bizzXceleration: Performance, Value and Profit

Fascinatingly the markets are up today, led by Financials of all things. Will wonders and delusions never cease ? This despite the fact that, other than WMT earnings, all the economic news was unremittingly bad: foreclosures are up 55%, new house prices dropped -7.3%, continuing jobless claims accelerated and new claims were unexpectedly high and consumer inflation jumped 0.8% MtM, a 17-year high ! None of that sounds like the outlook is sanguine in the sense of good. Anyway, as threatened, we're going to revisit the outlook and consequences for corporate earnings and what it means for the market. Tracking which posts get the most attention, equally strangely if not more so, the diagnosis of a schizoid market attracted more attention then the careful dissection of the profits outlook (Talkin Profits: Economic Outlook, Earnings, Business Performance ?) and what the rapidly deteriorating economic outlook means. To put a point on it if we are indeed crossing a tipping point and starting into a consumer-driven downturn, as is now being widely recognized, ignoring profits and the current market valuations is dangerous to your financial health. On the grounds that perhaps we haven't made it entirely clear why you really care we're going to build a longish post walking thru various aspects of profits, earnings, PE's and the outlook. Just as one example most of the downturn so far in the S&P is due to Financials. If the economy turns over, as we expect, none of that is priced in.

Economy vs Markets

Just to set the stage let's start by considering the long-run relationship between the economy and the Markets. The meme is that markets are forward-looking though the WSJ noted that hasn't been true recently - as in the last decade ! Actually it's never been true. This multi-part chart shows the YoY% changes in GDP and the SP500 on top and the % growth in both since 1951. To our eyes the markets are still far ahead of where the state of the economy would justify their current levels.

Earnings Outlooks

Hopefully the prior post put enough evidence on the table about the structural relationships between the economy and profits that we can take it as given. And the translation between Profits and Earnings will also be taken as understood. That being the case the fundamental valuation equation we like is Graham-Dodd's: PE = (8.5 + 2*Growth)* 4.4/AAA-Yield. We'll dig into that a little later but taking it as a starting point the question becomes what are earnings expectations. And, much more importantly, do they make sense in view of our economic outlook. Take a look at the following chart which reproduces S&P's bottoms-up collection of analysts earnings prognostications and take a careful look at a) the revisions by sector and b) whether or not you believe the outlooks. And to put another point on it the two sectors that are up today and driving the market are Financials and Consumer Discretionary - with the big debate about a bottom in Financials raging onward (Riding the Storm - NOT: Breakdowns, Culture & Malfeasance in Finance).

 Now if you're readers of this blog and these two sets of earnings estimates hang together for you you can probably stop reading. But if thinking that the Financials (in read) and the Discretionary and Technology outlooks (in yellow) have some questions that should be asked below we walk thru some valuable issues of PE and valuation that should be reflected. And aren't IOHO.

Continue reading "Profits, Earnings, PEs and Outlooks: Why You Should Reall....lly Care" »

Posted by dblwyo at 10:54 AM | Permalink | Comments (0)

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)

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)

David Hilbert was one of the great 19/20C mathematicians and one of the greatest of all time. Back in 1900 he proposed a list of 23 problems, ten of which he presented at a major conference, that id'd major challenges for the field and, aside from his own direct contributions, shaped the agenda of math since then. And much of modern science inasmuch as many of the problems turned out to have major real world application and/or impact. A few years ago I proposed my own list of Hilbertian problems to my colleagues in the SCM/Logistics world as worthy of being on the research agenda because they were critical challenges for business. Hilbert had a lot more success than I however. Well as a capstone to this series of posts on key challenges for Business, which started with the question(s) of dashboards and decisions we're coming full circle to my e-friend Tim Walker's opening the door to the Hilbert problems of business(What are the “Hilbert Problems” of business? ), excerpted below. And don't kid yourselves that this doesn't matter - aside from the minor concern that the central foci of this blog is business performance improvement. In over 45 years GM's stock has a negative gain, Ford's impetus from it's hard-bought transformation in the 1980s has disappeared and the steady, sustainable performer - Toyota - has kicked both their butts. Where to from here ?

