors became focused on near-term results, primarily in terms of growth in revenues and EPS. In the light of the downturn, however, investors appears to have shifted away from this short-term focus on earnings toward a new willingness to support management teams that want to manage for the long term. One of the differences that can have a big impact is what we call valuation advantage – that is, a company’s ability to command a valuation multiple that is strong relative to those of its peer group or competitor set. In effect, these investors are urging companies to “never let a crisis go to waste”. They want the companies they invest in not only to survive the downturn but also to use it as a springboard to a stronger competitive position. And they are prepared to award a valuation advantage to those companies with a compelling strategy to do so.

• Collateral Damage Part 5: Confronting the New Realities of a World in Crisis

The Peter Principle Lives The Peter Principle made us laugh, but it also made us aware of the importance of simple competence—and of how elusive it could be. When people do their jobs well, Dr. Peter argued, society can't leave well enough alone. We ask for more and more until we ask too much. Then these individuals—promoted to positions in which they are doomed to fail—start using a bag of tricks to mask their incompetence. They distract us from their crummy work with giant desks, replace action with incomprehensible acronyms, blame others for failure, cheat to create the illusion of progress. If Dr. Peter were alive today, he'd find that a new lust for superhuman accomplishments has helped create an almost unprecedented level of incompetence. The message has been this: Perform extraordinary feats, or consider yourself a loser. We are now struggling to stay afloat in a river of snake oil created by this way of thinking. Many of us didn't want to see the lies, exaggerations, and arrogance that pumped up our portfolios. Instead we showered huge rewards on the false financial heroes who fed our delusions. This is the Bernie Madoff story, too. People may have suspected that something wasn't quite right about the huge returns on their investments with Madoff. But few wanted to look closely enough to see the Ponzi scheme. Nor did anyone care to see the limits of professional athletes. Baseball's Barry Bonds was a great player, but excellence wasn't enough for the San Francisco Giants' management, himself, or deluded fans like me. During those alleged steroid years, Bonds sure looked juiced: His head resembled a balloon. My reaction? Like most Giants fans, I joked about the meds—and loved it when he blasted those homers. The cure for our malady? We should return to what Dr. Peter wanted: rewarding ordinary competence and being wary of feats that come too easily. Perhaps the late Ray Kroc is the right role model here. One of his first steps in building the McDonald's empire was to run his own outlet—he cooked, cleaned bathrooms, picked up the trash. The focus on doing ordinary things well was, he believed, key to McDonald's success. Simple competence was central, too, for former U.S. Marine Lieutenant Donovan Campbell, who led a platoon in bloody street battles in Iraq. As Campbell's account, Joker One, tells us, he earned his men's respect and protected them through simple acts: training them to get in and out of a Humvee quickly, reminding them to eat, and arguing with superiors when those under his command were unnecessarily put in harm's way. Finally, consider how Captain Chesley Sullenberger III explained his astounding emergency landing of US Airways (LCC) Flight 1549 in New York's Hudson River in January. "I know I speak for the entire crew when I tell you we were simply doing the jobs we were trained to do," he said. As Dr. Peter might have observed, there were no pretenders, blowhards, or shared delusions that day, just the deftly coordinated actions of people who had not reached their level of incompetence.

