bizzXceleration: Performance, Value and Profit

Now we're going to shift the focus back onto business performance but come at it top-down by starting with the macro-issues of profitability and asking what the economic outlook means for business performance and earnings outlooks. After the page-break you'll find some readings on those topics, general business conditions and some specific players (WMT, SBUX, Kraft, Whole Foods) that illustrate many of the points. Before we get into the meat however we'd like to share some of the morning's headlines which reinforce the arguments about a slowing economy and the deteriorating earnings outlooks. MUCH more importantly however these are the headlines from places like the WSJ and Bloomberg. Here's the first central question: what happens when it dawns on businesses and investors that the V-shaped recovery is history ? And that '09 is not looking much better ?

1.       Economists Expect 2008's Second Half To Be Worse Than First The U.S. economy is poised for an unpleasant finish to 2008, amid a consumer-spending slowdown and a weakening global economy. The emerging pattern is the reverse of what most forecasts showed at the beginning of the year.

2.       OECD Forecasts Sharper Slowdown for G-7 The world's leading developed economies are set to slow more sharply in the months ahead, according to the OECD's indicators of future activity.

3.       Predicting What's Next Gets Harder Investors often expect the stock market to behave like a crystal ball. Lately it has made a better rearview mirror. For decades, turns in the stock market typically led earnings by roughly six months. But during the past decade or so, stocks have moved roughly in tandem with, and occasionally lagged, the trajectory of profits…

4.       Is the Market Still a Future Indicator? At this point, you would have thought the Efficient Market Hypothesis would have died a quite death. The most fascinating aspect of this is the opportunity for anyone in the market to identify inefficiencies. Discover where the market has a non random error -- we've called it Variant Perception over the years -- and you have a potentially enormous money making opportunity.

 Those headlines pretty well capture the arguments we've been making for some time, are based on similar analysis and point to a lot of other folks seeing the tipping point being crossed. And as Barry Ritholz points out in his post on the Deficient Market Hypothesis "you have an ....opportunity" ....if you make the right choices of course :) ! Speaking of which the next central question is what happens when the analysts figure out that their earnings outlooks need to go in the trash ? And the markets absorb those revisions ? How long will all that take to percolate ? Somewhere in there may lie some of Barry's opportunities.

We'll leave you to skim thru the readings which beef up these arguments but will note that the blue-highlighted titles are URL's - in other words you can click thru to get to the underlying story or post if you like. Now let's jump into parsing out the profit analysis

 Corporate Profits: First Pass

Let's start with a fairly simple look by using the St. Louis Fed's FREDII data graphing tool to look back at YoY changes in corporate profits to 1980. Part of the point here is that you aren't reliant on the MSM but courtesy of the Fed can take some pretty deep dives yourself.  It may take a bit to learn the tool and data sources, and maybe a bit more to learn what the data's telling you, but generating current analysis eventually takes a few minutes. Also btw just clicking on any graphic or chart will bring up an enlarged version for closer examination.

Take a careful look here and there are several things to notice. First off the timing, patterns and business cycle relationships are exactly what one would expect. The economy drives profits, no if, ands or buts. With some aberrations  that are important.  The blue line is  "real company"  after-tax profits on the right scale and it's volatile. But that scale wouldn't be so distorted except for the huge jump since '00. Before that those profits were cycling around a trend, which turned down in the '90s. Notice also that the drop in this decade is steep, now near-zero and below and appears headed lower.

Corporate Profits: Pass II

Let's take another pass at the data courtesy of Northern Trust's econ department and zoom in a bit, albeit with slightly different data on profits coupled with some inflation data.

 First off notice that QtQ profits have been negative and dropping since Q406. Wonder where those buybacks and earnings reports are coming from ? You should. We do know it certainly didn't go into hiring or capex. And therefore won't either !

What about margins ? Well when the ratio between the good CPI and the finished consumer goods PPI is dropping like a rock that tells us there's no pricing power whatsoever. It also tells us that profits have been under enormous and growing pressures for some time. And when it accelerates those pressures worsen. Now what do you think about future profit prospects ? Worse and worse we hope ! :)

Corporate Profits: Pass III 

Now let's take final pass at the big picture so you can get the full "slowly-boiling-frog" environment. The rather busy chart below shows corporate profits from 1979 from the national accounts. The UL shows the absolute number stacked up and if it looks like the Finance industry has been wallowing at the trough you'd be right. The UR shows profits as a % of GDP. We see three major structural trends that will govern things in the future. First off profits for non-financial companies were steady until this decade when they started liquidating their futures. Second, it looks like Financial companies went thru a major structural jump-shift and grabbed off more of GDP and, in the LR chart which shows % share of total profits, that's confirmed. And we now know what that was based on and how solid it was. Hm.....not promising. Remember the broken business models and wonder how that'll play out. And third, it looks like foreign profits (Rest-of-World or ROW) showed a steady rise until later in this decade when they took a big jump. That's born out in the LL chart which shows YoY% chanages, which btw, are both steady and pretty much mirror the business cycle. Note that very recently ROW profits are showing a non-cyclic jump. Brave new world indeed.

Continue reading "Talkin Profits: Economic Outlook, Earnings, Business Performance ?" »

Posted by dblwyo at 08:02 AM | Permalink | Comments (0)

The Road to Perdition is paved often by good intentions and traveled by opportunists and in the near collapse of Fannie and Freddie we have both working over time over years, even decades. But in the last several days and weeks the shibbolethic ideologists have certainly been getting their licks in to. Not to long ago, despite the fundamental structural flaws being well-known, we were fantasizing about propping up the Housing freefall with GSE debt and loans. Unbelievable - das ist unsinn as my old German teacher used to say. And on the other side we have well-informed people ranting about rampant socialism and throwing their usual careful focus on the facts and the nature of things to the wind. We won't mention names but you know who y'all are. After the break there's a bunch of carefully selected readings which we hope you skim. If you haven't the time to go read them all then the last couple - the Economists dissection of the situation and the structural flaws and Larry Summer's short, pithy and brilliantly insightful summary are essential.