Business Hilbert Problems

Fortunately my list is shorter and probably not as intellectually difficult. On the other hand these problems are hard, difficult to solve, involve more than a guy with a pencil in a room, will help define the health of major companies, the well-being of millions and the long-term success of major economies. So they might be worth wrestling with :). Consider the chart at right, repeated from our assessment of the Auto Industry, as a graphic encapsulation and application example of an approach.

1) Organosclerosis - all organizations that are successful reach a point where they are insulated from external pressures, internal agendi become the dominant decision-making criteria and self-interested political decisions replace a focus on value. What kind of management system is required to correct these historical and innate tendencies - other than Darwinian sortation ?

2) Integration - no single factor determines the success of an enterprise. It needs to integrate the strategy and business model with the operational execution capabilities and establish a management system that holds the responsible parties accountable against realistic operating plans. How do we migrate from our decades-old set of isolated and conflicted functional silos to a more synergistic enterprise ?

3) Execution - most companies are competent or better on a few core disciplines but often neglect developing the full suite of functional capabilities to where they should really be. A growingly classic example is MSFT who's core discipline is Software Development but after the Code Red fiasco delivered an emasculated Longhorn to market based more on market power and coercion than enhancing customer value. How do we ensure, ala Billy Beane's A's, that we get as good a "player" in each position for the "game" we want to play at an affordable and value-effective price ?

4) Innovation - execution is all well and good but once you detox history and transform current capabilities, like a shark, you need to figure out how to swim into the SEE of the future.(Sailing Into the Storm: From Execution to Innovation) What's the best way to go about designing and implementing continuous innovation as a fundamental core competency of the enterprise ?

5) Leadership and Humanity -at the end of the day business is a team sport. And as Red Auerback taught us and the new Celtic have demonstrated you need great players with superb skills who play for the jersey they're wearing. Which requires Leadership which communicates, management systems that measure and reward real contribution and provides an environment that respects, in all senses, the individual as an adult (Aholes, Shirkers and Performance: a Draft People Principles Policy ). What HR, Communication and Leadership development approaches are best suited to the enterprise we're envisioning here ?

Now we've taken a shot at some of this before (Performance Assessment Basics: Five Fundamental Factors) as well but after the break you'll find a culled set of readings that address some of these issues from Big Picture approaches to key functions to critical operating infrastructure (HR, IT) to Innovation to Leadership and Team-building. At the end of the day we repeat though - this really matters. About as much as anything in the world does, ceteris paribus :) ! Put another way if the Iranians blowup the ME and our world economy it's likely different principles will become the order of the day. But check out the two Auto industry charts - long-term stock performance and our diagnosis of their challenges and deficiencies and translate those into jobs, economic growth and well-being. 'nuff said ?

Continue reading "Business Hilbert Problems: Fundamental Factors of Performance" »

Posted by dblwyo at 05:25 PM | Permalink | Comments (0)

O.K. we've finally combed back thru all the postings and followed up on the promise/threat to collect the various priors together. It turns out there's enough across a range of topics and domains that the "Business Analysis" tables will get split across three seperate posts. Here we're going to focus on the general approach to Enterprise Performance Analysis, specifically five major clusters - or continuing to beat our control system metaphor to death - consoles/dashboards:

1) Enterprise Performance: why it matters and the impact, including tables categorizing various headline companies into the good, the bad and the ugly as well as some interesting commentary from Carl Icahn.

 2) Financial Engineering: a key component of the last several years has been under-investment in hiring and capex and the largest investment in buybacks in decades. What's the impacts and implications for earnings outlooks ? And most especially - for long-term performance ?

3) Business Environment: businesses control what's inside their walls and must cope with the externals but, as should be very clear by now since it's the whole point of the dashboard argument, understanding how the wind, waves, and currents are setting is essential. 