• The Sons of Martha

A Leader to Bank On How has giant JPMorgan Chase weathered the financial storm while giant Citigroup was overwhelmed by it? The simple answer, to judge by Ms. Crisafulli's book, is that Morgan has been run by a seven-day-a-week number-cruncher who interrogates managers about the risk exposures in individual transactions. Citi, meanwhile, sailed into the howling winds with a lawyer on the bridge. The master, commander and lawyer atop Citigroup, CEO Charles Prince, missed the signals on the deteriorating housing market and allowed risks to pile up in off-balance-sheet structured investment vehicles (SIVs). He was forced out of Citi in 2007. A year before, Mr. Dimon's JPMorgan (he had taken over as CEO in 2005) had begun aggressively reducing its exposure to subprime mortgages after Mr. Dimon and others at the bank saw rising default rates at other, less-careful lenders. And Morgan had no use for SIVs. In her telling, the Morgan chief is exactly what shareholders need and want. He spends 80 hours a week examining and refining the operations of the firm, in constant communication with subordinates in various units. Usually he is asking for numbers, and when he doesn't get them, he writes down the information he is owed on a piece of paper that remains folded in his pocket. When he gets the data he is waiting for, he crosses the item off his list. A former colleague describes the executive culture that Mr. Dimon learned while working for Mr. Weill: "If there is a problem and you tell me, it's our problem. If there is a problem and you don't tell me, it's your problem -- and you don't want to have a problem!" One problem Mr. Dimon does not appear to have is a weakness for $1,400 wastebaskets and $87,000 area rugs. When he took over as CEO of Bank One in 2000, he took a relatively modest office among the senior managers and canceled a planned renovation of the executive floor. His cost-cutting was so thorough that he personally called vendors to reduce the firm's phone bill. When competitive pressures convinced him that bank branches needed to be open longer hours, he was told that longer days would hurt employee morale. Mr. Dimon tells Ms. Crisafulli that he responded by saying, "I don't give a sh -- about employee morale." He quickly adds: "I didn't mean that. What I meant was . . . you've got to compete. Never stop doing the right thing for the business to save a few bucks. Working hard and winning in the marketplace boosts employee morale." If Ms. Crisafulli's portrait in "The House of Dimon" is even close to accurate, we appear to have, in Jamie Dimon, a man at the top of a mega-bank who seems never to have grown comfortable with the idea that his firm was too big to fail. And that may be why it didn't.

Financial News, Front and Center: What Took So Long? THERE is a well-worn but telling newspaper industry joke: “If it bleeds, it leads.” But that has never applied to the elementary, if trickier, parts of business news — things like the federal budget deficit, current account shortfalls, or quarterly losses at companies like G.M. Despite the dramatic rise in stock ownership among ordinary Americans through 401(k) plans and electronic trading, financial news has remained, at best, an afterthought for most general-interest publications. Even though many financial threats the world faced in recent years were hiding in plain sight — in the pages of the business press — the broader media’s longstanding indifference to economic news helped keep it safely out of the public dialogue. Forget about television. Viewers tend to find business chatter more boring than a test pattern or a Charlie Rose interview. It has never delivered ratings — even CNBC considers an audience of 600,000 a pretty good day, and the network’s unaccountable loudmouth, Jim Cramer, is lucky to get a quarter of that. Now that the global financial system’s belly-flop has become Topic A, the mainstream media has stifled its yawns and is digging in ferociously. In reality, the financial press has been screaming about executive pay for decades, though hardly anyone else seemed to care. Sure, you could point to countless other articles in Fortune, and other magazines and newspapers, that read like love sonnets to A.I.G. and other companies that would later be vilified. But if you were paying attention, there were also plenty of warnings about equity and real estate manias, not to mention the ever-riskier bets on Wall Street that seemed destined to go terribly awry sooner or later. So far during this financial crisis, the cathartic moment has been Jon Stewart’s deft evisceration of Jim Cramer, on “The Daily Show” last month. But again, followers of the financial press could only roll their eyes. Critics have been hammering Mr. Cramer ever since he unveiled his Ozzy Osbourne routine on “Mad Money” a little over four years ago. With a little luck and a lot of taxpayer money, the economy will one day be removed from the intensive care unit and the news media will likely retreat from the business story again. But why wait for another financial crisis to start making sure that economic news has its rightful place alongside politics, sports and entertainment? Otherwise, we run the risk looking as silly as the TV viewers who bet real money whenever Jim Cramer shouts into his microphone if we keep expecting “The Daily Show” to take down the next Enron or smoke out the next Bernie Madoff. Jim Impoco is a freelance business editor and writer.

