I opened this morning's Wall Street Journal to see one of the most horrific examples of stock buying advice it's been my misfortune to probably ever read.
With the tenor of a cutesy sales circular, John Christy wrote,
"But with gloom already priced into retailing stocks, contrarian investors may still be able to find some bargains to add to their shopping lists.
Department stores and specialty retailers are among the worst-performing industry groups in the S&P 500, down roughly 30% each since the start of the year. To put things in perspective, that's an even bigger plunge than some of the worst-hit financial sectors. Investment banks and brokers, for example, are off less than 20% over the same period.
Clothing group Gap, by comparison, appears more reasonably priced at 17 times estimated earnings for its 2008 year. But this assumes that Gap's efforts to reinvigorate sales can produce 12% earnings growth this year and 13% next year against stiff economic headwinds. Talbot's, Pier One and RadioShack are other turnaround stories that are facing an uphill battle.
One bright spot is consumer electronics. Sales growth for TVs, camcorders and other gizmos is expected to be about twice as strong as overall retail sales this winter. That bodes well for Best Buy, which looks like a bit of a bargain at just 13 times 2008 earnings. True, it is under competitive pressure as Wal-Mart encroaches on its turf, but electronics junkies still make a beeline for Best Buy's stores. It's also one of the better-managed companies in the sector.
For those looking for a shot aimed directly at outdoor types, Cabela's may be a good stocking-stuffer.
Then there's the top end of the market. Of course, richer folks may tighten their belts as well, but they generally don't shift downstream. Stocks like Tiffany and Polo Ralph Lauren are a little pricier in earnings-multiple terms than, say, Gap, but sales growth could hold up reasonably well. A little luxury this holiday season might be good for investors."
"Add to their shopping lists?"
"Appears more reasonably priced?"
"Looks like a bit of a bargain?"
"May be a good stocking stuffer?"
"Sales growth could hold up....might be good for investors?"
What's going on here? Did I mistake the transcript of a Jim Cramer show for the Wall Street Journal?
What happened to portfolio construction? Managing risk? Analyzing a new purchase for its effect on a portfolio, and determining what should be sold to finance the new stock?
Moreover, the entire piece presumes that investors should look for possible inflection points. There's no rigorous analysis. Just cleverly worded phrasing to imply that maybe some of these stocks won't be so bad after all.
Where's the time-series analysis? The provision of information to help an investor understand under what conditions such price retracing might occur? With what probability? What expected value?
You can just imagine the instructions Christy received from an editor,
'Listen, John, it's the day after Thanksgiving. Everyone's out buying holiday gifts.
Why don't you do a piece on retailers? Make it punchy. Use a lot of language to make it seem like the retail stocks are sale items themselves?
Make it light and catchy, ok? Nothing heavy- no analysis. Just pretend you're writing a sales circular for Wal-Mart.'
Don't you expect better than this sort of nonsense from the nation's best business daily?
Friday, November 23, 2007
Wednesday, November 21, 2007
Google's Plans To Launch Its Own Network
Today's Wall Street Journal carried a very good editorial by Holman Jenkins concerning Google's prospective plunge into cellular network operations and ownership. The paper's Friday edition of last week featured the actual news story covering the impending development in the communications industry.
The facts, such as they appear to be in evidence, seem to be that Google is worried that evolving trends toward more web-oriented information searches by devices like the iPhone will leave it with a declining share of advertising revenues, and loss of control over free access to its wares by users.
As such, Google is experimenting with a wireless network on its own corporate campus, acquiring various pieces of a putative wireless network, and considering a bid on frequencies over which to run its own new wireless network.
By adding some piece of cellular revenues to its income stream, and potentially using cellular advertising revenues to subsidize its telephone operations, Google is thought to be the only player in a position to turn this industry on its ear and disrupt the current status quo among ATT/Cingular, Verizon, et. al.
Holman Jenkins' piece marks him as sceptical of the whole notion. He is of the opinion that Google is biting off much, much more than it can chew in going after the old Bell conglomerate, in its current two remaining pieces. Specifically, Jenkins believes that the phone companies' historic expertise with billing is an advantage, as is their use of technology which distributes precise content to each user, thus allowing the two phone companies to amass user information at a very detailed level.
Let me state that I don't own Google in my equity portfolio, and never have. It's too recently public for me to have sufficient information on it for investment purposes.
However, it has obviously been a rocket in performance terms, as the nearby Yahoo-sourced chart confirms.
The question, regarding Google's foray into telephony, is whether it will be the fabulous second- or third-act in Google's march across the information services battlefield, or its Waterloo.
I don't have a crystal ball, so I don't know the answer. For what it's worth, I think Jenkins has it partially right, but for the wrong reasons.
I don't agree that Verizon's or ATT's billing systems constitute an 'advantage.' Truth to tell, telcom billing systems have been the butt of many a joke for decades, and, literally, a revenue stream for dozens of consultants who used to make their living off the billing mistakes they would discover for their clients.
But what the two telcos do possess is unparalleled experience building and running far-reaching communications networks with unheard-of uptime performances. It's probably tempting for Google to somehow think that the web makes everybody ultimately rely on a common backbone for transmission, but that's not the case here. Further, designing and operating phone networks to be always available is no mean feat. And the Verizon and ATT folks, whatever their current moniker, have been doing it for a century or so.
That said, there's quite a bit to be said for Google's ability to come in from a different arena and wreck the current telco revenue model.
My old boss, Gerry Weiss, SVP of Chase Manhattan Bank for several decades, acquainted me with work that he and his then-colleagues at GE developed back in the late 1960s. It was called 'arena analysis,' and I was bequeathed the only known physical copy of the GE entertainment arena model by one of Gerry's lieutenants, Donald Heany. Don wrote the famous PIMS articles which appeared in the Harvard Business Review in the mid-1970s, and mentored me in the years before his death.
What Gerry, Don and their colleagues realized, and began to model, was the effects an interloper to an industry sector can have on the fortunes of existing product/service providers who rely on business models built upon different assumptions and technologies. The phenomenon was sufficiently different than in-sector competition to cause them to coin a new term- arenas.
