Saturday, April 12, 2008

Boeing's & McNerney's Continuing Bad "Dream"

Today's Wall Street Journal reported the story which broke on cable news networks yesterday. Boeing announced more delays for the Dreamliner, its newest jet. It seems that delays continue to plague this plane, whose delivery has now been pushed into 2009.

Is McNerney up to this job?

He arrived at Boeing in late 2005, as noted in this post on various former GE executives now heading other companies. As I wrote in that post, last September,

"But McNerney got there after Alan Mulally, now Ford CEO, had put the company back on track to success. The firm McNerney left GE to head, 3M, hasn't exactly set the world on fire.

And now, after McNerney's been at Boeing long enough to make an impression, the company falters. As the Yahoo-sourced price chart nearby reveals, Boeing's performance since late 2005 has begun to stall, as the S&P closes in on it."

Somewhere in the Detroit area, Alan Mulally must be laughing. The nearby chart shows Boeing's and the S&P500 Index's prices for the past five years. Mulally's efforts on the commercial side of Boeing had contributed to its nicely-rising stock price from 2003 through when McNerney arrived. Passed over for the top job, Mulally was vulnerable to the offer to be Ford CEO.

Now that Mulally, a genuine airplane guy, is gone, Boeing seems to have gradually wound down, performance-wise.

The nearby two-year price chart for Boeing and the S&P shows that the former no longer steadily outpaces the index. Instead, the index has ended the last two years handsomely up, and positive, relative to Boeing's roughly 5% price decline.

For just the past 12 months, it's similar. Though the S&P is also negative, it still comfortably beats Boeing's loss of more than 10%.

It's tempting to conclude that Boeing simply moves with the index, but, judging from the first chart, I don't think that's necessarily the case. The company had a solid path of outperformance through the middle of this decade.

Now, that's clearly gone.

Maybe McNerney should be, too.

As I discussed this post with my business partner last night, I thought about the logic Boeing used to recruit McNerney from 3M, where he had a similarly-lackluster, though very brief, tenure, to Boeing.

I wrote this post in June of 2006 concerning 3M and McNerney. In it, I wrote,

"All in all, an ironic track record for McNerney. It appears that under his leadership, 3M's stock price path remained pretty consistent, suggesting that investors didn't really see much difference with McNerney running the company. The only significant changes were bad ones- the dips in price in this decade."

3M's price trajectory hasn't really changed much since McNerney's departure in 2005. So he didn't appear to have markedly improved, or damaged the firm.

But in bringing McNerney to Boeing, the company's board cited his longtime experience heading GE's aircraft engine business.

On first blush, that sounds really relevant, doesn't it? That a guy who builds your engines can come run your company?

Then you stop and think....wait a minute!

That's sort of like saying the guy who runs Goodyear could run companies that used tires.

Or maybe Starbucks could be run by the guy, or woman, who heads up the paper cup supplier that the coffee maker uses.

Ford hired Mulally because they respected three things:

-his reinvigoration of Boeing's commercial plane marketing

-his leading the turnaround of that unit

-his long experience with a maker of complex large moving objects, i.e., airplanes.

I'm not sure that I see how Boeing's reasons for hiring McNerney were as valid.

As always, time will tell. But right now, I don't see McNerney having had a positive impact on keeping the Dreamliner and/or its program mangers performing up to expectations and promises.

Thursday, April 10, 2008

Greenspan Answers His Critics

Tuesday's Wall Street Journal contained a long piece focusing on Alan Greenspan's recent, continuing efforts to defend himself against mounting criticism of his reign as Fed Chairman.

Of course, last fall, it was a different story. Back then, I wrote two posts, here and here, which included this passage,

"Grant pulls no punches in questioning Greenspan's consistency as a libertarian, and acolyte of Ayn Rand, by ending up as the sole determiner of the economy's key interest rate. He makes clear Greenspan's lack of significant accomplishment as an economist or equity savant, prior to his role as Fed Chairman, and his misunderstanding of housing finance, after he took the position.