UPDATES:

Strategic planning: Three tips for 2009 Strategic-planning season has arrived for many companies, and it couldn’t be more different than it has been in years past. Gone are the days of linear trend-extrapolation exercises that produce base, upside, and downside cases. Strategists, now facing the most profoundly uncertain times in their careers, are creating disaster scenarios that would have been unthinkable until recently and making the preservation of cash integral to their strategies. Most strategists we know are avoiding the obvious mistakes, such as planning as usual or, conversely, eliminating essential strategy-development activities or even strategic planning itself. Nonetheless, strategists remain deeply—and understandably—concerned that the priorities emerging from the annual planning rituals won’t address the demands of today’s tumultuous environment.These are uncharted waters, and no one has a clear map for sailing through them. It’s clear that scenario planning, a well-established technique for coping with uncertainty, should play a critical role this year, but executing successfully has never been as challenging as it is now. Most companies will have to consider more variables and involve more decision makers than they have in the past. Strategists will also need to place a greater emphasis on measurement—the only way to recognize when changing conditions merit quick strategic adjustments. Finally, the focus on new or surprising scenarios shouldn’t obscure relevant long-term trends or devalue important existing strategies. There’s no occasion like the strategic-planning process to get a fix on such indicators—a fix that should also help companies make ongoing budget decisions in real time. That’s critical, because it makes no sense to set each operating unit’s budget allocation at the start of the fiscal year if cash is tight and corporate executives expect to dole it out carefully as plans become less uncertain. What companies need now is a dynamic “pay as you go” resource allocation process that conserves cash and encourages adherence to the strategic road map laid out in scenario planning.This year’s planning process should also generate unusually specific plans to monitor the performance of suppliers, customers, and competitors. As we’ve seen in the past six months, the most entrenched incumbents can plunge into financial distress with dizzying speed.

A Well-Crafted Critique of Business "Success" Books and My Ambivalence About Good to Great

 Yesterday's Boston Globe published an excellent story by Drake Bennett called "Luck Inc," about the questionable value of books about how to build great companies (the graphic is to the left). Drake provides an excellent summary of the arguments in The Halo Effect that rip apart the methods used in many such books, as well as arguments from Hard Facts, the book Jeff Pfeffer and I wrote on evidence-based management.  The story focuses most heavily on new research by Michael Raynor and his colleagues, which apparently shows that luck (i.e., randomness) provides the best explanation for which companies enjoy exceptional performance and are then celebrated as superstars in books like Good to Great and In Search of Excellence.  This point makes sense to me, and in fact, follow-up studies of Peters and Waterman's excellent companies and Collins' good to great companies are consistent with that view  -- and also consistent with an argument that -- when it comes to picking which stocks will perform best -- a "random walk" is mighty tough to beat -- that most stock pickers don't a randomly selected stock portfolio. 

Industry/Company News Samplers

Danger lurks behind banks' results U.S. banks' first-quarter results will show that losses from credit cards and commercial and real estate loans have not yet peaked, and perhaps dash hopes that the worst of the banking crisis has passed. The January-to-March period is the first full quarter since the industry got hundreds of billions of dollars of taxpayer bailout money and mergers weeded out several troubled lenders. Results at large banks such as Bank of America Corp (NYSE:BAC - News), JPMorgan Chase & Co (NYSE:JPM - News), Citigroup Inc (NYSE:C - News), Wells Fargo & Co (NYSE:WFC - News) are expected to improve from the fourth quarter, helped in part by a surge in mortgage refinancings, lower deposit costs and fewer writedowns. But investors will approach with abundant caution as bank results stream in over the next two weeks. They know the bottom lines will reflect a new accounting rule that may further limit writedowns without actually improving bank balance sheets. And the government is conducting "stress tests" to see which of the 19 biggest lenders may need more capital.

• Royal Bank of Scotland Plans Up to 9,000 Job Cuts
• Wells Fargo Projects Record Profit
• Berkshire Is Hit With Downgrades
• Barclays sells iShares to CVC for $4.4 billion
• Banks Holding Up in Tests, but May Still Need Aid
• Public Markets Lock Down Private Equity
• Crisis Altering Wall St. As Stars Begin to Scatter
• With Finance Disgraced, Which Career Will Be King?