In arena competition, one new competitor enters a sector with a tertiary use of its main technology, distribution system, etc., which happens to be so foreign and competitively-advantaged to the existing business methods, that it simply rips the value right out of the business models of existing competitors in the sector.
TI did this, in a small way, with its early digital watches. Entertainment distribution is a similar example.
Jenkins suspects Google is about to do this. Google's use of advertising to potentially damage the telco business model could be very effective, damaging everyone in the sector, and lowering effective wireless prices to all end users. Permanently.
On one hand, Google may go the way of Microsoft, only much, much more quickly. Rising faster, but plateauing more quickly, as well. Either from a loss of control of the cellular market, or winning control at too high a price, sustaining damage from competition with the telcos.
Or, it may, indeed, march triumphantly over the telcos, seizing the wireless business for use as an add-on to its advertising model.
Given the complexities of wireless network operation, and constantly evolving technologies, and the tendency for Schumpeterian dynamics to work everywhere, I am sceptical that Google will succeed financially, even if it does make substantial inroads into the cellular businesses of Verizon and ATT.
I have tremendous respect for Google's Eric Schmidt. However, wireless communications, integrated media distribution and storage are both complex and evolving. Google's strengths have historically been in software algorithms and the leveraging of those into advertising presence. I'm unsure that these will be extendable, profitably, into cellular.
It's a good rule of thumb that if all you bring to a business is money, you'll probably find those lower barriers allow others to surprise you, as well.
I wrote a post some time ago opining that Google moves so quickly into new areas because they realize, somewhere deep in their corporate consciousness, that a few other garage inventors will inevitably develop a superior search engine.
What happens if Google spends most of its resources and focus on wireless, only to have its core search business become vulnerable to a totally new technology?
Sort of like....Microsoft?
The facts, such as they appear to be in evidence, seem to be that Google is worried that evolving trends toward more web-oriented information searches by devices like the iPhone will leave it with a declining share of advertising revenues, and loss of control over free access to its wares by users.
As such, Google is experimenting with a wireless network on its own corporate campus, acquiring various pieces of a putative wireless network, and considering a bid on frequencies over which to run its own new wireless network.
By adding some piece of cellular revenues to its income stream, and potentially using cellular advertising revenues to subsidize its telephone operations, Google is thought to be the only player in a position to turn this industry on its ear and disrupt the current status quo among ATT/Cingular, Verizon, et. al.
Holman Jenkins' piece marks him as sceptical of the whole notion. He is of the opinion that Google is biting off much, much more than it can chew in going after the old Bell conglomerate, in its current two remaining pieces. Specifically, Jenkins believes that the phone companies' historic expertise with billing is an advantage, as is their use of technology which distributes precise content to each user, thus allowing the two phone companies to amass user information at a very detailed level.
Let me state that I don't own Google in my equity portfolio, and never have. It's too recently public for me to have sufficient information on it for investment purposes.However, it has obviously been a rocket in performance terms, as the nearby Yahoo-sourced chart confirms.
The question, regarding Google's foray into telephony, is whether it will be the fabulous second- or third-act in Google's march across the information services battlefield, or its Waterloo.
I don't have a crystal ball, so I don't know the answer. For what it's worth, I think Jenkins has it partially right, but for the wrong reasons.
I don't agree that Verizon's or ATT's billing systems constitute an 'advantage.' Truth to tell, telcom billing systems have been the butt of many a joke for decades, and, literally, a revenue stream for dozens of consultants who used to make their living off the billing mistakes they would discover for their clients.
But what the two telcos do possess is unparalleled experience building and running far-reaching communications networks with unheard-of uptime performances. It's probably tempting for Google to somehow think that the web makes everybody ultimately rely on a common backbone for transmission, but that's not the case here. Further, designing and operating phone networks to be always available is no mean feat. And the Verizon and ATT folks, whatever their current moniker, have been doing it for a century or so.
That said, there's quite a bit to be said for Google's ability to come in from a different arena and wreck the current telco revenue model.
My old boss, Gerry Weiss, SVP of Chase Manhattan Bank for several decades, acquainted me with work that he and his then-colleagues at GE developed back in the late 1960s. It was called 'arena analysis,' and I was bequeathed the only known physical copy of the GE entertainment arena model by one of Gerry's lieutenants, Donald Heany. Don wrote the famous PIMS articles which appeared in the Harvard Business Review in the mid-1970s, and mentored me in the years before his death.
What Gerry, Don and their colleagues realized, and began to model, was the effects an interloper to an industry sector can have on the fortunes of existing product/service providers who rely on business models built upon different assumptions and technologies. The phenomenon was sufficiently different than in-sector competition to cause them to coin a new term- arenas.
In arena competition, one new competitor enters a sector with a tertiary use of its main technology, distribution system, etc., which happens to be so foreign and competitively-advantaged to the existing business methods, that it simply rips the value right out of the business models of existing competitors in the sector.
TI did this, in a small way, with its early digital watches. Entertainment distribution is a similar example.
Jenkins suspects Google is about to do this. Google's use of advertising to potentially damage the telco business model could be very effective, damaging everyone in the sector, and lowering effective wireless prices to all end users. Permanently.
On one hand, Google may go the way of Microsoft, only much, much more quickly. Rising faster, but plateauing more quickly, as well. Either from a loss of control of the cellular market, or winning control at too high a price, sustaining damage from competition with the telcos.
Or, it may, indeed, march triumphantly over the telcos, seizing the wireless business for use as an add-on to its advertising model.
Given the complexities of wireless network operation, and constantly evolving technologies, and the tendency for Schumpeterian dynamics to work everywhere, I am sceptical that Google will succeed financially, even if it does make substantial inroads into the cellular businesses of Verizon and ATT.
I have tremendous respect for Google's Eric Schmidt. However, wireless communications, integrated media distribution and storage are both complex and evolving. Google's strengths have historically been in software algorithms and the leveraging of those into advertising presence. I'm unsure that these will be extendable, profitably, into cellular.
It's a good rule of thumb that if all you bring to a business is money, you'll probably find those lower barriers allow others to surprise you, as well.