Essential, why ? Well first off let's put it in context. Combined they hold over $5 Trillion in mortgages and guarantees and are counter-parties to another $2.3T in credit swaps. We're talking here about numbers so unbelievably huge that the sovereign credit and wealth of major worldwide economies are the only basis of comparison. Right now we're in the worst financial structural breakdown we've seen since the Great Depression but it has barely scratched the performance of the economy unlike that earlier episode. Why ? Because policy-makers have a much deeper and more profound understanding of how to manage markets. It was policy error that turned the Great Crash into the Depression. And from Aug07 to Mar08 we were headed that way because non of the traditional instruments were working as they should in normal cyclic patterns. This was a structural problem. When BSC went down that, IOHO, seriously threatened the stability of the entire system. To understand the difference between what happens if/when BSC was allowed to go under in capitalist purity and what would happen if FNM/FRE went you need to wrap your head aroung the Richter Scale. A reading of 2.0 vs 4.0 is not twicet - each number up is 10X the prior number. But that's not the real rub - the energy release scales by a power law so that a difference in magnitude of 2 represents a 1000X more energy. BSC was a 3, maybe a 4.0. A collapse of the GSEs would be an 8.0, maybe a 9.0. The difference between a kiloton explosion and a gigaton in the financial system.

All of this ideological prattling about socialist intervention is utter nonsense, it's also extremely disingenuous as well. On at least two strategic fronts and sustained over years. The most recent one being that it was spending on Housing and the Housing ATM that allowed us to sail past the Tech Bust without a major downturn. Now if the GSEs were/are half, at least, of the mortgage markets, and as the giant players, define the cost structure where do you think we'd have been without their implicit subsidies of lower than market mortgage rates ? Where would the economy have been ? And where would the so-called rally from '02-'07 have been ? All of which the critics benefited from without objecting to how the sausage factory was working.

But our turning a blind eye to the sausage factory health standards has gone on for decades. The GSE's managed to run with minimal supervision, grow into a serious threat to the Western world (literally), maniuplate their books and bribe Congress widely and deeply for years with our implicit cooperation. Greenspan, and to his great credit Bush, started trying to tackle all this back in '04 when accounting shennigans finally caught up with the Pashas and Mandarins of the GSEs. But again we've benefited for years ourselves. As the Economist points out the GSE are/were leveraged  up about 65X - a level no private company would ever be allowed to run at and one possible only with wink-wink, nod-nod government backing.

Which gets to the second bottom line and then the third. Since everybody saw thru the veil of independence to the implicit guarantee what's really at stake here is the faith and credence of US government debt. If we let Fannie and Freddie go what won't we not stand behind next ? And how good is the dollar - who'd want to keep their reserves in the currency of the banana republics ? Those are literally and legitimately the kinds of questions lurking in the backs of the minds of Finance Ministries all over the world. If a direct collapse could have been an R-scale event of 8.0 then the impact on our ability to borrow, on interest rates and on the dollar would be a 10.0 !

Which is not to say this can be allowed to continue either - as Summers points out. The last time we backed ourselves into these corners where the government guaranteed the S&L mess without forcing changes in business models, operations, policies, risk management and controls was a disaster with a huge bill. We need to get thru this and then re-engineer the GSEs. Which is exactly what Paulsen and Bernanke are proposing. And have apparently been working on for months if not years.

So it's time to throw out the ideological, man the pumps, repair the ship and get her to port. And then re-build her from the ground up. Or else. Oh btw that R10.0, let me quote:

10.0+ Epic Never recorded; see below for equivalent seismic energy yield. Extremely rare (Unknown). 1 teraton equivalent. Estimate for a 2 km (~1.2 mi) rocky meteorite impacting at 25 km/s (~55,000 mph)

Continue reading "Bad Times, Really Bad Behavior, Bad Trouble: Fannie/Freddie and Perdition Road" »

Posted by dblwyo at 07:27 PM | Permalink | Comments (0)

Sometimes you work to a plan and sometimes you get interrupted by events. If you can put the events into the context of the plan we call that interrupt-driven event-managed, the sine qua non of aglity and resilience :). In this case the plan was to take forward the prior economic discussions and apply the implications to various business sectors. The last two days of market gyrations, Merrill's stunning announcements and some serendipitous inside scoop from Big Picture cause us to change course...a little. Consider the following excerpt from a recent post:

 Merrill's $5.7B Write-Down, $8.5B Share Issuance My (naive) question: "Wait a second -- didn't Merrill just report last week? How did they not disclose a $5.7 billion dollar whackage?"Merrill guy's by-the-book-answer: "Earnings were the 17th; The decision had not yet been made to sell the ABS CDOs, or take the writedown, or issue more stock. That was done this week." I think:  "yeah, sure it was."  Frickin weasels. 

Other Merrill guy says: "Geez, the stock is gonna get hit tomorrow" (ya think?) The stock closed Monday at $24.33, down 55% year-to-date. Merrill woman: "When do we buy this?" CDO guy: "When it hits $15" Me: Ouch!

Only that wasn't quite how it played out. The markets nose-dived yesterday and got another nosebleed today from re-climbing back to their previous altitudes. As Barry occasionally puts it ...WTF !!! Take a look at the accompany 10-Day composite chart of the SPX and NDX and tell me it all makes sense you. Particularly in light of the last two posts on the domestic and international economic situation (Note: trade talks have collapse - NOW that's really bad news as we discussed). No way that all makes sense. The commentary yesterday was that the IMF report on Housing troubles was the trigger and the running unsinn today that better confidence was the re-trigger. BS ! But let's put those arguments to bed.