As Joe Kernen, an anchor on CNBC, articulated, Grant also seems to question Greenspan's motive in writing this book. Whereas Kernen opined that Greenspan wants back in the limelight, Grant suggests it's about trying to write his own legacy, before someone else writes a less flattering one."

And, in fact, Jim Grant, of Grant's Interest Rate Observer, was entirely correct. But it seems that Greenspan's pre-emptive effort has failed.

According to the Journal article,

"The criticisms that get under his skin are those from friends and former colleagues, many of them respected economists who backed his policies at the time but now say, in hindsight, that the calls were wrong. "I do take it seriously if my peers think I have misstated the facts," he says. "But where's the evidence? Too many people make accusations by assertion. I think it's improper." "

Which, as I noted last September in that second post, is true. There was insufficient objectivity about Greenspan back in the day. Too many people put him on a pedestal to begin with.

One subject on which I agree with Greenspan, which is vitally important right now, is the genesis of asset bubbles. The Journal article continues with,

"Mr. Greenspan now admits he was wrong about the improbability of a housing bubble. Yet he has long maintained that bubbles are an unavoidable feature of a dynamic economy. He pulls out a 1999 speech and shows, underlined in green marker, passages in which he warned of recurring but unpredictable patterns of overconfidence followed by investor panic. He does not share some foreign central bankers' belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble.

"I am reasonably certain that I am right here," Mr. Greenspan says. If proved wrong, he says, "I will change. I do not have a vested interest in holding wrong ideas." "

But with Greenspan's last statement, I disagree. Obviously the former Fed Chairman has a very great, vested interest in having his actions sustained and generally regarded as correct. Who, after such adulation as Greenspan achieved, would not be worried that his image would be sullied afterward?

Greenspan's book and subsequent consulting deals smack of someone a lot less secure in his actions at the Fed than, say, Paul Volcker.

For instance, consider this passage from the Journal piece,

"Mr. Greenspan says many of the criticisms against him are unjust. He is particularly perturbed by attacks over a 2004 speech in which he suggested that more borrowers would benefit from adjustable-rate mortgages. Interest rates were at a historical low at the time, which means that those who held on to the mortgages would have seen rates adjusted upward.

Mr. Greenspan says the speech merely pointed out that many people who get a 30-year mortgage move or refinance long before it matures. Eight days after giving the speech, he says, he clarified his comments to say he didn't mean to disparage 30-year fixed-rate mortgages. "I find it profoundly disturbing" that critics cite the recommendation and not the retraction, he says, tapping his fingers on the table in front of him. "In all seriousness, this is really quite unfair." "

You can't say that Greenspan is unfamiliar with how the media treat public pronouncements by him. To complain that the headline got all the attention, and a minor clarification didn't, is to believe Greenspan is naive. But he's not. He was a longtime power player in Washington, and well knows how quotes can be misused.

Further, it's hard for Greenspan to now duck his explicit hesitancy to conduct closer supervision of specific, mortgage-related bank and bank-subsidiary lending practices.

For what it's worth, I don't really think we should rely on Federal regulators to take the place of commercial bank risk managers when it comes to lending practices, once guidelines are set. However, would it have been so bad for Greenspan to observe the rush to no-money-down mortgages and insist on 10% or 20% downpayments, instead?

This way, the Fed wouldn't have second-guessed bank risk management, so much as simply aligned housing purchases with those of financial assets, which the US long ago put on a higher-margin basis.

Reviewing the history of Greenspan's tenure as Fed Chairman, it's probably fair to say that he handled specific crises well. He showed flexibility with rate movements in response to various challenges to the economy, but was probably slow to return low interest rate levels to more appropriate ones consistent with a stronger dollar. And, finally, he didn't exercise as much influence over safe lending terms for mortgages as he could have, given the Fed's inherent ability to do so.

It's too bad that Greenspan is pouting about the changing sentiment regarding his Fed reign. It's not like he is being viewed as a failure. But, after last fall's public coronation of the man as the 'best central banker' of all time, it's understandable that he's suffering from a reduction in public esteem.

It may well be that, with more time, either Volcker or Bernanke will more fittingly be judged worthy of the title that Greenspan so clearly wants to keep.