I wrote a post some time ago opining that Google moves so quickly into new areas because they realize, somewhere deep in their corporate consciousness, that a few other garage inventors will inevitably develop a superior search engine.
What happens if Google spends most of its resources and focus on wireless, only to have its core search business become vulnerable to a totally new technology?
Sort of like....Microsoft?
CNBC Needs An Economics Reporter
This morning, CNBC 'senior economics reporter,' and I use the term very loosely, Steve Liesman, was yammering about how he doesn't understand the latest release of the Fed's meeting minutes.
Just so. Perhaps CNBC's producers should take that as their cue to get a real economist to replace Liesman. After all, both of Liesman's degrees are in journalism, not economics, or even business.
Liesman is a writer who's weaved is way into economics beats after covering a variety of business assignments earlier in his career. However, Liesman has no great grasp of economics.
He reminds me of another CNBC on-air personality, Maria Bartiromo. They both behave somewhat like human fax machines- they mouth words fed to them by a teleprompter, but have no idea of the meaning of what they just said.
Worse, every time the CNBC programs need an 'economic' viewpoint, they haul out Liesman to add his immeasurably minor contribution. Usually confusing things by contradicting someone with experience and actual knowledge, like Rick Santelli, Larry Kudlow or Brian Wesbury.
Liesman's major problem seems to stem from his single-minded adherence to Keynesian economics, long after much of it has dropped from modern usage. In Liesman's world, all taxes are good, and no deficit ever is. Contexts are irrelevant.
Further, in Liesman's world, Democratic spending is OK, new taxes are no doubt necessary, and the Fed is typically either wrong, or incomprehensible.
Couldn't CNBC retain Brian Wesbury for economic on air commentary? Or some other, degreed economist who has actually published some work, can speak intelligently on the topics, and is up to date with economic theory?
Just so. Perhaps CNBC's producers should take that as their cue to get a real economist to replace Liesman. After all, both of Liesman's degrees are in journalism, not economics, or even business.
Liesman is a writer who's weaved is way into economics beats after covering a variety of business assignments earlier in his career. However, Liesman has no great grasp of economics.
He reminds me of another CNBC on-air personality, Maria Bartiromo. They both behave somewhat like human fax machines- they mouth words fed to them by a teleprompter, but have no idea of the meaning of what they just said.
Worse, every time the CNBC programs need an 'economic' viewpoint, they haul out Liesman to add his immeasurably minor contribution. Usually confusing things by contradicting someone with experience and actual knowledge, like Rick Santelli, Larry Kudlow or Brian Wesbury.
Liesman's major problem seems to stem from his single-minded adherence to Keynesian economics, long after much of it has dropped from modern usage. In Liesman's world, all taxes are good, and no deficit ever is. Contexts are irrelevant.
Further, in Liesman's world, Democratic spending is OK, new taxes are no doubt necessary, and the Fed is typically either wrong, or incomprehensible.
Couldn't CNBC retain Brian Wesbury for economic on air commentary? Or some other, degreed economist who has actually published some work, can speak intelligently on the topics, and is up to date with economic theory?
Tuesday, November 20, 2007
Breaking News: Carl Icahn Named New Citigroup CEO!
In a late-breaking story after the 4PM EST close of US equity markets, unknown sources reported that one-time corporate raider, now shareholder-value champion Carl Icahn, has been approached by the board of Citigroup to take the CEO position, and has accepted same.
The completely unconfirmed story alleges that Citi board member Richard "Dick" Parsons broached the idea to Icahn, on behalf of the entire Citigroup board.
Parsons was reputed to have claimed, in an off the record comment,
'I've had.....ahh...dealings, yes, dealings and experience with Carl. He is a most tenacious man. Once he believes he knows what will unlock and increase shareholder value, he will stop at almost nothing to do that. Believe me, I know whereof I speak. *Sigh*
With Carl as Citi CEO, the board feels we know exactly what we are going to get. We anticipate no surprises whatsoever as Mr. Icahn is given free reign to create more value at the bank.'
When reached for an unsubstantiated comment on this story, Icahn is reputed to have replied that, upon taking over at Citi, he'll move 'like a hot knife through butter' to unlock business value.
CNBC on-air reporter Charlie Gasparino was rumored to have asserted that none of his sources were familiar with the Icahn offer.
"Completely unbelievable and preposterous,"
Gasparino was alleged to have said of the idea that Citi would turn to Icahn to clean up its mess.
In further unconfirmed and unrecorded remarks, the shareholder value advocate was believed to have said, when asked if he had yet reviewed business plans at the banking behemoth,
'Business plans????
I don't need no stinkin' business plans!
You don't need a business plan to spin this turkey into four or five portions in time for Thursday's dinner! All you need is the phone numbers of the M&A guys at Goldman, Morgan Stanley and Lazard. And maybe Steve Schwartz's, too.'
When asked to confirm these remarks, Citigroup acting chairman Bob Rubin was not quoted as saying,
"Carl is a unique creator of corporate value. He has a style all his own, and we look forward to him adding value for our shareholders and continuing the fine work Chuck Prince and his predecessor, Sandy Weill, began here at the bank. With Carl's instincts and decisiveness, we believe he will rapidly understand the global nature of Citigroup's strengths and act on them accordingly to increase value as soon as possible.
Fortunately for Citigroup, Carl's lack of experience in the finance sector will not be a hindrance to his carrying out the board's mandate to him as CEO. Whereas other candidates lacked the ability to operate various parts of our firm, with Carl, that's irrelevant. In fact, Carl has unlocked material value at other companies with whose businesses he had no prior personal experience. Frankly, we're excited by that prospect, and hope he can repeat his earlier successes here at Citi.
Given Dick Parsons' experience with Carl, the board feels extremely confident that he (Mr. Icahn) will leave no stone unturned in his quest to add value to the firm, no matter who gets in his way."
A disreputable source who claims to have seen Icahn's compensation agreement noted that it provides for no salary, only a percentage of the gain in market value of Citigroup common stock between Monday, when Mr. Icahn is expected to begin his tenure as CEO, and one year from that date.