Rejected By VCs, Rescued By Angels  After spending a year talking to more than 70 venture firms on both coasts, Earl Galleher gave up on raising venture capital and turned to angels to fund his unproven idea - software that automates and analyzes the process of landing meetings with sales leads. As his company, Basho Technologies Inc., was running put of cash, Galleher was able to score $2 million from two groups of angel investors in Wilmington, N.C., to launch the first product. What surprised him during the year-long funding process was not that angels were willing to invest when venture firms were not, but the widely divergent attitudes about investing in new businesses. Basho’s initial angel investors, Harbor Island Equity Partners and Wilmington Investor Network, have used their contacts to help the company secure meetings with other angel groups across the country, and Galleher says they hope to raise more angel money and avoid the need for traditional venture capital. Angel investors have been showing more of an appetite for seed and start-up stage investing lately. Such investments made up 45% of all angel investments in 2008, up 6% from the previous year, according to the Center for Venture Research at the University of New Hampshire. While the number of venture capital deals fell 10% to 2,550 in 2008, according to VentureSource, the number of angel investments dropped only 2.9% to 55,480 deals. However, the University of New Hampshire survey did point out that angels are becoming more frugal.

• Angel Investors Still Busy But More Frugal

Drugstore Chains Insured Against Health Cuts The health-care industry is braced for an assault of government reform. Can well-fortified pharmacy chains endure? Events last week in Washington state suggest the chains have a fighting chance. The state government proposed cutting reimbursements on brand-name drugs for Medicaid participants. The change would save the state millions, leaving drugstores to shoulder the burden. But a court stalled the changes after intervention from Walgreen and others. Walgreen also had threatened to stop serving Medicaid patients at many stores if the cuts go through. A negotiated compromise is likely. Walgreen's big market share gives it clout: It sells 23% of total prescription drugs in the Seattle area, while smaller rival Rite Aid has 19%. Either company's presence is especially critical in areas of the state with few pharmacies. Drugstores have fought the battle before. In 2002, CVS said it would drop out of Medicaid after Massachusetts proposed to cut reimbursements. The state eventually narrowed the cut by two-thirds. The three largest drugstore companies control roughly 40% of the prescription market, according to Barclays Capital's Meredith Adler. But their share of Medicaid prescriptions is even higher, because there is no Internet competition for the state-administered program. Admittedly, Medicaid accounts for only a small portion of the chains' revenue, 6% for Rite Aid and a little less for Walgreen and CVS. But Medicare, the federally run benefit service for older people, generates more than 10% of revenue for all three. Sweeping changes to Medicare could be harder to fight than Medicaid rules on the state level. But the government has easier ways to save Medicare costs before reaching the pharmacy level. President Obama's health-care plan is expected to cut payments to insurers that administer Medicare. Investors have reason for nerves about the health-care system's overhaul. But drugstores are proving their role as vital organs.

• Retailers Find Nice Surprise in Bargain Bin
• Wal-Mart Comes Up Short
• Sales of Luxury Goods Seen Falling by 10%

Airbus Aims to Pull Back Without Stalling Airbus production boss Tom Williams has spent the past five years raising the European plane maker's output. Now, as airlines defer deliveries and cancel orders, he faces a difficult balancing act: downshifting factories without killing prospects for a recovery. Airbus said Friday that it booked orders for just 16 planes in March, compared with 54 orders in March 2008 and 37 orders the previous year. The company has said it may capture only between 300 and 400 new orders this year, down from 777 orders minus cancellations last year. Building jetliners is so complex that slamming on the brakes can be almost as tough as hitting the gas. Factories that Mr. Williams had recently optimized for fast production by adding equipment and staff must pull back without letting the fixed expense per plane rise painfully. Airbus's dozens of suppliers, which provide components ranging from tiny rivets to massive landing gear, can't get stuck with warehouses full of unsold parts or idle factories, or they will be too weak when demand returns. And laying off skilled workers could cause a brain drain that slows an eventual recovery. "It takes a long time for us to train our folks who design and assemble planes, so we've got to be careful," said Mr. Williams, Airbus's executive vice president for programs, in an interview at the company's headquarters here. Since 2003 Airbus has increased production of its planes by 60%, to a record 483 deliveries last year. But in October the unit of European Aeronautic Defence & Space Co. shelved plans for further increases, and in February said it would reduce deliveries of its popular single-aisle models to 34 a month from 36 and consider further cuts. Airbus, and U.S. rival Boeing Co., which said it would lay off 4,500 workers but keep output steady this year, are reacting much more cautiously than other major industrial companies to the global economic slowdown. United Technologies Corp., which makes aerospace equipment, air conditioners and elevators, in March said it will cut 5% of its work force, or 11,600 jobs. Caterpillar Inc., which makes construction equipment, has announced some 24,000 layoffs as it slashes output and mothballs production lines.Airlines and industry officials predict Airbus and Boeing will have to cut output more drastically to avoid producing planes that customers can't take. Douglas Harned, aviation analyst at Sanford C. Bernstein & Co. in New York, predicted in a report published last month that Airbus and Boeing will have to cut deliveries next year by 20% from current plans. Aircraft lessors recently called on both plane makers to cut production to avoid glutting the market and undermining the value of planes on their balance sheets.Airbus and Boeing officials say building jetliners is different from other industries because the planes, which carry catalog prices ranging from $50 million to $300 million, take roughly a year to build. As a result, the cycle moves more gradually.