WTF 1: Real Data on Confidence and Housing Prices 

The first composite chart shows U of Mich. consumer sentiment on a YoY% and absolute basis. Notice that YoY changes are as bad or worse as the Volcker-Reagan surprise short-stop of the economy that broke inflation. But on an absolute basis they're as bad as we've seen in nearly 30 years. Headlines may talk about MtM improvements but in actual fact these haven't been worse in a long...long time.

Now, courtesy of Calculated Risk consider the composite of Housing prices based on this morning's SP Case-Shiller reports. Ditto...they also are about as bad on both an absolute and YoY basis as we've seen in a very long time. Much worse if you think thru the absolute numbers we'd think that there's a long way to go before a semblance of normalcy returns to the housing markets....years of future pain. Now everybody may be getting jaded.

WTF 2: What Really Happened ?

On the basis of those charts plus Merrill's stunning anouncement, which follows right on the heels (that's deliberate - heels as in slimebxxx not heals as in fixes or even heels as in bringing up the rear) of MER's recent earnings announcements which said "we're under control, don't need more capital and no more write-offs. Sheesh.... Several reactions.

1. If they didn't know this was coming a few days ago their grasp of their own situation is sadly deficient and the company is completely out of control (which should also make you wonder about the rest of the industry).

2. If they did know it was coming and weren't ready or refused to couple the two together that's borderline malfeasance. If the deception was deliberate it's beyond borderline and on a murderous cattle raid that should start a war.

But wait, there's more.

3. Yesterday's news should have been insufficient to trigger the major drops we saw, especially since it was triggered and driven by financials. If it was/is true then today's more credible news on the economy PLUS MER's announcements should have seen an even bigger drop.

4. It looks like the details of the announcement got leaked out all over the place without being formally and publicly announced yesterday. That, I believe, satisfies the technical definition of criminal. Now we're beyond bad companies and into bad judgement and bad behavior - can you spell integrity.

5. Oh BtW, as long as we're having several WTF moments - the recent fantasy rally was based on the Financials having seen reality, admitted it and cleaned it up. So much for that notion.

Who do you think can trust to tell anything resembling the truth at this point ? Now there's a question you should never have to ask. It's one thing - not a good one IOHO - to spin-doctor to keep the patrons from stampeding in the fire. It's entirely another to tell them there was no fire, there is no fire and anyway it's out. And leave the building while leaving them there watching the movie.

After the break are some readings you might want to consider on this business picture designed to survey the depth and breadth of the breakage as well as provide some guidances for finding candidate truth-tellers. 

Update: BNN comes thru again with the best, substantive and human discussions that'll actually do you some good instead of being more tainment than info

 Scott Peterson reports on Merrill Lynch & Co.'s plans to raise $8.5B by selling stock.

 BNN speaks to Janet Tavakoli, president, Tavakoli Structured Finance Inc.

Continue reading "Bad Times, Bad Behavior: Merrill, Malfeasance, Markdowns, Markets" »

Posted by dblwyo at 11:21 AM | Permalink | Comments (0)

My what a funny market - clearly the worst is over...again. All the writeoffs have been taken, banks are repairing their balance sheets and the "recession" isn't really here. Or so one would believe from the last few days of market action. The sudden uptick - which we plan on discussing in more depth this coming weekend - has been driven by surges in Finance and Consumer Discretionary, including huge jumps in GM and F. Of all people. Just to wrap a little perspective on it check out the graphic which is a 10-day snapshot of the SP500 major sectors. Who's read and who's green - all the folks who've done well are now reddish to glaring crimson while the converse is true of the ones who've been taking it in the kister. We won't wax on too much about whether or not this all makes sense per se.

But you likely recognize the Buffett quote about finding out who's been swimming naked when things get tough and the rising tide starts receding. As you no doubt know by now we think the tide is really just starting to ebb and there are going to be a lot of stranded players. Many of whom have been swimming more naked than they've admitted and, sadly, than they may know themselves. Interestingly despite the "good" earnings news from financials and others in fact this is more a case of severely lowered expectations being satisfied. Not the delivery of good news. From ORCL's poor outlook a couple of weeks ago to Apple and MSFT's not-so-good outlook we come to today's news where, for example, Costco's poor but honest outlook has tanked the stock. Now we ask you if one of the better run retailers in the world is getting nailed by rising costs, falling demand and tighter spending who else is going to catch it ? The markets have shrugged off AmEx's warnings and increased negative outlook as well but it's even more of a harbinger. Which leads us to the topic and readings we do want to get to.

Finding a Wet Suit

 Just as refresher we've found that five major factors determine whether one is naked, wearing a swimsuit or is even better equipped. IOHO there are two things you should be thinking about right now. First, while this bounce may run for a while it's certainly been wishy-washy and seems to be largely on the back of the demand drops for oil. Not a positive sign. That would say this is more an opportunity to sell into the market rise and build up some dry powder. Second you ought to be looking for those companies that will be worthy of that powder...at some point in the future. And they may already be telling you who they are.