When asked to comment on this, Mr. Icahn was rumored to have responded,
'I really shouldn't respond. However, let me just say, in this situation, the parent company won't be around long enough to pay me a salary. I'll do much better with a share of the value I unlock by breaking the joint up. Think....nuclear fission.....'
Calls to various sources for confirmation on the information contained in this column were not returned.
Author's Note: Of course, this is a completely fictional story. However, upon discussing this post, which I wrote earlier today, with my partner at lunch, I realized that Icahn has the perfect credentials for resolving Citigroup's dilemma by spinning it into its component units. Not having years of experience in other industries did not prevent him from increasing shareholder value in those instances.
The completely unconfirmed story alleges that Citi board member Richard "Dick" Parsons broached the idea to Icahn, on behalf of the entire Citigroup board.
Parsons was reputed to have claimed, in an off the record comment,
'I've had.....ahh...dealings, yes, dealings and experience with Carl. He is a most tenacious man. Once he believes he knows what will unlock and increase shareholder value, he will stop at almost nothing to do that. Believe me, I know whereof I speak. *Sigh*
With Carl as Citi CEO, the board feels we know exactly what we are going to get. We anticipate no surprises whatsoever as Mr. Icahn is given free reign to create more value at the bank.'
When reached for an unsubstantiated comment on this story, Icahn is reputed to have replied that, upon taking over at Citi, he'll move 'like a hot knife through butter' to unlock business value.
CNBC on-air reporter Charlie Gasparino was rumored to have asserted that none of his sources were familiar with the Icahn offer.
"Completely unbelievable and preposterous,"
Gasparino was alleged to have said of the idea that Citi would turn to Icahn to clean up its mess.
In further unconfirmed and unrecorded remarks, the shareholder value advocate was believed to have said, when asked if he had yet reviewed business plans at the banking behemoth,
'Business plans????
I don't need no stinkin' business plans!
You don't need a business plan to spin this turkey into four or five portions in time for Thursday's dinner! All you need is the phone numbers of the M&A guys at Goldman, Morgan Stanley and Lazard. And maybe Steve Schwartz's, too.'
When asked to confirm these remarks, Citigroup acting chairman Bob Rubin was not quoted as saying,
"Carl is a unique creator of corporate value. He has a style all his own, and we look forward to him adding value for our shareholders and continuing the fine work Chuck Prince and his predecessor, Sandy Weill, began here at the bank. With Carl's instincts and decisiveness, we believe he will rapidly understand the global nature of Citigroup's strengths and act on them accordingly to increase value as soon as possible.
Fortunately for Citigroup, Carl's lack of experience in the finance sector will not be a hindrance to his carrying out the board's mandate to him as CEO. Whereas other candidates lacked the ability to operate various parts of our firm, with Carl, that's irrelevant. In fact, Carl has unlocked material value at other companies with whose businesses he had no prior personal experience. Frankly, we're excited by that prospect, and hope he can repeat his earlier successes here at Citi.
Given Dick Parsons' experience with Carl, the board feels extremely confident that he (Mr. Icahn) will leave no stone unturned in his quest to add value to the firm, no matter who gets in his way."
A disreputable source who claims to have seen Icahn's compensation agreement noted that it provides for no salary, only a percentage of the gain in market value of Citigroup common stock between Monday, when Mr. Icahn is expected to begin his tenure as CEO, and one year from that date.
When asked to comment on this, Mr. Icahn was rumored to have responded,
'I really shouldn't respond. However, let me just say, in this situation, the parent company won't be around long enough to pay me a salary. I'll do much better with a share of the value I unlock by breaking the joint up. Think....nuclear fission.....'
Calls to various sources for confirmation on the information contained in this column were not returned.
Author's Note: Of course, this is a completely fictional story. However, upon discussing this post, which I wrote earlier today, with my partner at lunch, I realized that Icahn has the perfect credentials for resolving Citigroup's dilemma by spinning it into its component units. Not having years of experience in other industries did not prevent him from increasing shareholder value in those instances.
On Citigroup's Leadership Hunt
Today's lead article in the Wall Street Journal's Money & Investing section concerns Citigroup's search for a new CEO.
It's hard to believe that one of the country's three largest commercial banks wouldn't have had any serious succession plans in place for a CEO, Chuck Prince, who was in place more than three years.
Nonetheless, that appears to be the case.
The names on the Journal's list of potential candidates, now that John Thain sensibly chose Merrill over Citi, is predominantly filled with overseas bankers: Goodwin of RBS, Ackerman of Deutsche Bank, and Diamond of Barclays. Filling out the list are Robert Willumstad, a former senior Citibank executive, Vikram Pandit, currently head of the firm's investment bank, and Chase CEO Jamie Dimon.
Every one on the list is missing experience with at least one large part of Citigroup's lines of business. And, on the note, every one on the list has more experience with some part of Citigroup's businesses than he did.
For that matter, even Sandy Weill, who cobbled the hydra-headed financial utility together some years ago, then hip-checked John Reed out of the picture, had direct experience that was far short of covering the resulting merger's (of Traveler's and Citibank) broad business array.
I've written many posts about Prince's inept leadership of the questionably-organized bank, two of which may be found here, and here. Others are under the labels 'Chuck Prince' and 'Citigroup.'
What seems obvious to me, then, is that Citigroup is simply too diversified to ever successfully provide its shareholders with consistently better returns than they can get by merely holding the S&P500. This, I contend, is the acid test of whether a company is really creating investible value for shareholders.
Commercial banking, in general, among the remaining money centers, isn't a good bet to beat the S&P500 anyway. It's not just Citi's problem.
As the nearby, Yahoo-sourced price chart for Citi, Chase, BofA, Wachovia and the S&P500 for the past two years shows, none of the banks has outperformed the index. Citi is the worst, by far, Chase the best of the mediocre lot.
If you look back a bit further, Chase has slightly outperformed the S&P500, but, when adjusted for volatility, as I recently discussed in this post, the margin of outperformance nearly disappears. The other banks, again, all lag the S&P on a completely unadjusted (for risk) basis. Citi, again, is at the bottom of the bunch.