4) Business Analysis: checklists, blueprints and frameworks along with associted readings and a guide to Warren Buffett's master class on business performance analysis. What are the elements, how do they work together, what should you be looking for and how do you go about looking. Tnink of these as performance blueprints and evaluation templates.

5) Functions and Issues: the enterprise consists of key fucntions like Customer Service, HR or Technology. From time-to-time we'll take a deep dive on a specific function or issue to understand what it is and how it should work vs generally does. Among other things this section includes some interesting work on HR and Innovation as well as Strategy. 

In the table below you can think of the postings detailed below as being the ones behind the left-hand column (sorry if there's some formatting problems - it's better after the break):

Continue reading "Key Postings IV: Business Analysis Foundations" »

Posted by dblwyo at 06:13 AM | Permalink | Comments (0)

Time for a little Su. reflection as well as a rather large collection of readings with regard to business performance. Now over the last few weeks we've put up some posts on analyzing business performance and associted readings to illustrate some key points. Ranging from understanding the necessary balances between strategy and execution (Business Performance III(Readings): Sad Stories, Good Stories & "Fixes") to the critical role of innovation(WRFest 27Apr08(Tech Ind): Innovators, Survivors & Also-rans). These readings extend those arguments and provide in the company stories specific examples of many of these themes, along with several of our prior dissections of particular industries, e.g. Airlines or Technotainatronics [:)]. By this time we hope enough machinery has been provided to enable and encourage you to wrap each story with the big picture of Economy-Industry-Company mantra.

We've divided the excerpts into three sections. Long-term Perspective, Key Issues and Companies. And while the stories weren't deliberately selected to support the themes we've been striking it's nonetheless true that they do in fact align extremely well. Which suggests perhaps that the machinery might be relatively powerful.

If you think back over the last several years the investments that have done well have done so as the result of anomolies. That is as the result of some sort of deep, sometimes, structural change in the economy, industry or company. Think of real estate, commodities or energy all of which went or are going thru major structural shifts. Or think of Emerging Markets which are well beyond their emergence into relatively full, sophisticated and sound participation in the world economy. Albeit with some major risk factors still remaining as the last two posts on the World Economy show.

In the LT Perspestives, with articles on earnings quality, PE valuation and Buffet's accelerating shopping spree you find what we think is a fundamental theme now and for the future. How good are earnings, what are they likely to do and what'll they be worth. After several years of passing by stocks Buffett is putting big money to work because he's finally seeing opportunities in a combination of performance improvement and lowered prices. The section starts with one of the great financial analysts assessment - which boils down to "worst credit crisis since the '30s" and "very low earnings quality". We'd strongly suggest keeping those two signposts in mind.

In the Issues section we see several major strategic concerns from the impacts on morale and performance of the pay gap between worker bees and executives (Aholes, Shirkers and Performance: a Draft People Principles Policy) to major challenges and shifts in the emerging markets - the combination of rising labor costs and skills shortages with an effort/need to move up the value stack. And then two excerpts on the critical role of Innovation which is rapidly becoming a required core competency...only it's not.

In the Company section everything from Retailing to Airlines to Big Oil and Steel to Disney and Kodak are covered. Each story representing more than just the company in question. Many of the best Big Box retailers are hoping to seize the opportunity created by this downturn to continue enterring new markets and expansion. We'll have to see how that holds up if the economy, as we expect, turns down farther and longer than many are anticipating. Nonetheless this is a bold strategic move which suggests these are candidtes to put on your Buffett list. As a retailing counter-example Starbucks got badly scalded but is still looking for int'l expansion. The question is going to be can SBUX do for itself what MickeyD's did several years ago - self-arrest, recover and transform ? On that fundamental question hangs it's future value, as for so many others.

In complete contrast there's AMR, losing $3M/day, as proxy for an industry which is direst need of the most fundamental rexamination of business models, strategies and, most especially, network structure. An initiative which does NOT appear to be even being considered by any players. Instead they're moving ahead to re-arrange the deck chairs as the soles of their shoes are getting soaked.

