Tag Archives: company news

measuring Steve Ballmer

August 26, 2013 By in internet, Stock ideas, Technology Tags: , , , , , 3 Comments

On the day before Steve Ballmer took over as head of MSFT, that company’s market capitalization was a tad below $600 billion.  If MSFT shares had matched the performance of the S&P 500 since then (about +15%), the company’s stock market value would now be just  under $700 billion.  Instead, just before the stock spiked on news of Ballmer’s surprise resignation, MSFT was worth barely a third of that figure.  Under his stewardship, then, MSFT owners lost a staggering $450 billion in relative stock market performance.

Sometimes the simplest measuring sticks are the best.

(Yes, MSFT management has bought back about 20% of the outstanding shares since 2006, but it’s hard to know what the net effect of the stock purchases would be.  Certainly, earnings per share would be lower.  Arguably, the stock price would be, as well.)

In late 1999, I sold the MSFT shares I had held for a decade.  The price earnings multiple was crazy high and it was clear that MSFT has no internet strategy.  But for a while I kept going to the annual analyst meetings in Seattle.

At one of them, Mssrs. Ballmer and Gates were jointly hosting a Q&A session.  One analyst raised his hand and observed that the annual earnings growth rate of Microsoft had dropped from 20%+ to mid-single digits.  He asked when management thought the company would resume its former rate of growth.

Awkward   …especially in a public forum.

I don’t think the questioner had any ill will, though.  He just wasn’t a particularly vivid-color crayon.

The response was illuminating.

Gates and Ballmer were both very harsh.  They all but called the guy an idiot, and asserted that it was a triumph of management to achieve any earnings growth in a firm of MSFT’s large size.  Wow!

What did I take from this?  Three things:

–neither Gates nor Ballmer was a very nice person,

–working for them it would be their way or the highway, and

–MSFT wasn’t going to have huge earnings growth because neither of the top people thought it was possible.   (The fact they subsequently brought in the head of a forest products company, a mature, cyclical commodity industry, to cut costs as CFO says it all.)

For the record, I thought Steve Ballmer was a bad CEO.   Not Carly Fiorina bad, but pretty terrible.

On the other hand, Bill Gates selected Ballmer and kept him as CEO for more than a decade.  So until very recently, he clearly approved of what Ballmer was doing.

If we want to lay blame at anyone’s door for MSFT’s weak performance during Ballmer’s tenure, the lion’s share would be delivered to the front of the Gates compound.

housing boom and retail sales

August 19, 2013 By in Current Market Thoughts, economics, Industry Analysis, Recent Market Action, Retail Tags: , , , , , , , , Leave a comment

Last week, Macy’s, Kohl’s and Wal-Mart all reported disappointing 2Q13 results–leading to worries that economic growth in the US is beginning to slow.  In Wal-Mart’s case, I think the problem is structural, not cyclical.  The manufacturing  jobs much of the chain’s lower-income customer base has traditionally had have disappeared forever.  With them, fat paychecks have gone as well.

But what about Macy’s and Kohl’s?  Why are their results so at odds with general economic indicators?

One possibility is that the weakness in general merchandise they’re exhibiting is a result of the housing boom.

In most areas of the world, and over most periods of time–except for the US during the past few decades–a cyclical housing boom alters consumers’ retail spending patterns.  The change usually appears with a modest time lag.

After buying a new residence, the owners typically redirect their spending in two ways:

–more of their income goes into paying their mortgage, and

–they redirect what remains toward furnishing and decorating their new home.

So spending on furniture, kitchen appliances, paint, carpeting… rises.  Spending on restaurants, cellphones, clothing… falls.  The latter category doesn’t drop to zero.  But consumers cut back–both on big-ticket items and on shopping-as-entertainment, where the items in question aren’t unique or special.

The only exception to this pattern that I’m aware of comes close to home.  During the long period when interest rates in the US were in decline–from the early Eighties until now–falling interest rates made housing prices rise so quickly that new homeowners weren’t forced to cut back on spending.  They could borrow against their fast-appreciating home equity, instead.

It’s too early to tell for sure, but the lackluster sales we’re seeing from Macy’s and Kohl’s may just be a return to normal by US homeowners after an extended period of excess.  If so, the situation is a threat to department store profits, and stock prices, but not to the overall economy or stock market.

 

Wal-Mart (WMT)’s earnings miss: significance?

August 16, 2013 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

the coview

Yesterday, WMT reported 2Q13 earnings results, which came in below company guidance.  WMT also revised down its expectations for the rest of the year.  That news followed a similarly disappointing result from Macy’s (M).