Even Chase's price curve indicates that the basis of its current five-year outperformance of the market is due largely to a few months in mid-2003. Which was prior to Dimon's arrival at Chase as CEO. Since then, it's performance has been somewhat flat, and not materially better than the index's, overall, with a significant period of falling returns, from early 2004 to late 2005.
The classic money center banks of the last decade, before they began to be merged with second-tier securities firms, were already tough to manage. It's only gotten worse with time and added complication.
For example, this last Yahoo-sourced price chart of the four banks and the S&P500 Index covers the period from 1989 to the present, or roughly 18 years.
Except for the 'old' Citibank, the other three banks moved pretty much in lockstep. And Wachovia wasn't even a large bank back then. Again, most of the banks are either below, or essentially on a par with the S&P return for the period.
Back in the day, Citi was a clear-cut innovator in financial services, nimbly outperforming every other large US commercial bank. However, that ended in 2000. Since then, it's plateaued, looking like the other major US banks.
I think the moral of this story is that it really doesn't matter much anymore who runs any of the largest five US commercial banks. Given a CEO with some banking background, all of them will pretty much move together, with occasional lags and surges from slightly different proportions of one business or the other in their asset and income mix.
Citigroup, however, remains overly diversified, relative to its ability to be managed for consistently superior shareholder returns , let alone as an average large US commercial bank.
To me, the solution at Citigroup is for Rubin and the board to simply begin packing and spinning back to shareholders an independent consumer bank, asset management firm, securities firm, and wholesale bank. Executives for each of these would be fairly easy to find, if not among the current heads of those units.
If only out of sympathy for the suffering shareholders of Citigroup, including the Prince in Saudi Arabia, the Citigroup board should understand and acknowledge the implications of their difficult CEO search, and just split the bank up into manageable units.
It's hard to believe that one of the country's three largest commercial banks wouldn't have had any serious succession plans in place for a CEO, Chuck Prince, who was in place more than three years.
Nonetheless, that appears to be the case.
The names on the Journal's list of potential candidates, now that John Thain sensibly chose Merrill over Citi, is predominantly filled with overseas bankers: Goodwin of RBS, Ackerman of Deutsche Bank, and Diamond of Barclays. Filling out the list are Robert Willumstad, a former senior Citibank executive, Vikram Pandit, currently head of the firm's investment bank, and Chase CEO Jamie Dimon.
Every one on the list is missing experience with at least one large part of Citigroup's lines of business. And, on the note, every one on the list has more experience with some part of Citigroup's businesses than he did.
For that matter, even Sandy Weill, who cobbled the hydra-headed financial utility together some years ago, then hip-checked John Reed out of the picture, had direct experience that was far short of covering the resulting merger's (of Traveler's and Citibank) broad business array.
I've written many posts about Prince's inept leadership of the questionably-organized bank, two of which may be found here, and here. Others are under the labels 'Chuck Prince' and 'Citigroup.'
What seems obvious to me, then, is that Citigroup is simply too diversified to ever successfully provide its shareholders with consistently better returns than they can get by merely holding the S&P500. This, I contend, is the acid test of whether a company is really creating investible value for shareholders.
Commercial banking, in general, among the remaining money centers, isn't a good bet to beat the S&P500 anyway. It's not just Citi's problem.As the nearby, Yahoo-sourced price chart for Citi, Chase, BofA, Wachovia and the S&P500 for the past two years shows, none of the banks has outperformed the index. Citi is the worst, by far, Chase the best of the mediocre lot.
If you look back a bit further, Chase has slightly outperformed the S&P500, but, when adjusted for volatility, as I recently discussed in this post, the margin of outperformance nearly disappears. The other banks, again, all lag the S&P on a completely unadjusted (for risk) basis. Citi, again, is at the bottom of the bunch.
Even Chase's price curve indicates that the basis of its current five-year outperformance of the market is due largely to a few months in mid-2003. Which was prior to Dimon's arrival at Chase as CEO. Since then, it's performance has been somewhat flat, and not materially better than the index's, overall, with a significant period of falling returns, from early 2004 to late 2005.The classic money center banks of the last decade, before they began to be merged with second-tier securities firms, were already tough to manage. It's only gotten worse with time and added complication.
For example, this last Yahoo-sourced price chart of the four banks and the S&P500 Index covers the period from 1989 to the present, or roughly 18 years.Except for the 'old' Citibank, the other three banks moved pretty much in lockstep. And Wachovia wasn't even a large bank back then. Again, most of the banks are either below, or essentially on a par with the S&P return for the period.
Back in the day, Citi was a clear-cut innovator in financial services, nimbly outperforming every other large US commercial bank. However, that ended in 2000. Since then, it's plateaued, looking like the other major US banks.
I think the moral of this story is that it really doesn't matter much anymore who runs any of the largest five US commercial banks. Given a CEO with some banking background, all of them will pretty much move together, with occasional lags and surges from slightly different proportions of one business or the other in their asset and income mix.
Citigroup, however, remains overly diversified, relative to its ability to be managed for consistently superior shareholder returns , let alone as an average large US commercial bank.
To me, the solution at Citigroup is for Rubin and the board to simply begin packing and spinning back to shareholders an independent consumer bank, asset management firm, securities firm, and wholesale bank. Executives for each of these would be fairly easy to find, if not among the current heads of those units.
If only out of sympathy for the suffering shareholders of Citigroup, including the Prince in Saudi Arabia, the Citigroup board should understand and acknowledge the implications of their difficult CEO search, and just split the bank up into manageable units.
Monday, November 19, 2007
Point Estimates of Value: Accenture's 'Latest' Concept
A few weeks ago, in the Wall Street Journal's weekend edition of October 27-28, an article in their special section associated with MIT, entitled, "The Future Is Now," appeared.
The piece is the fruit of work by the Accenture Institute for High Performance Business. Essentially, it retraces valuation work done over a decade ago by allocating the current value of a company between current financials, and all else, which, according to the authors, must be 'future value.'