Virtuous Circle of Enterprise Performance

After the break you'll find another readings excerpt collection that walks nicely thru the five factors and then some. The immediately adjacent graphic is another way of thinking about things btw....no one factor by itself will make sure a company has a deluxe wetsuit. It takes all of them working together in a synergistic feedback loop. But those that've got it are going to really hammer those that don't. The readings include some good and bad stories... including those companies still squandering scarce capital on buybacks. In a time which we believe couldn't be worse, except for what's to come. A perfect contrast of strategies is the unraveling of Cold Stone Creamery's not-so-sound business model as compared to some very strong outfits that are using this downturn to turn up the pressure on their competitors - the usual suspects, e.g. HPQ, LUV, FDX. All of whom are companies with operational capabilities as excellent as it gets in their respective industries. Yet who's example is sadly neglected as the stories on Manufacturing and Logistics neglect illustrate. Just as a sidebar we've been talking about the need for manufacturing excellence since the Japanese started kicking our butts almost three decades ago - after having learned the howto from an American. Makes you wonder.

Largely it's a question of leadership, management and discipline. JNJ's discussion of how they run themselves is superb and contrasts with the bad stories from Dow and American Axle. It's also a story of good, strategic human resource development - in other words of making work worth an extra effort. And finally it's a story of tying it all together with the right kinds of measurements and controls - an integrated management system. Highlighted here by another discussion of the Moneyball approach to doing it right.

These are the folks you want to be hunting down - the experts at BizzBall ! Who aren't swimming naked but are going to stake out those who have on the beech for the crabs. 

Continue reading "Bad Times, Good Companies: Who's Swimming Naked" »

Posted by dblwyo at 08:04 AM | Permalink | Comments (0)

Having reviewed Markets and the Domestic Economy that led us to the on-going disruptions in the Finance Industry. Notice despite decent JPM performance and not bad from Wells Fargo that a lot more results aren't as encouraging. Not to mention in other industries. Nor the collapse of Indy-Mac, the "bankruptcy" of FNM and FRE and the on-going threats in the Auto Industry. Most of which is "dashboarded" by this composite chart of some key companies and industries (GM, F, Airlines, Hombuilders, Retail and the Con. Disc. sector). Again what's continuosly surprising from these charts is that folks are surprised. At the same time they illustrate several key themes we've hammered more than a few times. Key ones of which are a) business performance matters, incredibly much.(Business Hilbert Problems: Fundamental Factors of Performance) And b) the Economy-Industry-Company mantra is alive and well. We've previously dissected some of these industries in particular, for their own sake and as representative exemplars of key strategic issues (Retail Industry: Plus Ca Change...or Bend Over and Kiss...,Once More Into the Breech: 3 Decades of Auto (Industry) Delusions, Life and Death in the Air: Carriers, Manufacturers, Realities). After the break you'll find these stories, trends and arguments carried over into the Industrial Sector (Dow, GE, aircraft manufacturing), the Auto Industry (Honda, GM, BMW), Retail (Saks, Starbucks, Tesco, office-supply) and logistics services (FDX/TNT).

GDP Components and Outlook

As you skim over these excerpts we'd ask you to keep the accompanying chart on YoY changes in GDP components in mind. It offers, IOHO, some deep insights into the pressures that are slowly emerging and evolving on each of the major sectors. Just as a reminder the top sub-chart shows the YoY changes in each component while the middle one shows the % contribution (impact) on the YoY change in GDP. And the bottom shows the running total. Look at Consumer Spending for example which has been shrinking rapidly and who's contribution likewise. The two most important things to think about are the decrease in Capex as businesses tighten up - what one would expect as capital spending begins to follow the normal cyclical pattern - and Net Exports. Which have really been the sole source of relatively good news. Which raises the interesting question of whether the accelerating downturns in foreign economies will allow that to continue. Which we don't think it will - bad news for GDP in general but specifically for the Tech Industries who've shifted so much of their business offshore. And one then has to ask what're the implications for the Tech stocks, eh ? As well as any realistic grasp of these trends is priced into the markets !

Continue reading "Readfest (Business): Back to the Future, Revisiting Old Themes" »

Posted by dblwyo at 01:33 PM | Permalink | Comments (0)

Let's pick up the thread of our listings of key postings with the finale - specific company analysis. At the end of the day the central focus of this blog, even if/when the weight of postings seems to indicate otherwise, is on improving enterprise performance. Hence our repeated mantra of Economy - Market - Industry - Company. Now you might be asking yourself why does that matter ? Other than that's how we all make our livings directly or in-directly (public organizations may make society more effective but it's still companies who make the squirrel cages go round - puns and images intended).Just to put a point on it consider this recent chart of GE's market performance as well as some recent headlines and excerpt:

"GE at 4 1/2-Yr Low as Broker Wants More Unit Sales General Electric Co (NYSE:GE - News) shares fell for a fourth straight day on Monday after J.P. Morgan cut its rating on them to "neutral" from "overweight." The shares fell 2 percent to $28.55, after touching a 4-1/2 year low early in the session on the New York Stock Exchange. J.P. Morgan said the second-largest U.S. company by market capitalization needed to sell off wide swaths of its operations to restore investor confidence."

 Frankly we think that whole line of argument is absolute unsinn based on not understanding the business - and if we don't pay analysts for that then what justifies their compensation (and GE's investor presentations are very clear and to the point so no excuses). Nonetheless Immelt and crew screwed up badly by not being better at economic analysis and in planning ahead for its' impact on their company. And the headline/story certainly captures the enormous pressures they're under, justified or accurate or not.

If GE is one of the better and more well-run enterprises with an enviable track record measured at least in decades what does that say about understanding performance for the non-GE's of the world ?  As usual we have some graphics for you to consider where we've been categorizing at least the "headline" companies, so everybody can dig into and verify the background if you choose, over the last several years using our enterprise performance criteria. The first graphic is, shall we say, the mal-performing companies. Now sometimes they migrate...sometimes even to the well-performing list....and back ...or visa versa as well. That is they start out as good and then a failure to adopt turns a Dell from exemplar to trashcan.