Media comment has interpreted these reports as signaling the domestic economic recovery is stalling out, that “pent-up demand” –catch-up buying resulting from purchases postponed during the Great Recession has finally been exhausted.  Now, the talking heads opine, the true “fragile” state of the US economy is finally being revealed.  This realization is why the stock market declined sharply yesterday.

why I think the consensus is wrong

This interpretation may turn out to be the correct one.  But it’s not the only way to look at things.  In fact, in this case, I think the media view is wrong.  Here’s why:

1.  Interest rates went up yesterday.  The 10-year Treasury reached a yield of 2.77% on Thursday; the 30-year, 3.81%.  Both are highs for the year.  In other words, the bond market isn’t seeing economic weakness.  It’s seeing strength that will eventually lead to the Fed raising interest rates.

2.  WMT’s main business is selling food and general merchandise for cheap in no-frills stores targeted at middle- and low-income households.

When Sam Walton started doing this some 40 years ago, WMT had the field to itself.  But success spawned imitators.  In particular, recently, and especially during the recession, the dollar stores have been taking market share away from WMT.  In a way, this a replay of the competition between mainline department stores and specialty retailers that emerged in the 1970s-1980s.

3.  During recessions, people change their buying patterns.  They put off buying big-ticket items.  And they trade down to cheaper alternatives for everyday necessities.  When recession ends, they normally trade back up.  For the affluent, that is already happening.  For average and lower-income Americans, as I read the results from manufacturers of staples, that hasn’t occurred yet.

4.  About 30% of WMT’s traditional customers are low-income Americans.  I read the WMT earnings report as saying that economic recovery hasn’t yet reached this part of the company’s customer base.

This, I think, is the real news in the WMT results.  I think the earnings miss is evidence in favor of the idea that high unemployment in the US is a structural phenomenon that low interest rates can’t cure.  Action by congress and the administration is needed, instead.  But suggesting this is opening a can of worms that talking heads–and the securities analysts who feed them information–would rather not touch.  Easier to say (counterfactually, in my view) that the overall economy is cooling off.

my bottom line:  as a citizen, I have a strong opinion on the structural/cyclical unemployment issue. I think WMT’s weakness is a company-specific issue, not a macroeconomic one.

As an investor, however, there’s no need to either have an opinion on this issue or to make your view a major feature of your portfolio.  Just avoid low-end general retail.

Look, instead, for niche retailers who are showing strong same store sales growth   …or avoid retail altogether.  There’s no rule that says you always have to have retail stocks in your holdings.

Bill Ackman, J C Penney (JCP)’s largest shareholder, is leaving the board. What does this mean?

August 14, 2013 By in Current Market Thoughts, Portfolio management, Private equity, Retail, Stock ideas Tags: , , , , , , , 3 Comments

the JCP board and its CEO search

Bill Ackman is the activist investor who initially targeted (no pun intended) JCP as a serial laggard that could be made to perform better.  Recently, he has argued with the rest of that company’s board–at first in private–about the pace of JCP’s search for a new CEO.  Ackman believes the search could/should be done in two months.  The rest of the board seems to be thinking in terms of nine.

Last week he made public a letter he wrote to the board, which he concluded with, “We can’t afford to wait.”

This week, after being criticized by many, he resigned from the JCP board.

Certainly. the spat between the board and its largest shareholder won’t speed the flow of CEO candidates knocking on JCP’s door.  On the other hand, it won’t deter very many, either, in my view.  What it does do is raise the price the new CEO can command.

The media have portrayed Mr. Ackman as a shallow, petulant Ivy-Leaguer having a mini-tantrum because he isn’t getting his way.  Entertaining and gossipy as that may sound, the media assessment is probably not right.  In fact, Mr. Ackman may prefer that people view the affair this way, because is suggests that everything else, save Mr. Ackman’s personality, is all right.

It isn’t.

what’s really going on

Two possibilities, one based on back-of-the envelope calculations, the other pure conjecture.  Both are based on the idea that the fact of the board disagreement has information in it–and that it’s not gossip column fare.

1.  a castle in the air

Let’s say the properties JCP controls are worth $5 billion.  That’s halfway between brokerage house estimates (which may ultimately come from Mr. Ackman) and the recently announced, but incomplete, Cushman and Wakefield assessment of $4.06 billion.

If we think the rental yield on these assets should be 7%, then the annual rental income from them should be $350 million.  That’s the amount a third-party would pay to do business on those properties.