Wednesday, April 09, 2008

Starbucks' Howard Schultz On CNBC Today

By chance, I happened to catch Maria Bartiromo's softball interview with Starbucks' recycled CEO, Howard Schultz. Schultz was all a twitter about today's introduction of the firm's latest beverage- a specially-designed, basic brewed cup of coffee.

As the nearby, Yahoo-sourced five-year price chart for Starbucks, McDonald's and the S&P500 Index illustrates, Schultz had better hope it delivers something big for his shareholders.

I've written at least six labeled posts about the company, and probably a few more prior to those. My most significant recent piece was this one, in January, regarding the marketing battle heating up between Starbucks and McDonalds, with Dunkin Donuts also in the mix.

Perhaps the most amazing comment Schultz uttered in the rather surreal interview this morning on CNBC was, in response to Bartiromo's question about McDonald's,

'Competition- they're just noise,'

or words very close to those.

Well, as I noted in this post, regarding Schultz's recent, hand-picked strategist, Michelle Gass, contended,

"She says she hasn't been focused on competitors in developing the new plans. "I think we'd all readily admit that a lot of the situation we're in is self-induced."

Sounds familiar, right? At least Gass and Schultz are reading from the same page in the same playbook.

But in that prior post, I went on to note,

"Thus, I find Ms. Gass' comment to be dangerously short-sighted and internally-focused.

Instead, she might wake up to the reality of Schumpeterian dynamics. Between Starbucks' own prior expansion into lower-income segments, and McDonalds' search for growth in kindred products, the former's market dominance was almost certainly going to come to an end, one way or another.

As it is, Starbucks is being bracketed by another coffee retailer on one side, and a fast-food giant on the other. This has less to do with Starbucks' 'self-induced' troubles than it does with recent targeting of the coffee giant's business by two very large, savvy food retailers.

I hope, for Howard Schultz' and Starbucks' sake, that Ms. Gass begins to become aware of this reality."

While McDonalds has not, historically, been a competitor of Starbucks, it is now. Looking at the three Yahoo-sourced charts in this post- the five-year, two-year and one-year timeframes of Starbucks', McDonalds', and the S&P's price performances- it's clear that the fast food giant has been resurgent for the entire five year period just past.

Starbucks peaked two years ago, and is now struggling to find a way to rekindle its total return performance. Viewing the two firms' looming battle, and now learning that Schultz' latest weapon is a simple, brewed cup of coffee, I really wonder if Starbucks 'gets it.'

They are in the fight of their lives. They no longer own the premium coffee product/market. At least with espresso-based coffees, they had a lot of room to innovate and maneuver.

But brewed coffee? Lower priced, I would guess. And how long will it take Dunkin Donuts or McDonald's to emulate the new flavor, if it's warranted? Dunkin already wins taste tests with its signature coffee.

The shorter time period charts show Starbucks losing 50% of its price over two years, and 40% in just the past twelve months.

In contrast, McDonalds has racked up more than 20% in price appreciation, while the S&P was slightly negative.

My point is not that Schultz and Starbucks have to perform exactly like McDonald's, but that the latter is newly-focused and on a roll, with upscale coffee targeted as one of several important new product/markets.

The end of Bartiromo's interview with Schultz saw him fumbling to handle her question about how investors should view his new brewed coffee initiative. He spat out some tired lines about returning to the firm's roots and values while pursuing international growth, all calculated to

'Return Starbucks to its traditional place in this segment,'

or something close to that statement, which is not an exact quote.

It seems, per my prior posts, that Schultz and his chief strategy lieutenant, Gass, think that all of their company's troubles have been simply a matter of self-inflicted loss of focus and failure to refresh their brand.

In fact, again, per my prior pieces on Starbucks, the truth is more complicated than that. McDonalds is certainly much more dangerous than 'just some noise.'

So is Dunkin Donuts. Starbucks' most recent target segment, lower socio-economic groups, are currently hurting economically. The firm's success has attracted two large, capable competitors.

Are we to believe that one brewed coffee blend is going to reverse a 40% slide in the firm's stock price? With two hungry competitors active in the same market?