My own research, which, ironically, had some of its early roots at Andersen Consulting, Accenture's predecessor, has demonstrated the lack of validity that any point-estimate approach to valuation has for strategic or long-term investment applications.
Back in the mid-1990s, I led research in the financial services practice of Andersen Consulting which addressed the question of linking strategy, performance, and valuation for our client companies. My work was sufficiently advanced to become a funded worldwide industry program for our segment, with marketing support to implement it with clients.
Then, in 1995, Andersen reorganized its major axis of management from industry to geography. The new head of our practice was a partner from Texas, who eschewed any type of intellectual property-related work, in favor of raw IT-style consulting. It was then that my managing partner, who remains a senior executive at Accenture even today, and I agreed that my ability to pursue my work at Andersen had reached an end. Shortly thereafter, I became the first director of research for then-independent Oliver, Wyman & Company. At that time, OWC was a financial services consulting boutique, spun out of Booz, Allen Hamilton.
I continued to develop my ideas and research at OWC, and thereafter. Upon completing extensive research on both financial services and the S&P500 companies, I contacted my former managing partner at Andersen to ascertain the firm's interest in my work.
As it happened, they were attempting to do something conceptually similar, though far more primitive. Further, they were, as usual, trying to do it using spare time from idle junior staffers, managers and a consulting partner.
Even back then, in the late 1990s, I had realized the importance of measuring corporate performance through time. As I stressed in my presentations for the consulting application of my work, point-in-time valuation methods had a number of serious flaws. For one, they had no normative prescriptive component. With just a single number, or a few numbers which deconstructed a single time value number, nothing could be said of the result with any confidence.
Second, a snapshot made any subsequent analysis victim to a particular point in time which might not be representative of the recent past, or imminent future, of the company's market performance, either technically or fundamentally.
For instance, the Journal piece describes the Accenture approach thusly:
The Objective: Executives who are managing with the goal of increasing shareholder value need to be able to analyze their company's future value -- the portion of the share price that isn't based on the earnings from current operations or products.
The Process: A relatively simple mathematical formula can be used to determine how much of a company's share price is based on current value and how much on future value. Those proportions can then be compared with those of competitors and can be monitored for signs of changes in how the stock market is evaluating the company's prospects.
The Payoff: A clear picture of both the current and future components of a company's share price can give executives a better sense of whether they have struck the appropriate balance between short-term and long-term goals.
If the method involved looking at total returns through time, I'd say it might be more valuable. As it is, Accenture's old-style approach of capitalizing income streams and assigning values to debt and equity is needlessly complex and, to some extent, indefensible. It is quite similar to Stern Stewart's outdated 'EVA-MVA' approach, which suffers from similar point-in-time measurement weaknesses.
I don't believe a management "need(s) to be able to analyze their company's future value -- the portion of the share price that isn't based on the earnings from current operations or products."
Rather, it is simpler for a company to simply measure its total return, relative to the S&P500, in step with its fundamental performance over time. It is the change in value of the company, or the total return to shareholders, that matters, not the value of the assets, per se.
My own work along this line, for consulting applications, has resulted in much simpler, but more powerful diagnostics of corporate performance. Benchmarks have been developed, irrespective of industry or time. And they are related to the simplest, yet most important and powerful of all performance measures, total returns through time, relative to the market.
After I read this piece by the Accenture-related authors, it took me a while to understand how such an antiquated, simplistic view of valuation could result from a putatively leading consulting firm's 'institute.'
However, in discussing it with my business partner, we agreed that Accenture's work must be seen as having value to its clients. And clients who look to Accenture, and/or its Institute, for guidance and ideas, are bereft of their own.
In short, Accenture can't really serve up the very latest, leading edge valuation concepts to managements that are, typically, mediocre. If the managements were better, they'd be able to realize that methods like the ones described in this article were dated, rather ineffective, and have dubious value in application for strategy.
Rather, what Accenture has to sell is what middling managements will buy. And that won't be something normative.
In fact, this article, and its relationship to my own work, takes me back to a conversation I had at the end of my second involvement with Andersen Consulting, circa 1997.
The Financial Services Global executive for Strategy, Mike May, had originally seen, and become interested in, the work I presented to my former MD, Steve Racioppo. Mike had put me in touch with his Chicago practice partner who was heading their internal effort. That partner expressed relief that he would soon be able to hand off the effort to me, get back to consulting, and stop trying to solve the problem I already had, with a team of underpowered junior consultants.
At one point, May even solicited my interest in licensing my approach to Andersen on a global basis, for his segment.
Then a curious thing occurred. A few months later, May, his lieutenant, and I had a breakfast meeting in New York. While his junior partner silently sat and watched, May reversed his stand and told me he was no longer interested in my work.
He stressed that, at the time, in the late 1990s, strategy consulting in the financial services segment was growing 'faster than we can staff it.' Andersen had projects in backlog so far they were evidently worried about being able to staff everything they had sold.
In that environment, May told me, my technique had become an unnecessary minor item. A product whose revenues would be lost in the rounding error of his major strategy engagements, and whose door-opening value was not needed at that time. Products, May told me, were of little actual value to him anymore. Their return was too small in his current situation of mega-strategy projects for large financial services clients.
In conclusion, May told me something which, in hindsight, was a gift, although it took me a few days to realize it. He said, in effect, to paraphrase his words,
'This is an excellent tool for measuring valuation and return. It's without question the best I have seen. It will enable us to assure a client that the recommendations we have for them are, in fact, going to improve their performance, and are the best recommendations.
However, we have so much work we don't need it. Furthermore, our clients don't really care whether we can prove to them that our advice is right. They'll hire us and listen to our conclusions, whether we know those conclusions are going to improve the client's total returns, or not.
So I really don't need your technique to prove that our advice is the best thing for our client. They'll do it anyway, just because we say so.'
And that is one reason why I abandoned consulting applications of my research soon after, to focus on equity management.
When the largest consultants in the business- Andersen/Accenture, McKinsey, Mercer/OWC- didn't worry about demonstrating the actual value creation of their work, it was obvious my approach, which focused exclusively on improving a client's total returns over time, would never be competitive.