As examples of another sort consider Oil and Steel (On Being a Boiled Frog: the Strategic Outlook for US Industries). The latter is our poster child for an old-line industry who's been reborn thru long, hard, painful and disciplined effort. Who'd have thought. Yet many of their troubles were self-inflicted by avoiding and delaying necessary changes for decades. Lessons that many other industries are having to learn the hard way. Obviously Airlines but also Autos. Big Oil is facing some similar challenges, strangely enough. Not because they're incompetently run. Just the opposite in fact. The problem is that their environment is changing where new oil discoveries are lagging, they aren't replacing reserves as fast as they're using them, national oil companies and politics are controlling the agenda and are doing so for short-term political goals and their exploration and production costs are escalating rapidly. Whee....talk about changes....and differences from the headlines.

Finally there are two stories of Renewal. One from Disney which we consider a poster child of both the innovative new mediatainment company and a superb example of what self-arrest and transformation should look like. The other is Kodak which continues to change but also to struggle. Disney had to re-discover itself. Kodak has to create a new self - a much...much harder problem. Made harder by, again, denial and willful ignorance. In the last few years they seem to have worked thru that after a decade of avoidance but now it's a race between creating the new Kodak and getting enough speed down the runway to get in the air. Remember V1 - the speed where you're moving fast enough to rotate the nose wheel ? You'd better hope there's enough runway left, especially if you're still too heavy with historical baggage. (Auto Industry: Pressures, Changes & Outlook - Finding V1) 

Continue reading "General Business: Perspectives, Issues & Companies" »

Posted by dblwyo at 12:11 PM | Permalink | Comments (0)

Our normal sequence would call for taking up the market situation but that's not only too depressing, for several reasons, but Sun. seems more suited to reflection on big issues. So we're going to focus on Innovation. Now hopefully some previous posts have established the motivation for that, and they're listed below the break, but in discussing sad, not so sad and good stores about business performance a couple of themes emerged. One of course was good execution and another was balancing strategy with operations. But if you review some of the readings sustainable long-term performance, by which we mean growth in revenue, profits and earnings, also requires adaptability and invention. Innovation in other words. And when you look at the examples from HPQ to P&G you can see where this is all born out. And conversely when you look at the sad stories where the counter-examples also support the argument.

But in case you need more more convincing or, better yet, you'd like to see it explained by somebody with a real track record of both sustained performance and sustained change management we'll point you at the recent appearance of A.G. Lafley on Charlie Rose. IOHO this ought to be required listening in every MBA program and executive suite in the country. As well as by every analyst mistaking this quarter for infinity and beyond. Another interesting exercise is look over the recently published list of the Fortune 1000 and see who ranks where by revenue, profit and return. You'll have to do some eyeball work as the story behind the ranking won't just jump out but a couple of themes emerge. One of course is energy and hot commodities. Another is folks who've been franchises and moats, e.g. WMT and MSFT, who continue to enjoy the fruits of the legacy for now. But you'll also find some of our exemplars moving up those ranks as well. The other thing you'll notice is that ten years it was all about "technology" per se. Now it's about changing the way you do business, bring products to market and is beginning to appear across leaders in all industries.

There's a lot of confusion about innovation, especially as distinct from invention and raw R&D. We define Innovation as the ability to create new products, services and business models that deliver value to the customer profitably. And sustain that over a period of time. Enterprises that can do this are rare but they are the ones who'll do more than merely prosper in the coming storms. And notice some of the subtleties. Innovation is not number of patents, % of revenue spent on R&D or any of those similar metrics. Heck, by those measurements Ford is an innovative company. But what has it to show for it ? Or the Auto Industry in general.

We were happy to hear Mr. Lafley not only has a similar view but is very eloquent both on how hard it is and how important. But also on how becoming an innovative company requires a fundamental change in every aspect of the company. In other words this is NOT about what happens in the lab but the ability to look at the market, develop new products, make them and then delivery them. And then repeat.