• Boeing to Cut Output of 777s as Traffic Sags

Choosing Its Own Path, Ford Stayed Independent On Nov. 29, 2006, the Ford Motor Company made a surprising pitch to the nation’s biggest banks. In a packed ballroom at a New York hotel, Ford’s chief executive, Alan R. Mulally, said he would mortgage all the company’s assets for billions of dollars in loans to finance an overhaul of the troubled automaker. Although the economy was healthy then, Mr. Mulally said the money would give Ford “a cushion to protect for a recession or other unexpected event.” At the time, the request was considered an act of desperation. But the $23.6 billion in loans it received turned out to be Ford’s saving grace. Plunging car sales have driven its two American rivals, General Motors and Chrysler, to the brink of bankruptcy, forcing them to borrow $17.4 billion from the federal government to stay in business. The future of both companies will be decided in the weeks to come by President Obama and his special auto task force. But Ford, because of the money it borrowed in the private sector nearly three years ago, is in far better shape than its two crosstown rivals. The loans have kept it independent, and on a course to survive the worst new-vehicle market in nearly 30 years.Ford has accelerated along that path, pursuing a top-to-bottom transformation into smaller cars, fewer brands, and a leaner cost structure. As a result, for the first time in decades, Ford’s fortunes no longer seem so closely tied to the broader fate of Detroit. While G.M. and Chrysler wait for more federal aid, Ford is capitalizing on its status as the only member of the Big Three to make it, so far, on its own.

• Toyota to Revamp U.S. Operations , Toyota Plans a Major Overhaul in U.S.
• At Auto Shows, a New Sobriety Reigns
• China Sets Electric-Car Plan

Winners Emerge As Manufacturers Buckle  When businesses flame out, there are often others on the sidelines, like Craftmaster, ready to pick up the pieces. Most companies don't like to openly discuss the demise of competitors. But in hard times, the grim reality is that grabbing business from fallen players is one of the few avenues to growth -- or at least a way to minimize a company's own sales slide. At Craftmaster, which assembles upholstered sofas and chairs that sell in stores for less than $1,000, revenues rose 4% last year and have grown 5% since January, according to the company. That might seem like a modest increase, but given the state of the industry, it's remarkable. Sales in the $80 billion U.S. furniture market, which is closely linked to housing, were off by an estimated 20% over the past six months, say analysts. Craftmaster is now on the verge of becoming a major supplier to American TV & Appliance of Madison Inc., a 15-store retail chain in the upper Midwest that previously carried Norwalk's Hickory Hill brand of furniture. That account used to be served by Norwalk's Wisconsin-based salesman, who now works for Mr. Calcagne. "Craftmaster is actually picking up business from three different suppliers who have gone out of business on us in just the last few months," says Ken Wagner, a senior vice-president at American TV. Another example of the company's prowess: growing orders from Raymour & Flanigan Furniture, an 80-store furniture chain based in Syracuse, N.Y. Neil Rosenbaum, Raymour's senior vice president of merchandising, says he first started noticing problems with some of his existing suppliers about 18 months ago. Several, he recalls, had fallen into a pattern of late shipments. He didn't waste time in reaching out to Mr. Calcagne. Raymour, which was already a client of another Samson unit, arranged to have Craftmaster supply two living-room "groupings." Raymour sells about 100 such sets in total. Mr. Rosenbaum was impressed when Craftmaster swiftly developed the groupings and adapted itself to suit Raymour's inventory system. That includes guaranteed delivery times, of three days or less, to its end customers. "They respond quickly, they get samples made quickly, and they have the ability to get us to the price we need," says Mr. Rosenbaum.