Consider this second graphic which shows the relative better performing companies in appropriate categories. You might also want to notice that to balance out the tables we moved "Strugglers and Stragglers" to the good chart. Now these charts aren't absolutely up-to-the-minute but you'll notice that GE is one of the few, IOHO, who's in the sustainable column of demonstrated excellent performance - no matter what the market's short-term impressions might be. And darn few others. On the other judging from a recent post (Dell Computer: It Ain't Your Grandfather's Beige Box) Dell might be in the process of re-inventing itself. They're certainly doing a lot of the right things, or so we've judged. On the other hand Starbucks probably deserves a significantly revised entry indeed.

After the break you'll find the table of company specific postings, including the long series on Home Depot that kick-started the whole effort and a prior analysis on Citi. And just as a reminder the analysis uses the "framework" and relies on a lot of industry analysis as well. For example our analysis of the state of play in the Finance Industry leveraged and adapted the model developed to analyze Citi. Partly because their investor relations reports were so good and gave us all a great picture of the major components of the whole industry. Comes full circle. Which is another way, btw, of saying that the key postings on business and industry analysis are be used here to do specific companies. Need the framework to do the analysis - a blueprint and checklist. Need to the analysis to validate and verify the framework.

Over time we hope to add more companies to the inventory but meanwhile here's Home Depot, Citi and Dell. Which are also a retailer, a bank and a manufacturer which links back to the and provides insights on any other Retailer, Bank/Finance, Manufacturing or Tech company. Consider that as well. 

Continue reading "Key Postings VI: Company Level Business Analysis" »

Posted by dblwyo at 05:29 PM | Permalink | Comments (0)

Since Dell not only announced it's results this morning and surprised everybody, perhaps itself also, with pretty good numbers we thought a deeper dive on what's going on might be appropriate. And a test of our various toolkits for enterprise and industry analysis. Here we're going to dive into Dell's strategy, commenting along the way, as they see it themselves. And base it on their most recently available analyst presentations. We've argued before that Dell's downturn was visible at least three years before the fecal matter hit the impeller for two reasons. First off their core business - selling cheap beige boxes to large enterprises - was maturing and headed down. Now we also admit that we though their basic business model of low-cycle-time, customized order fulfillment would adapt nicely to a lot of other opportunities. Second we argued that they were cutting way too many corners since their whole business model was based on trust, reliability and outstanding, responsive customer service. When they started off-shoring and that service became non-responsive what had been a competitive weapon devolved into a cost to be shrunk. We won't mention the disingenuous accounting that went along with all this. Well let's not get to excited but things may in fact be turning around...and not because of the numbers. We still have to see how sustainable those are and how the economies hold up. Nonetheless DELL goes on our watch list as a strategic buying potential. Let's talk about why.

The two major challenges Dell had was they needed to re-think their business model for a new world. AND they needed to completely re-think, transform and re-build their operational capabilities to support whatever they finally came up with. Dell had three key initial challenges: 1) face reality, 2) re-think, re-craft and adapt their historic business model and 3) translate that re-thinking into new execution capabilities. We'll take a deeper dive on major aspects of these after the break but here's a composite picture of two key charts from their Apr08 analyst meeting.

The top half lists out the key challenges, where they want to go and where, according to their dashboard they think they're at. Refreshing and honest on many levels take a careful look. The bottom chart focuses on the two key strategic elements of profits and costs. Re-thinking product design and development, both as a cost control and a strategic marketing initiative. And reducing on-going operating expenses. Again both appear well-thought thru and accurate. The proof of course will be in the pudding. 

That is are the new ideas and business models being translated into the key strategic initiatives required to implement them. Well take a look at another composite chart which certainly indicates somebody has done some serious thinking indeed. The top sub-chart shows key strategies combined with the major, DIFFERENT, markets they are going after. Each of which requires different capabilities, business model adaptations and NEW operational capabilities. From marketing to customer service to go-to-market channels, logistics, manufacturing and product design and development.

So the next critical questions are they being put in place - which is preceded of course by recognition, acknolwedgment and commitment. And are they working as planned - likely in the face of economic turbulence and worldwide competition as well as the inherent challenges of doing business in unfamiliar markets. But it is the right, componentized, modular and adaptive Chinese menu of re-structurings that suits the markets they propose to tackle. 

Continue reading "Dell Computer: It Ain't Your Grandfather's Beige Box" »

Posted by dblwyo at 10:49 AM | Permalink | Comments (0)

Hopefully you've had the chance to take a look at yesterday's post on Citigroup. By this point most of the MSM, et.al. commentary is in. Now I'll admit that an in-depth post on Citi and it's deep-seated structural deficiencies has been on my to-do list for a very long time. And interestingly commentators like Jim Jubak and Meredith Whitney have been less than positive (their vidclips are at the bottom of the intro btw...worth watching). However after reviewing the Analyst presentation from last Fri. IOHO they may in fact be dead wrong. Note - we're saying may. If you think back to our template of business business performance (Performance Assessment Basics: Five Fundamental Factors) we argued that a business had to have a strategic vision/business model, execution capabilities that supported it and the ability to manage the outcomes. All of which Citi has lacked for years. Instead it's operated as a discombobulated set of isolated, conflicting and self-serving silos. Even if you believe the breakup thesis each of these silos needs to be turned into an efficient and effective business in its' own right. Then you get to the synergy question.