As I reflect on my equity strategy work, which is the other, non-consulting application of my research over the past 20+ years, I realize that Mike May did me a big favor. Had I licensed my work to Andersen/Accenture, I'd probably have spent years in a far less satisfying type of work than applying my research to equity management.
So, reading about Accenture's latest valuation concepts in the Journal last month brought a smile to my face. The technique they espoused isn't even close to being as powerful as what Andersen, and I, were working on over a decade ago. But, then again, I believe what the Accenture Institute folks are doing will be well-received by middling managers of struggling companies the world over. It won't tax their minds too much, and it dispenses with any promise of actually improving anything.
It's a perfect tool for a large consulting firm.
The piece is the fruit of work by the Accenture Institute for High Performance Business. Essentially, it retraces valuation work done over a decade ago by allocating the current value of a company between current financials, and all else, which, according to the authors, must be 'future value.'
My own research, which, ironically, had some of its early roots at Andersen Consulting, Accenture's predecessor, has demonstrated the lack of validity that any point-estimate approach to valuation has for strategic or long-term investment applications.
Back in the mid-1990s, I led research in the financial services practice of Andersen Consulting which addressed the question of linking strategy, performance, and valuation for our client companies. My work was sufficiently advanced to become a funded worldwide industry program for our segment, with marketing support to implement it with clients.
Then, in 1995, Andersen reorganized its major axis of management from industry to geography. The new head of our practice was a partner from Texas, who eschewed any type of intellectual property-related work, in favor of raw IT-style consulting. It was then that my managing partner, who remains a senior executive at Accenture even today, and I agreed that my ability to pursue my work at Andersen had reached an end. Shortly thereafter, I became the first director of research for then-independent Oliver, Wyman & Company. At that time, OWC was a financial services consulting boutique, spun out of Booz, Allen Hamilton.
I continued to develop my ideas and research at OWC, and thereafter. Upon completing extensive research on both financial services and the S&P500 companies, I contacted my former managing partner at Andersen to ascertain the firm's interest in my work.
As it happened, they were attempting to do something conceptually similar, though far more primitive. Further, they were, as usual, trying to do it using spare time from idle junior staffers, managers and a consulting partner.
Even back then, in the late 1990s, I had realized the importance of measuring corporate performance through time. As I stressed in my presentations for the consulting application of my work, point-in-time valuation methods had a number of serious flaws. For one, they had no normative prescriptive component. With just a single number, or a few numbers which deconstructed a single time value number, nothing could be said of the result with any confidence.
Second, a snapshot made any subsequent analysis victim to a particular point in time which might not be representative of the recent past, or imminent future, of the company's market performance, either technically or fundamentally.
For instance, the Journal piece describes the Accenture approach thusly:
The Objective: Executives who are managing with the goal of increasing shareholder value need to be able to analyze their company's future value -- the portion of the share price that isn't based on the earnings from current operations or products.
The Process: A relatively simple mathematical formula can be used to determine how much of a company's share price is based on current value and how much on future value. Those proportions can then be compared with those of competitors and can be monitored for signs of changes in how the stock market is evaluating the company's prospects.
The Payoff: A clear picture of both the current and future components of a company's share price can give executives a better sense of whether they have struck the appropriate balance between short-term and long-term goals.
If the method involved looking at total returns through time, I'd say it might be more valuable. As it is, Accenture's old-style approach of capitalizing income streams and assigning values to debt and equity is needlessly complex and, to some extent, indefensible. It is quite similar to Stern Stewart's outdated 'EVA-MVA' approach, which suffers from similar point-in-time measurement weaknesses.
I don't believe a management "need(s) to be able to analyze their company's future value -- the portion of the share price that isn't based on the earnings from current operations or products."
Rather, it is simpler for a company to simply measure its total return, relative to the S&P500, in step with its fundamental performance over time. It is the change in value of the company, or the total return to shareholders, that matters, not the value of the assets, per se.
My own work along this line, for consulting applications, has resulted in much simpler, but more powerful diagnostics of corporate performance. Benchmarks have been developed, irrespective of industry or time. And they are related to the simplest, yet most important and powerful of all performance measures, total returns through time, relative to the market.
After I read this piece by the Accenture-related authors, it took me a while to understand how such an antiquated, simplistic view of valuation could result from a putatively leading consulting firm's 'institute.'
However, in discussing it with my business partner, we agreed that Accenture's work must be seen as having value to its clients. And clients who look to Accenture, and/or its Institute, for guidance and ideas, are bereft of their own.
In short, Accenture can't really serve up the very latest, leading edge valuation concepts to managements that are, typically, mediocre. If the managements were better, they'd be able to realize that methods like the ones described in this article were dated, rather ineffective, and have dubious value in application for strategy.
Rather, what Accenture has to sell is what middling managements will buy. And that won't be something normative.
In fact, this article, and its relationship to my own work, takes me back to a conversation I had at the end of my second involvement with Andersen Consulting, circa 1997.
The Financial Services Global executive for Strategy, Mike May, had originally seen, and become interested in, the work I presented to my former MD, Steve Racioppo. Mike had put me in touch with his Chicago practice partner who was heading their internal effort. That partner expressed relief that he would soon be able to hand off the effort to me, get back to consulting, and stop trying to solve the problem I already had, with a team of underpowered junior consultants.
At one point, May even solicited my interest in licensing my approach to Andersen on a global basis, for his segment.
Then a curious thing occurred. A few months later, May, his lieutenant, and I had a breakfast meeting in New York. While his junior partner silently sat and watched, May reversed his stand and told me he was no longer interested in my work.
He stressed that, at the time, in the late 1990s, strategy consulting in the financial services segment was growing 'faster than we can staff it.' Andersen had projects in backlog so far they were evidently worried about being able to staff everything they had sold.
In that environment, May told me, my technique had become an unnecessary minor item. A product whose revenues would be lost in the rounding error of his major strategy engagements, and whose door-opening value was not needed at that time. Products, May told me, were of little actual value to him anymore. Their return was too small in his current situation of mega-strategy projects for large financial services clients.