After the break we'll share some of the conceptual framework we've developed over the last several years for what's required, what the typical problems are and what an integrated approach to innovation should look like. At the end of the day this matters to investors, stakeholders, employees and any other related party because the closer a company gets to these "Should-Be" ideals the more likely it'll be on the list in another ten years, or 20...or 30 or....well you pick your horizon. One warning note - right now US companies have something of an advantage in this business "software" but our friends in China, India and elsewhere know that and are taking steps to improve their own capabilities. 

Continue reading "Sailing Into the Storm: From Execution to Innovation" »

Posted by dblwyo at 03:56 PM | Permalink | Comments (0)

We're continuing yesterday's thoughts on Business Performance with some sad stories and some happier stories as well as some readings on thinking about performance and how to improve it in both the short and long-terms. The sad fact is that almost all of the companies who are in trouble, much of it life-threatening, got there thru their own internal machinations, by loosing sight of the customer, failing to execute crisply and not planning for the future.

The sadder fact is that, as the first excerpt shows, that this is not just about under-estimated earnings and downturns. Many of the mediocraties will have to deal with that and many good companies will as well. But many of the poor performers who have been able to get by on leveraged funny money are facing a rising tidal wave of bankruptcy. And the much sadder fact is that the world is changing around them and they are not only not prepared to adopt and adapt. They won't have the resources of money, skills or leadership. But that's not the saddest fact. No, the saddest fact, aside from much of this being self-inflicted, is that there are ways to address and fix these fundamental breakdowns. If they have the time, money and guts. And we're not just making that up as some of the good stories prove.

The chart perfectly captures what can and  needs to be done. It shows the evolution of Olympic High Jumping thru four major "industry" innovations in fundamentals along with the on-going improvements along the new innovation paths:Innovation + Strategy + Execution = Performance. BtW if you'd like to see the whole pitch on strategic thinking here's the dloadable file.

Continue reading "Business Performance III(Readings): Sad Stories, Good Stories & "Fixes"" »

Posted by dblwyo at 09:48 AM | Permalink | Comments (0)

We've seen some really interesting gyrations in earnings reports so far but we'll remind you that it's early days yet. Not just for this quarter but if/when the economy continues to weaken earnings will too. A lot more severely than analysts are currently anticipating due to inherent weaknesses in the process that we and others see (Readings (Earnings): The Real Earnings Realities that Ain't...YET). Now our mantra  here is  Economy/Industry/Company/Job  meaning that you need to understand the general economic situation,  the impact on an industry as well as that industry's  innate characteristics and where  a particular company  fits, or not, in that big picture.  By and large  these factors are the climate and weather of doing business. Where a company performs or not in the circumstances  it is given though is  up  to it.  And performance  really....really matters, as the collection of readings excerpts shows.  Earlier we put  up a post (Performance Assessment Basics: Five Fundamental Factors) on a  way of thinking about and analyzing the  key factors that will determine  performance and earnings.  That  was probably  a tad abstract, not to  mention business wonkish,but it nonetheless was and is the things  that tell you how the whole  enterprise will perform. Here  we're  going to flesh out the abstractions with some flesh, bone and, especially, blood.

But first consider the summary performance charts which are slightly updated. We've been tracking various headline performers for some time and watched them evolve from category to category. Some of the stories are encouraging and some are sad and some are much worse than that. If you're a bit of a baseball fan consider the non-business examples of the A's, NYY and Sox as well as the Red Raiders of Texas Tech. Purely as an illustration of course with no implied comments as to the merits of any particular team (please no hatemail or bombs).

Continue reading "Business Performance II (Readings): Performance, Pain and Prospects" »

Posted by dblwyo at 06:56 AM | Permalink | Comments (0)

We'd thought to put up the next readings collections focused on traditional businesses but with INTC's results and GE's from last week, along with the resulting market gyrations, it seemed like a good idea to set that up with a deeper dive into evaluating business performance beyond the headlines. And trying to couple that with some observations on market behavior and investing.