I think it's fair to say that the bloom is long off Starbucks' rose.

Tuesday, April 08, 2008

AMD's Sagging Fortunes

How the world has changed in the semiconductor sector!

Just about two years ago, I wrote this post in observance of AMD's successful revenue and profit growth, while Intel struggled.

This morning, however, the Wall Street Journal published an article detailing AMD's recent woes, including a 10% cut in its workforce.
What went wrong?
Nearby is a Yahoo-sourced five-year price chart of AMD, Intel and the S&P500 Index. It seems that my post from May of two years ago, based upon another Journal article, from that time, caught AMD just past its stock price apogee.
Today's Journal article notes,
"The company has been coping with a series of problems, including a heavy debt load from its 2006 acquisition of ATI Technologies Inc. and a stronger line of competing products from Intel. AMD counterattacked in September by announcing a new line of chips that pack the equivalent of four electronic brains on a single piece of silicon.

In December, AMD disclosed technical defects that affect models of the chip for server systems and desktop PCs. It has now introduced versions without those bugs, but computer makers held up purchases in the meantime, said JoAnne Feeney, an analyst at FTN Midwest Securities Corp.

She added that demand has been softening for desktop PCs, a field where AMD has been the strongest lately. "They were gaining share in desktops, which paradoxically exposed them more" to the demand problem, Ms. Feeney said.

John Lau, an analyst at Jefferies & Co., estimated that the total PC market declined about 10% from the fourth period, with AMD's 15% drop also reflecting losses in market share."
So, putting the pieces together, it seems that AMD's acquisition of ATI, Intel's own counterstrikes, and then AMD's management troubles combined to push its stock price down ever since that brief window of triumph.
Since that brief, two-year period of outperformance of the index and Intel, AMD has had a pretty much monotonic decline, as depicted by the nearby Yahoo-sourced price chart for the past two years.
Even so, as the first chart clearly shows, AMD is still not tremendously far below Intel over the longer timeframe. After its rollercoaster ride up and down, AMD looks to have returned to the same overall neighborhood of performance that Intel has shown by its nearly-flat trajectory over the period.
Both have underperformed the index for five years, indicating why neither shows up on the list of equity selections for my portfolios.

Monday, April 07, 2008

Lehman's Structural Issues

Tuesday's WSJ covering Lehman's $4B preferred stock placement.

The Wall Street Journal carried an article last Tuesday describing Lehman Brothers' recapitalization with $3B of preferred equity. Scared by Bear Stearns' collapse after a run by counterparties and customers, Lehman elected to shore up its capital and cut its leverage.

Perhaps Lehman isn't Bear Stearns. Perhaps it's a bit more diversified and- now- more conservatively funded.

But that's not the entire question, is it? That is, we don't really need to know about just the necessity of Lehman's funding. Sufficiency is the real issue.

Is it possible that only one, perhaps two investment banks- Goldman Sachs and Merrill Lynch- are now sufficiently diversely funded and large to avoid the ultimate negative consequence of their leverage- insolvency?

Maybe Lehman, for all its efforts, just still isn't sufficiently diverse, large, and long term funded. Maybe Morgan Stanley isn't, either.

Oh, yes. Lehman had the Fed window now, as does Morgan Stanley. Then why the new preferred issue?

Well, later last week, Fed Chairman Ben Bernanke did confirm that the window for investment banks is an emergency step. It will be closed when Ben and his colleagues judge the emergency to have passed.

You have to wonder if this is about to be an opportune time for Dick Fuld, Lehman's hardnosed CEO, to exit via a sale of his firm to a commercial bank.

Once Fed funding is off-limits again, what will Lehman's stock price do? For how long will investors really believe that an investment bank is safe, now that SEC Chairman Chris Cox noted that Bear Stearns lost slightly less than 90% of its liquid assets in one day last month?

Lehman still has significant exposure to mortgage loans. And Bear's experience demonstrates how quickly the loans from commercial banks, on which all brokers/investment banks depend, can be pulled.

Per my recent posts in the wake of the Fed's window opening to investment banks, I just don't see, long term, why any but perhaps the very best one or two investment banks can remain independent.