In conclusion, May told me something which, in hindsight, was a gift, although it took me a few days to realize it. He said, in effect, to paraphrase his words,
'This is an excellent tool for measuring valuation and return. It's without question the best I have seen. It will enable us to assure a client that the recommendations we have for them are, in fact, going to improve their performance, and are the best recommendations.
However, we have so much work we don't need it. Furthermore, our clients don't really care whether we can prove to them that our advice is right. They'll hire us and listen to our conclusions, whether we know those conclusions are going to improve the client's total returns, or not.
So I really don't need your technique to prove that our advice is the best thing for our client. They'll do it anyway, just because we say so.'
And that is one reason why I abandoned consulting applications of my research soon after, to focus on equity management.
When the largest consultants in the business- Andersen/Accenture, McKinsey, Mercer/OWC- didn't worry about demonstrating the actual value creation of their work, it was obvious my approach, which focused exclusively on improving a client's total returns over time, would never be competitive.
As I reflect on my equity strategy work, which is the other, non-consulting application of my research over the past 20+ years, I realize that Mike May did me a big favor. Had I licensed my work to Andersen/Accenture, I'd probably have spent years in a far less satisfying type of work than applying my research to equity management.
So, reading about Accenture's latest valuation concepts in the Journal last month brought a smile to my face. The technique they espoused isn't even close to being as powerful as what Andersen, and I, were working on over a decade ago. But, then again, I believe what the Accenture Institute folks are doing will be well-received by middling managers of struggling companies the world over. It won't tax their minds too much, and it dispenses with any promise of actually improving anything.
It's a perfect tool for a large consulting firm.
Sunday, November 18, 2007
More Worries Concerning Starbucks' Growth Prospects
Thursday's Wall Street Journal featured a front page piece about Starbucks.
The article focused on Starbucks' growth prospects. Some passages from the piece stated,
"More broadly, Starbucks's recent attempts at expanding its brand have had mixed results. While its strategy to sell music has been a hit with customers -- baristas recently gave customers free songs from iTunes with their coffee -- the films it has promoted in stores have had only minimal box-office success. Some analysts say the chain has fallen behind on creating enticing new beverages and its breakfast sandwiches have created little excitement.
Chairman Howard Schultz has said that, throughout the company's history, outsiders have questioned the company's growth potential, and that he's always proved them wrong.
What has investors worried is that for the past two quarters the growth in transactions per store in the U.S. has been flat after climbing for several years. Same-store sales, which measures sales in locations open at least a year, have hovered in the mid single-digit range, after years of growing at a high single-digit or double-digit rate each quarter.
Much of that may not be Starbucks's fault. Pressures on consumer spending haven't made it any easier for Starbucks to increase sales, particularly because Starbucks's customer base has gradually broadened to include Americans with lower average incomes, a group more likely to cut back. This summer, a spike in dairy costs caused the company to implement its second price increase in less than a year. And competition has intensified: McDonald's Corp. has bolstered its coffee offerings and plans to add lattes and cappuccinos to thousands of U.S. stores next year.
At Starbucks's annual meeting in March, Mr. Schultz told how, when the company went public in 1992, an analyst wrote a report doubting the company's prospects.
"The analyst headline, which was picked up by a newspaper, said, 'This dog won't hunt,' " he told the audience. In those 15 years, Starbucks market capitalization went from $250 million to $24 billion. "I had it in my desk drawer for many, many years," he said. " 'This dog won't hunt.' ""
To me, the most telling sentences are those in the fourth paragraph which I have quoted from the article. The company, in order to sustain growth over the past few years, headed down market. Now, those less-wealthy customers are being more affected by recent economic events, including prices of gasoline and food, while even Starbucks' ingredients' price rises are driving them to increase prices, too.
Lastly, McDonalds and Dunkin Donuts, both of whom no doubt count the newer Starbucks customers as their targets, as well, have taken aim at the Seattle coffee giant. All of this is right out of Joseph Schumpeter's theory of creative destruction. Starbucks' own success has brought it into tertiary markets, drawn competition, and simply pushed its business model to the brink.
Then, after Starbucks' announced earnings on Thursday, after the Journal article ran, Friday's Journal noted,
"Shares of Starbucks were down 7.5% in premarket action, after the company said traffic in its stores fell for the first time since the company started keeping this figure. Also, the coffee shop giant reduced its earnings and same-store-sales-growth estimates for the coming year, despite a 35% increase in profit for the third quarter. The stock was one of the most actively traded in premarket action, according to Nasdaq, trailing just the Nasdaq-100 and S&P 500 tracking ETFs."
I guess this would seem to begin to confirm that Schumpeterian dynamics are, at last, at work at Starbucks. Same-store sales is no longer growing. Eventually, despite Schultz's ire at the early, wrong prediction that Starbucks wouldn't grow and prosper, it had to eventually hit a wall. And now it seems it has.The nearby Yahoo-sourced stock price chart for Starbucks and the S&P500 for the past five years confirms that the company's total return has not consistently outpaced the index. Now, its return has almost fallen to the level of the index.
Music and films might provide some small added growth, but coffee is still the company's main product line. If their music and films flopped, but their coffee remained strong (pun intended), they'd probably remain in good shape, if not enjoying robust growth. But if their music and film sales shot up, while their coffee business sagged, they'd be finished.
At least they are only suffering a lack of growth in the coffee business, rather than outright declines. Their recent quarterly sales growth figure was 22%. However, as the dynamics of that growth shifts to new outlets, from older ones, everyone realizes that their core markets must be fairly saturated now. And new growth will be more expensive, infrastructure-related.
In the end, Schumpeterian dynamics catches up to every business that I've ever studied. Every one of them. It's usually the hubris of the CEOs which keeps companies from acknowledging this fact. And Schultz's stubbornness in the face of the quantitative evidence suggests that maybe, now, he is in that situation.The company's stock price shows that investors, however, are more sanguine. This stock price chart, covering Starbucks and the S&P500 Index since 1992, show a clear plateau in total return performance over the past two years.
The company has had a tremendous run of building shareholder value at a pace which outstripped the S&P500 index for years. But 15 years is a long time, and that era is now over.
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