The bottomlines are that GE is actually doing much better than its' hammering, deserved in the short-term but a buying opportunity in the long. INTC is also doing some wonderful things, though not as outstanding as the headlines, and both are long-term investment opportunities. And for largely similar reasons. Both have undergone massive transformations over the last several years, both have broadened and modernized their product portfolios to match the 21st C and both are running very tight, forward-looking but current-controlled enterprises. We'll pick on each one a little more detail in a follow-on post but we need some machinery first. 

We've talked before about our approach and Warren Buffett's to understanding a business, and it might be worthwhile to review that (Masterclass: Buffett on Investing and Business Analysis), but two guidelines Warren came out with that motivate this whole exercise. Understand the business you're investing in - what he doesn't mention is that he spent decades at it, not just sticking to ice cream. And focus - if you're going down this path focus on 7-10 investments but constantly track and monitor a pool of selected targets of 20-30. GE and INTC are perfect examples because, among other reasons, if you get familiar with them you get a baseline for understanding a broad swath of industries. And when Warren says understand a business he means this kind of in-depth investigation.

Understanding the business means digging into five major factors and their relationships with each other and the company as whole, laid out in the graphic and discussed in detail below. If you'd like some more discussion keep on....

Continue reading "Performance Assessment Basics: Five Fundamental Factors" »

Posted by dblwyo at 11:25 AM | Permalink | Comments (0)

Earlier we put up a readfest (WRFest 23FEb08(Business Strategy): What the Future May Hold ?) focused on business strategy, including a view of our strategic concept/context chart. Judging from the performance of the Finance Industry as a whole most of the arguments we made were and will continue to be ignored. But as stakeholders (investor, employees, suppliers, customers) we don't think you. Eveventually and ultimately. Now the WSJ has kindly joined us in our finger-wagging prescience with a fascinating story about strategic awareness really matters. Rather then wait to put up a shorter excerpt we're posting a longer one now. There are many lessons and examples cited here. The question for you becomes - as a stakeholder - do you know where your stake is tonight ?

UPDATE: More credit costs seen weighing on banks, brokers Analysts at Goldman Sachs cut estimates for the nation's top banks and brokers Monday and said these major institutions would likely report write-downs of between $1 billion and $12 billion for soured real-estate loans and related exposures.  Goldman's estimates of new write-downs ranged from $1.4 billion it expects for Bear Stearns Cosall the way up to a whopping $12 billion projected for Citigroup Inc.

The Coming Leveraged Debt Write-Downs

Continue reading "Strategy, Context and Awareness: Sub-prime Lessons" »

Posted by dblwyo at 11:18 AM | Permalink | Comments (0)

Have you ever stopped to really think about what makes a business work ? Obviously it's a central question here but have you really wondered ? Well it's intellectually fascinating - really few things are that complex, with so many moving parts and challenges. A mix of chess, poker and rock climbing because it takes brains, thought, discipline, skills, people judgement and ability to manage stress and risk. More clearly it really...really matters to people where things are going badly or poorly...just ask all those auto workers laid off, the Yhooites about to loose their jobs because of executive short-comings or all those folks in NYC about to suffer even worse. For every millionaire Ibanker laid off there's likely to be hundreds who feel the effects. But it's even more than that - big business has been the engine that's driven our economy and society since the late 19thC. Small businesses create more jobs but the repostitories of big change, for good or ill, or are when innovations are turned into US Steels, the Pennsylvania RR, Ford or GM, GE, Pfeizer, Intel, IBM, Microsoft,..., etc. etc. [If you're interested in exploring this more and understand how much the rise and fall of big business shapes the world around you we HIGHLY recommend two book:Big Business and the Wealth of Nations, Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Science Industries ]. Just as an analyst, investor, employee or other participant you'll learn a lot.