What we saw in Pandit's presentation starts to answer the mail in each of these areas. Just by way of compare and contrast here's two dloadable files from the old regime and the new. The first is so confusing it's scary. The second is so well-structured, thoughtful and straightforward it's scary in a whole other way. If you dload nothing else take it because of what it tells you first off about Citi. Secondly because of what it shows us about how to think thru a complex business looking to turn itself around. And third because it's as a good an overview of the worldwide finance industry and key strategic trends as you're likely to find. In the same way that looking at IBM's pitches gives you a broader insight so does this. What we show at right is our template of the Fundamental Performance Factors used to create a foward-looking map of what Citi should look like. And which we think Pandit's presentation goes a long way toward speaking to.

Below we have two analysis sections you might find worth looking at. One is a review of real historical performance vs. the common wisdom using long-term stock prices. The second are excerpts from the presentation of key and critical charts with a little discussion wrapped around them. The bottomline here is that major challenges remain - primarily putting in a good management system and changing the culture from one of self-interested aggrandizement to measured collaboration. As Lou Gerstner admitted in his book changing the culture is the hardest part and he left it too late to have much impact. We'll have to see. And as Pandit admits this is NOT an overnight effort nor should it be. Furthermore there's a lot more short-term pain to come from the economy and markets as well as company specific. Nonetheless we think what we see is the beginnings of a Buffet-like long-term value investment opportunity. 

• Whitney Says Pandit Faces `Impossible Feat' at Citigroup May 12 (Bloomberg) -- Meredith Whitney, an analyst at Oppenheimer & Co., talks with Bloomberg's Margaret Popper and Carol Massar in New York about Citigroup Inc.'s business strategy, capital position and earnings outlook, and the performance of Chief Executive Officer Vikram Pandit. David Darst, chief investment strategist at Morgan Stanley Global Wealth Management, also speaks. (Source: Bloomberg)
•  Jubak’s Journal: Citigroup’s real problem Citigroup says the financial supermarket created in the 1998 merger was never fully integrated. Citigroup now has the tough task of selling $400 billion in “hobby” businesses.

Citigroup has been a poster child for many things in the last few months...actually over the last decade. As such they make a good example of digging into a company to examine it's current situation, performance and outllook. Now they've faced a myriad of problems and bad news, much of it self-inflicted, as it turns out. And the bad news keeps on coming with recent writeoffs, more layoffs and more and more MSM media coverage of the sort "can anybody run Citi ?".

The standard story that's been built up is that Sandy Weill put together a giant financial super-market thru astute deal-making but his successors have failed to translate that vision into executable reality. There's a lot of truth to that story but even for a standard mythology it tells us only about 1/2 and reinforces the storyline that Weill himself has been selling.

As a start for digging into it we've collected a bunch of readings from fairly recent reports on the writedowns and earnings, key analysts take on capital and dividends and headline stories on the workability of Citi. Where this all comes together is that this year is the 10th anniversary of Weill's legerdemain and the newest CEO, Vikrim Pandit, just gave his first major presentation to the investment community telling us what he's found, what's being done to fix things and where they're going. Not surprisingly much of the reaction to his pitch is..."oh no, not that same old leaner, meaner story again". Actually we happen to think that the presentation, which we have reviewed is superb, simple, both broad and deep and, if properly executed, indicates the beginnings of the same kind of turnaround that Alan Mullaly is orchestrating at Ford. And by the same approach.

Consider the chart of Citi's stock at right as being the initial starting point and main evidence for the Weillology of "my successors" screwed it up. On the surface it would seem to support his argument. At least until you take a closer look. Notice that the giant runup in price began in the early 1990s, not with Weill's magic touch. Which means a great deal of it had to do with the overall runup in the markets in the '90s. The other thing one would want to ask when looking at a chart of this length is what would inflation-adjusting it tell us ? A third small detail to notice is that once the economy slowed and the bubble in mainstream stocks starting deflating Citi, on Sandy's watch, didn't do particularly well. At minimum he wouldn't appear therefore to have created a vast differential in performance.

What we think happened is that he put a lot of stuff together, ran off the key operating/strategic exec (Jaime Dimon) who was required to turn that mess into an integrated whole and left a whole bunch of organic problems to his hand-picked successor. When Prince took over he ended up having to jettison a lot of businesses. clean-up $Bs of legal and operational problems and try to repair the lack of controls and management system as well as the culture. Unfortunately while he did pretty well on the first part the second wasn't his forte. And worse he let himself be seduced by the performance Sirens into making some really dangerous decisions. Summarized in the "while the music's playing you've got to keep dancing" quote. Well actually not. What they pay the senior executives for is to dance with style, grace and skill, to know which dances they're good at and which not, to sit out the bad ones and to leave before the party's over. Looking back it looks like Prince got it all wrong.

So what's Pandit going to do ? If you'll recall we've suggested two major mantras, dashboards or filters for thinking about things. The first is the Economy-Industry-Company mantra. In other words  the continuing downturn in the Economy will continue to impact Citi's performance while the fundamental re-thinking of the Finance Industry that needs to go will, or should, trigger major changes in strategy, operations and business models.

The other major dashboard/evaluation mantra we've suggested is that a high-performing company  needs to: 1) Have a fundamental value proposition and a Business Model/Strategy that translates that into specifics. And 2) it needs to be able to execute against the strategy in an aligned way at the most fundamental level. And finally, 3) it requires a management system that makes sure everybody is marching to the same drumbeat and rhythm where people are held accountable for delivering on their responsibilities. And conversely that the things they are held accountable for are the things they are responsible for, i.e. have control over.

Citi as an entity failed all those tests thruout the last decade. Now the question is can Pandit fix them. We'll take that question up in our next post. 