Recession Now Hits Jobs in Health Care Employment in health care, the only major industry outside the federal government still adding jobs, is succumbing to the recession. In the latest sign, the president of New York City Health & Hospitals Corp. wrote Friday to community organizations as well as employees and unions at its 11 hospitals and four nursing homes, saying the agency will lay off more workers even after slashing 400 jobs last month. Across the country, hospitals are taking financial hits. They are seeing losses in the portfolios that they rely on for investment income. The number of uninsured patients is rising. Elective procedures -- which reap big profits -- are down at a third of hospitals nationwide. Nursing homes are trimming payrolls. And with state governments continuing to cut budgets and talk of health-care reform from Washington, industry executives are preparing for even leaner times. More than 16 million people -- one in eight workers on U.S. payrolls -- work in health care today, up from just 1% of the work force 50 years ago. mployment in health care and social assistance -- which includes hospitals, doctors offices, nursing homes and social services such as day care -- has grown by half a million jobs since the recession began in December 2007, while the rest of the economy has shed 5.1 million jobs.But the pace of job growth in health services has slowed sharply this year. The sector added an average of 17,000 jobs per month in the first three months of the year, less than half last year's pace. Health care usually weathers downturns better than many other industries because consumers tend to cut spending on cars or clothes before they forgo trips to the emergency room or pharmacy. But this recession is the deepest in a generation. The decline, while unusual, is still likely to be a temporary break in the industry pattern. Growth in health-care spending, and thus employment in the sector, is likely to rebound when the recession ends, a function of the enormous advances in medical technology and Americans' strong appetite for health care. President Barack Obama has also named the sector one of his three pillars of the future U.S. economy, alongside energy and education. Health expenditures as a share of gross domestic product have more than tripled in the past 50 years to about 16% today, and the government's Centers for Medicare and Medicaid Services say that figure is likely to hit 20% within a decade. "It's a long-term shift reflecting changes in technology and what consumers want," says Robert Fogel, a Nobel laureate and professor at the University of Chicago's Booth School of Business. "Health care is the growth industry of the 21st century."

Pfizer Outlines R&D Structure Pfizer Inc. outlined the leadership structure of its sprawling research efforts once it merges with Wyeth, moving ahead on its commitment to swiftly integrate the two organizations. fizer said Tuesday it will break research and development into two separate organizations, one that looks at traditional chemical pills called small molecules and another that studies large-molecule, or biologic, drugs made from living cells. Pfizer's current R&D chief Martin Mackay will lead the small-molecule researchers, while Wyeth's R&D leader Mikael Dolsten will oversee the biologics. The new company will be made up of nine businesses, a continuation of Mr. Kindler's push to make its units nimbler and more accountable. Among the new businesses are primary care, vaccines, oncology, consumer and nutritional products. Pfizer, which sold its consumer-health unit to Johnson & Johnson in 2006, is making a renewed effort to diversify its businesses as blockbuster breakthroughs are fewer and further between. In addition to Drs. Dolsten, Emini and Pangalos, Pfizer has signed on another five members of Wyeth's top brass. Retaining talent is key, and the drug industry in the past has had a hard time convincing biotech stars to stay on when their companies are taken over by more buttoned-up corporate parents. In 2008, for instance, AstraZeneca PLC lost two of the standouts who had come with its $15.6 billion acquisition of MedImmune. Pfizer's Dr. Mackay is making it a priority to avoid having research stalled by the integration efforts. Pfizer's previous mega-deals -- its 2000 takeover of Warner-Lambert and its 2003 merger with Pharmacia -- have been criticized for slowing down its research for years. Critics of the Wyeth deal have questioned whether Pfizer can avoid those pitfalls. With an annual research budget over $10 billion, the new organization will be mammoth, with major challenges of coordinating locations and scientists. Dr. Mackay, a veteran of those previous integrations, says that won't happen again. Tuesday's announcement signals that the company is moving more quickly than it did in those earlier deals. "My intention is to learn from the past," Dr. Mackay said in an interview. "We want to build an organization that is ready to run at close."