Continue reading "WRFest 23FEb08(Business Strategy): What the Future May Hold ?" »

Posted by dblwyo at 06:03 PM | Permalink | Comments (0)

Following two of our long traditions we're going to a) post several links together rather than sepertately, unlike typical blog practice (a several months tradition now with our Readfests :) ) because these stories are valuable individually but more so IMHO taken all together, as William James puts it. And b) post them en passant during the week (a many (3 ?) weeks old tradition).

As you may have noticed the markets roared ahead today and it was all because of the outstanding Retail Sales numbers, not to mention momentum from yesterday when Buffett's offer to the bond insurers plus GM's earnings surprise got this 2nd Bear Bounce kicked off (and oh yeah, leave us not forget yesterday's look at earnings and the talking heads also: Grading the Takehome: Bottoms, Earnings & Outlooks).Setting the table here was Marketwatch's take on things:U.S. STOCKS RIDE HIGHER ON RETAIL SALES AND STIMULUS; NASDAQ CLOSES UP MORE THAN 2%

Tim Walker over at Hoover's Business started an interesting line of discussion with a post on asking simple questions about apparantly complex problems - btw, the comments are worthwhile, ahem.

Continue reading "Naive Questions: Taking the Next Step" »

Posted by dblwyo at 04:53 PM | Permalink | Comments (0)

A constant them here is having to dig into the actual structural nature of an investment, particularly business. On that topic we've put up some posts on approaches, valuations, and Warren Buffett's thinking (btw - if you haven't follow that post to the YouTube videos we repeat it's well worth your time). The question we haven't addressed as yet is how. Which we propose to make a bit of a start on here. Below the line you'll find a listing of web resources that we've found useful. Now these aren't the resources of course that somebody in the business has access to - in fact we rather hope they have much better and deeper ones. Nonetheless there's more and more information sufficient for you get into investment and business analysis. Along with the links we'll also wrap a short explanation of the stepwise process.

As part of the approach let's repeat our fundamental mantra: Economy, Industry, Company. In other words understand how the overall Economy (& therefore Markets are headed), then understand how particular industries will play in this context. And finally how particular companies will play. Now Warren is found of saying he pays no attention to big picture, macro stuff which is all well and good, especially when you've got his resources and timeframe. But the mantra is not just top-down, as it might appear. One could as readily start on the other end by finding interesting companies, however you do it, and then understanding their bigger picture context. So the mantra works both topdown and bottom-up. 

So below the line please find our suggested links, resources and (implicit) approach to business analysis. We hope you find it useful and productive. 

Continue reading "Earnings, Valuations & Business Analysis (II): Resources and Approaches" »

Posted by dblwyo at 01:19 PM | Permalink | Comments (0)

The immediate prior post was a collection of recent stories about how credit problems are Metastasizing into tighter lending standards, lower demand, lowered ability to sell corporate debt and the increased liklihood of accelerating defaults. All of which increase the stresses on an already fragile general business condition. As the chart at right makes clear(er) the prices for corporate debt are headed into the tank. And corporate default rates are headed the other way !

Yet, judging by the market action so far this week, the increasing liklihood of a recession and the associated impacts on earnings are NOT priced into the market. A critical part of this is the very optimistic outlook for second half earnings on the part of sell-side analysts, who are looking for amazing up-bumps in Q3/Q4 earnings. None of which is consistent with a slowing economy. When you factor in the liklihoods of increased pressure due to decelerating consumer spending as Housing worsens and a generally tight credit market wil be worsened. When you factor in the fragilities of excess leverage & buybacks/buyouts, margin and revenue pressures, etc. etc. indicate, at least in our 'humble opinions, that the Street's analysts are too focused on bottom-up views of their indiviudal companies. And not enough on their ability to survive in this rapidly evolving environment. Put another way - what are they thinking ? Or smoking as the case may be !

Continue reading "Earnings, Valuations & Business Analysis(I): Readings" »

Posted by dblwyo at 10:53 AM | 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)