Continue reading "Poster-child of Mal-Performance: Citi, Wow Deja Vu' ?" »

Posted by dblwyo at 10:41 AM | Permalink | Comments (0)

With all that's going on and our predilection for big picture stuff it's still fascinating and educational to look at the "small" (relatively speaking of course). Here's a great narrative of 10 days that shook the world and destroyed 87 years of Bear Stearns hisotry thru a combination of chutzpah, arrogance and mis-calculation. This is worth reading for its' own sake...BUT consider this...please. What would have happened to the Credit Markets if this same "run on the bank" had happened more broadly. We really did face the danger despite everybody passing it by..

Continue reading "Anatomy of Collapse: BSC...and the Markets ?" »

Posted by dblwyo at 07:12 PM | Permalink | Comments (0)

Among the other big news, and there was sure a lot of it last week, was Fri's announcement of MSFT's semi-hostile offer for Yahoo. An offer which apparantly is the last item in almost two years of on-going discussions and failure to reach agreement. In our humble opinions this is a disaster in the making and they only possible beneficiary is Google. That conclusion is reached by a combination of familiarity with the Industry, with companies and technologies involved and applying our model of enterprise assessment (Masterclass: Buffett on Investing and Business Analysis). It's also a lesson in business history among other things. In any case how this plays out is important for Internet users, for investors and for employees as well as customers and suppliers of the companies involved. As a start on pulling the pieces together we used our framework to put together a preliminary analysis skeleton of the merger and wrapped it in a bit of industry analysis as well. Below the line you'll find some very interesting reading excerpts and linkages as well. In particular we highly recomment following thru the link on Nicholas Carr's article and using his discussion as a template for understanding what's going on here. To put another point on it btw - this is an excellent example to illustrate how one might begin to do deeper analysis on companies. Let's start with the skeleton in the table below:

 The emphasis here is on preliminary - a considerable amount of additional work would be needed to flesh out the details,especially at a company level. Nonetheless several key points stand out when one uses the template to think things thru a bit.

Continue reading "B2C Wars:Yhoo/MS Merger - Disaster in the Making ?" »

Posted by dblwyo at 08:33 AM | Permalink | Comments (0)

For some time now it's been the intention to revisit prior dissections of HD - where we ran a nice little series but also with the intent of using HD as an example of we outsiders taking a look at company performance. It seems like it might be time to re-visit that and for several very good reasons. As the set of postings on profits and earnings show company performance is a critical factor in many things. And, the point in yesterday's post on the Weekly Reader, there's a lot of examples of folks who deserve poking at.

Just to review the bidding the last HD posting id'd six major factors in digging into HD's performance and then worked thru them in some detail. The six are: 1) Economic environment and whether or not it was going to be worse, 2) Employee Morale and it's linkages to HD performance (an anlysis thread we dug into in several postings, and here), 3) Customer Service - a major area of old competitive advantage, current major breakage and bad image and one requiring major investments but not too major, 4) Operations - major changes in procurement, logistics and store operations to improve service and lower long-term operating costs, 5) Product Development - continue and expand the development of new products with higher value propositions and new services to support them ala Target and 6) revisions and extensions of the historical Business Model because the US market is pretty well saturated and new market niches will need to be developed to restore growth.

So the key questions are how're they doing, what's likely to happen and what can we do about it ? Below we present a summary table of the six factors along with some discussion and some implications. But before doing that let's review the last few months of headlines:

• May/Jun - Q108 same store sales down approx. -8%, buying back $25B of stock (a 1/4 of capitalization at the time) using $10B in proceeds from the sale of Hughes Supply plus $12B of borrowings. [Earlier on MSN Money over 10K e-mails were recieved with detailed stories of customer woes and complaints]. BigPicture rants about poor service.
• Jul/Aug - EPS for FY07 -15-18%, down from expectations of -9% with a 1-2% reduction in shares btw. Buyback set at $39-44/share. (7/26) Moody's downgrades all ratings, buyback reset (8/9) at $37-42/share, (8/26) Hughes prices drops to $8.5B with a guarntee of $1B in debt plus retaining equity.
• Sep/Oct (9/5) Buyback 290Mil shares at $37/share for approx which would be 1/2 way uisng $8B in proceeds plus $2.7B in cash, about 12.5% of the stock. Seperately outlook was revised and pessimism increased for revenue, profits and earnings. (10/10) HD Design Center concept announced - warm & fuzzy hardware stores targeted at women (?). (10/16) Same store sales down -16% and (10/30) Buffett rumored to be interested.
  

While those are the sorts of headlines you'd expect in the financial press, especially in these times, notice that after a couple of quarters of "how-to-fixup-HD" articles the summer to date is primarily about buybacks, finacings and deteriorating sales with a little buyout thrown in to flavor the buyback. On the surface you'd have to ask yourself is this HD just being coy, preserving competitive information while it explores those options or is the lack of information a lack of action ?

Given a downtrending economy, increased financial pressures, and an imploding primary market then using scarce & expensive capital resources to buyback shares, especially when you're having to borrow and increase leverage to do it, doesn't make much sense. Even if you're a PE guy this outfit is going to spend the next couple of years fighting down pressures on EPS. Pressuring management to buyback shares makes sense if they're under-valued. Using scarce capital to hold back the tide and worsen performance is in nobody's interest. Or so it seems to me. 

And judging by the stock chart so it would seem to Mr. Market. Now if you're buying back stock at $37 that then is worth $32 you better hope Warren buys it for $35 or more and reduces your loss. It seems to me that now would be a good time to hunker down, explain what's going on, make some judicious investments and get set for an upturn that would/will hopefully follow what's likely to be another two tough years. And for gosh sakes - tell your people that too. Not use borrowed money to prop up your stock and paper over the deep challenges. 

Continue reading "Performance Re-visited: Another Trip to HD's Woodshed" »

Posted by dblwyo at 02:58 PM | Permalink | Comments (0)

Tesco, the largest UK retailer, is coming to the US with a new format that primarily focuses on ready-to-go meals of high quality and will start in the US market. Knowing them they've thought this thru thoroughly, tested and will execute with style, discipline and customer-focus.