How much does JCP pay?  I don’t know.  Certainly it’s substantially less than $350 million.  Let’s say JCP actually pays $50 million. This means that in a sense JCP real estate subsidizes the department store operations by the difference between what it could get by renting the properties to someone else vs. operating JCP stores on them.  According to what I’ve written so far, that subsidy is $300 million.  After income tax, that amounts to about $200 million.

Why is this important?

In 2010, the last year before Mr. Ackman brought in Ron Johnson to run the company, JCP made $378 million in net income.  If my numbers are anywhere near correct, over half JCP’s profits came from owning real estate.  In 2011, selling stuff lost money.

Strip away real estate gains over a long period and JCP’s retailing profits look very highly cyclical.  That makes sense, because JCP’s traditional market has been less affluent consumers, whose incomes are the most cyclical.  The company may suffer a lot during recession but makes up for that by making a relative killing as recovery gets into year three or four.

In other words, JCP should be cleaning up now.  Instead, it’s piling up enormous losses.  This spells potential trouble as/when the economic cycle turns down, and–if past form runs true–profits evaporate.

Maybe this is the source of Mr. Ackman’s sense of urgency.

2.  pure speculation

Maybe Mr. Ackman’s chief worry isn’t his projected timeline for JCP’s profits but the structure of the fund he put together to invest in the company.  He’s told reporters that his cost basis in JCP stock is $25.  But he may have financial leverage or options or other derivative instruments that make the risk/reward clock tick faster for his fund than for JCP itself.

Whatever the cause of Mr. Ackman’s behavior over the past few weeks, it’s almost certainly not simply pique.

Blackberry (BBRY)’s search for strategic alternatives

August 13, 2013 By in Current Market Thoughts, Industry Analysis, Private equity, Stock ideas, Technology Tags: , , , , , , , , , , , 1 Comment

a 6-K

Yesterday BBRY filed a 6-K (it’s a foreign–i.e., Canadian–company, hence it’s a 6-K, not an 8-K) with the SEC, which consists of the press release it issued at the same time.

In it, BBRY (BB for you Toronto Stock Exchange fans) says it’s setting up a committee to explore strategic alternatives, which the firm defines as “possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions,”

BBRY also says the board member, Prem Watsa, CEO of BBRY’s largest shareholder, investment firm Fairfax Financial, has resigned from the board citing “potential conflicts” that may arise as the committee does its work.

What’s going on?

It seems to me that BBRY effectively hung a “For Sale” sign around its neck in March 2012–and has had no takers.  So the announcement appears to mean–and is being widely taken on Wall Street as meaning–that BBRY is getting ready to go private.  Mr. Watsa’s resignation from the board suggests his firm will want to be part of the private ownership group.

Why go private?  

Why can’t BBRY do what’s necessary while retaining its listing?  It’s all about financing.

1,  For one thing, it’s better to have no price than a low price.

BBRY may need radical surgery to survive.  Contrary to the picture presented in finance textbooks, Wall Streeters aren’t steely eyed rational thinkers.  The sight of blood and body parts on the operating table makes them woozy.  During restructuring, the stock price might decline–sharply, very sharply.  Professional short-sellers, whose job is to kick a fellow while he’s down, would certainly help push the price down.

The low price–let’s say $1 a share vs. about $11 now–has several bad consequences.

–It scares the wits out of potential sources of finance, either the junk bond market or commercial banks, who would take the same factual situation much more calmly if there were no plunging price chart.  This effectively cuts off liquidity, just as the firm needs it the most.

–The price could get low enough that the stock is delisted, another unnecessary black eye.

–Worst of all for shareholders, a stock that’s unattractive to acquirers at $11 may become irresistible at $2.  Shareholders might jump all over a takeover bid at $4–in effect “stealing” the patient right out of the recovery room.

2.  Look at DELL.  Silver Lake has lots of experience in turning around tech companies.  Its price?  …ownership of the company, i.e., the lion’s share of the profits from doing so.  That’s just the way it is.

3.  One of the ugly secrets of private equity is this:  sometimes, when the private equity owners sense the ship is sinking despite their best efforts, they make a large junk bond offering and pay out some or all of the proceeds as a dividend to themselves.  Their risk is lessened by the return of capital; that of the offering company is increased.  This maneuver would be impossible to accomplish with a publicly listed company.

4.  Yes, going private frees management from SEC-mandated financial disclosure and from the need to do extensive investor/press relations.  But I think this is a minor benefit in comparison with either #1, #2 or #3.