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China Telecom-Gear Firms Pass Rivals Chinese telecom-equipment companies Huawei Technologies Co. and ZTE Corp. have long been laggards in their home market, despite success elsewhere around the globe. But now, thanks to government support for new wireless technology and an aggressive strategy of deeply undercutting competitors on price, the two are beating out rivals in the world's biggest cellular market by subscribers. Huawei and ZTE are now ahead of big foreign firms like Telefon AB L.M. Ericsson, Alcatel-Lucent SA and Nokia Siemens Networks in the scramble for an estimated $59 billion of spending over the next three years on new third-generation wireless networks. So-called 3G technology enables high-speed data services such as wireless video and Web surfing. With some 659 million mobile subscribers, China was already vital for global telecom-equipment companies, and the rollout of 3G is making it even more important at a time when sales growth in many big markets is weak. China's Ministry of Industry and Information Technology estimates that 170 billion yuan, or about $25 billion, will be spent on 3G networks in China this year, nearly half the 400 billion yuan in spending it projects through 2011. Analysts say Huawei and ZTE will likely double their combined market share to more than half of China's 3G revenue over the next several years, from just 25% to 35% of the revenue from construction of China's existing wireless network. Among the big foreign companies, Mr. Zhang says, Ericsson's market share has remained roughly stable, while those of Alcatel-Lucent and Nokia Siemens, a joint venture of Nokia Corp. and Siemens AG, are declining. Huawei, founded in 1988, and ZTE, founded in 1985, were too small to be serious competitors when China began building its existing wireless network in the early 1990s. Established foreign players like Ericsson won the lion's share of those early contracts, establishing close relationships with China's state-owned telecom carriers. Huawei and ZTE were forced to focus overseas because "the domestic market was sewn up," says Duncan Clark, chairman of BDA China, a Beijing-headquartered research firm. The Chinese companies poured much of their efforts into developing 3G technology, which countries in Europe and Asia started rolling out early this decade. Now, Huawei and ZTE are undercutting competitors' prices by as much as half for 3G equipment in China, according to analysts and industry executives.

Pixar’s Art Leaves Profit Watchers Edgy Pixar Animation Studios has never released a movie that was not a commercial and creative triumph, and its 10th feature, “Up,” is looking to be no exception — at least artistically. To the extreme irritation of the Walt Disney Company, however, two important business camps — Wall Street and toy retailers — are notably down on “Up.”  The film, about the adventures of a cranky 78-year-old who ties thousands of balloons to his house, features dazzling animation that evokes the work of Hayao Miyazaki, the refined Japanese filmmaker and anime master. Like Pixar’s Oscar-winning “Wall-E,” there are stretches without dialogue. A few scenes are rendered in black and white. Some industry watchers, a few of them still griping about the hefty $7.4 billion that Disney paid for Pixar in 2006, are fretting about the film’s commercial potential, particularly when it comes to benefiting other Disney businesses. Richard Greenfield of Pali Research downgraded Disney shares to sell last month, citing a poor outlook for “Up” as a reason. “We doubt younger boys will be that excited by the main character,” he wrote, adding a complaint about the lack of a female lead. Mr. Greenfield is alone in his vociferousness, but not in his opinion. “People seem to be concerned about this one,” said Chris Marangi, who follows Disney at Gabelli & Company. Doug Creutz of Cowen and Company said qualms ran deeper than whether “Up” will be a hit — he thinks it will — but rather whether Pixar can deliver the kind of megahit it once did. “The worries keep coming despite Pixar’s track record, because each film it delivers seems to be less commercial than the last,” Mr. Creutz said. Robert A. Iger, Disney’s chief executive, responded, “We seek to make great films first. If a great film gives birth to a franchise, we are the first company to leverage such success. A check-the-boxes approach to creativity is more likely to result in blandness and failure.”

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