Where this is both interesting and a harbinger of things to come is twofold. First, just in their sector, making something like this work takes a complex blend of skills in store operations, replenishment, logistics & transportation, product development, procurement and technology. Having worked some with Tesco in years past they are as good and balanced as anybody in the world at the reach and range of these skills. In fact their logistics operations are THE critical enabler of their responsive, high-service store operations and are built with more capabilities than any other; and closely coupled to very sophisticated IT.

Second, it's a harbinger for the retail market as a whole. Which is largely split between high-end retailers where price isn't much of an object and the EDLP (every-day-low-price) cost-control mantra low-end with some examples but no major players in the middle. With a sorta of exception in Target and more so in Trader Joe's. Yet it's where the largest opportunities lie when you add up the number of people with disposable income who are ill-served.

So that makes the US entry of Tesco a great, dramatic and exciting event for some of us who find the world of business (as it is not as Dallas would have it) intriguing. 

Continue reading "The Unpopulated Middle: Tesco in the US" »

Posted by dblwyo at 07:41 AM | Permalink | Comments (0)

With all the turbulence in the Economic and Market environments the next question is what do we do about it ? That's a question of particular and peculiar fascination for me and I hope for my readers. At the end of the day the externals define the context while it is what business does that makes them successful or not. Earlier we spent a great deal of time on examing how well Home Depot was coping and found that major internal errors led to major strategic breakdowns in performance. Yet, in looking around at the headlines, we also found that this bizzskul exemplar was hardly alone. In surveying the headlines the number of companies that have been experiencing significant performance challenges seems to be more in the majority than not (thought admittedly that may be in my sampling :) ).

 Two major areas of under (UN ??) development are strategic HR and IT. In the special section below we find a fascinating case study of a firm that puts major emphasis on nurturing human talent at the lowest levels and sees it as a strategic advantage. IT is one of the great mysteries - the gap between the business and technology sides of the enterprise not only continues as wide as ever but seems to be increasing. Yet it's widely admitted how strategically important and how much the leading players from WMT to FDX to AmEx benefit from their systems innovations. And the problem is growing apace, as shown by an article below.

But continuing the 'companies in trouble' theme there are updates on Dell, MSFT, and AMD which dive deeper into their struggles while also pointing out some of the things Lenovo is doing. There's also a set of interesting postings on the state of the Telecom industry and key players. Finally some interesting reading on GM and the Auto Industry as well as MickeyD's ability to continue to innovate and find new value - in this case by moving up from below to challenge SBUX's value prop.

Life is interesting. Perhaps we need a great Greek Dramatist to chronicle the tragedies and comedies, no to mention the occaisional pure farce :), of the trials and tribulations. Wasn't it Aeschylus in the Oedipus series that gave us our best take on how pride, hubris and ignoring the environment led to disaster ? Though perhaps Shakespear's King Lear is a better model for how power struggles lead to performance catastrophes ?

Continue reading "Weekly Reader: 16Sep07 Business" »

Posted by dblwyo at 08:04 PM | Permalink | Comments (0)

So here's our preliminary shopping list - things to focus on now and things to do to set the table for the future. In other words while emergency repair and recovery needs to be pusued with all due haste and effort those short-term focused efforts need to seque into longer-term and deeper changes or they will be unsupportable.

Continue reading "Six Steps to Prosperity: HD Initiatives to Consider" »

Posted by dblwyo at 12:32 PM | Permalink | Comments (0)

After some sidetrips to explore performance vs. valuation and the impacts of sacrificing employee morale on long-term performance it's time to revist our friends at Home Depot. Not that we're above just plain old picking on HD, probably the sign of jilted expectations for us as well as the many folks who innundated message boards around the Net and the Blogosphere expressing their deepest disappointments with value and customer service at HD. But it's also more than that - and we hope - much...much more. HD was, perhaps is and certainly can be a great company again but it faces many challenges.

Continue reading "Picking on HD Some More" »

Posted by dblwyo at 09:55 AM | Permalink | Comments (0)

Well let me try and get back to discussing Home Depot and the lessons therein for corporate performance. While my primary purpose and focus here is on enterprise performance I keep letting economic and market events seduce my attention away - largely because it's hard to sail the boat well if you don't know where the wind and the currents will take you. That said I'm liable to succumb in the future somewhat often to build up my collection of tools and observations.

In the prior HD post we talked about Nardelli's short-term focus doing tremendous damage to the soft-assets of customer value and employee morale; and that enormous asset depreciation being reflected in a long-term decline of PE Ratios and the associated drop in enterprise value. With a couple of toolkit posts on PE trends and valuations in the market we can turn around and dig a little deeper now into HD's history. Unfortunately the Nardelli experiment in excessive cost control for apparent short-term earnings not only spent soft-assets but squandered a major market opportunity. Now that housing is slowing dramatically the new management must not only re-build the company that was but face severe down-pressures in demand. It won't be easy but perhaps a look back may help.

Continue reading "Home Depot: a Little History" »

Posted by dblwyo at 11:01 AM | Permalink | Comments (0)

Despite the outrage let me suggest that his departure was cheap at the price. And that the real question was why it took the Board so long to reach the necessary conclusions. Perhaps the short-term lesson is that dissing the Board, as he did by not inviting them to last year's annual meeting, is not in any CEO's interest. On the other hand after six years he walks away with at least $20M in cash and the rest of the package.

Continue reading "Cheap at the Price: Nardelli, Home Depot and Performance" »

Posted by dblwyo at 10:17 AM | Permalink | Comments (1)