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May 24, 2005
Quote of the Day for Tuesday, May 24, 2005
Today's quote is from Harry Emerson Fosdick, born on this date in 1878:
"No horse gets anywhere until he is harnessed. No stream or gas drives anything until it is confined. No Niagara is ever turned into light and power until it is tunneled. No life ever grows great until it is focused, dedicated, disciplined."
May 23, 2005
Quote of the Day for Monday, May 23, 2005
Today's quote is from long-time General Motors President and Chairman Alfred P. Sloan, born on this date in 1875:
"There is no resting place for an entreprise in a competitive economy."
Posted by John at 4:35 AM | Comments (0) | TrackBackMay 20, 2005
A Major Bank-Brokerage Combination Which--Amazingly--Has Worked
With an acquisition track record marked by such questionable results as have been exhibited in Georgia, one would expect that the absolute worst deal a bank like Regions Financial could make would be to acquire an investment banking firm. After all, the assets of an investment banking firm can go down the elevator and disappear out the front door; the point has been proven by most big banks’ acquisitions of such firms.
Regions Financial’s acquisition of Morgan Keegan, however, has been an exception to a seemingly firmly ensconced trend. Unlike some of the bank acquisitions we highlighted, Regions’ shareholders have actually received some value out of the Morgan Keegan deal.
In the year 2000, Regions has less than $100 million in combined revenue from investment banking, brokerage, and trust. Regions paid $774 million in stock for Morgan Keegan in early 2001; at the time, the Memphis-based investment banking and brokerage firm had roughly $500 million in revenues.
In 2004 Regions reported total investment banking, brokerage, and trust revenue of $637 million. This combined level of revenue is actually greater than the run rate of what the pro forma entity would have reported in 2000, the pinnacle of the equity markets.
Regions has succeeded with its acquisition of Morgan Keegan not only because it has left the acquired firm alone (or as alone as you leave any company you’ve acquired). The acquisition has been successful because Regions, in a move of humility not typically associated with bigger banks, folded its existing investment-related businesses into Morgan Keegan. It’s truly amazing, when you stop to think about it.
The deal’s payoff for Regions’ shareholders, given the manner in which it was handled, shouldn’t be surprising at all.
Posted by John at 9:24 AM | Comments (0) | TrackBackFrittering Away Shareholder Value in Georgia Banking Acquisitions
We recently explored United Community’s Hall County, Georgia hiring blitz and its implications. Most of the over 50 bankers which United Community hired came from Regions Financial. Regions’ Georgia experience is a case study in the premise that the acquisition programs of larger banks often turn into exercises in accounting gymnastics which do not truly enrich the shareholder.
Regions’ presence in Hall County came from its 1996 acquisition of First National Bancorp, the parent of First National Bank of Gainesville and by far its largest subsidiary. One can understand the attraction of this institution to Regions. According to FDIC branch office data compiled as of June 30, 1995, First National Bank of Gainesville had $729 million in deposits in Hall County, about 50% of the total deposits in the county ($1.47 billion) at that time.
Regions paid $654 million in stock, a premium of $350 million over First National Bancorp’s stated shareholders equity. The deal was consummated in March, 1996.
Regions’ experience in Hall County since paying such a premium has been, well, less than stellar. According to the latest FDIC branch office survey (June 30, 2004), Hall County’s deposits had grown to $2.32 billion, reflecting the dynamic growth of this suburban Atlanta locale. At the same date, Regions reported $722 million in deposits in Hall County.
It’s no misprint. Despite operating in one of Georgia’s fastest growing counties, Regions has actually lost deposits in Hall County over nine years.
The FDIC branch office survey is admittedly imperfect. It does not reflect all the deposit wealth in a community, as it does not reflect deposit balances at brokerage firms, credit unions, or internet banks. Moreover, banks change branches they assign deposits to, not only for operational reasons but because this information is so readily available and scrutinized by competitors, analysts, and the press.
The sum of Regions’ acquisition experience in Georgia is equally dismal. In roughly four years from 1994 to 1998, Regions purchased sixteen different Georgia banking institutions. Most of these assets were in the Atlanta area, or where the sprawling growth of Atlanta could reasonably be expected to reach over the next decade.
The graph below suggests what Regions shareholders have to show for all the deal activity in Georgia. Although its deposit growth in Georgia was positive for a couple of years after its acquisition spree stopped, Regions’ franchise in the state is clearly stagnant. The recent loss of so many banking professionals is likely to deepen this stagnation over the next few years.
For all the shareholder resources distributed in Georgia in the form of shares paid for banking acquisitions, Regions shareholders don’t have much to show for it.
In recent years management and investor attention has turned to Arkansas, where Regions purchased First Commercial Corp. in 1998, and ultimately to the merger with Union Planters completed last year. These deals and others have turned Regions Financial into an $84 billion behemoth.
Regions’ experience in Georgia has almost been lost in the shuffle. Indeed, such it is one of the unspoken benefits of the more recent deals Regions’ management has engineered since its late 1990s Georgia foray.
Quote of the Day for Friday, May 20, 2005
Today's quote is from philosopher John Stuart Mill, born on this date in 1806:
"Life has a certain flavor for those who have fought and risked all that the sheltered and protected can never experience."
Posted by John at 5:05 AM | Comments (0) | TrackBackMay 19, 2005
The “Trouser Guy” Heads to Mexico and Vietnam
Bloomberg columnist Andy Mukherjee gets to the heart of the matter on the reimposition of quotas on cotton trousers imported from China:
Consulting firm A.T. Kearney estimates that it costs $135 to manufacture a dozen pairs of trousers in the U.S. The import price of Chinese trousers in the first quarter this year was $57 per dozen; a similar average for the rest of the world was $69.
Trouser manufacturing in the U.S. isn't just uncompetitive versus China. It's uncompetitive, period.
Capping Chinese exports won't help U.S. apparel makers. In 2003, when imports of Chinese-made trousers were limited by quotas to 1.6 percent of the total, 78 percent of the 200 million dozen cotton pants sold in the U.S. were still sourced from abroad--Mexico, the Dominican Republic, Hong Kong and Vietnam.
The “Trouser Guy,” first cousin of the “Sock Guy,” must be in Mexico or Vietnam right now.
Quote of the Day for Thursday, May 19, 2005
Today's quote is from Robert Brault:
The average pencil is seven inches long, with just a half-inch eraser--in case you thought optimism was dead.
May 18, 2005
Quote of the Day for Wednesday, May 18, 2005
Today's quote is from philosopher Bertrand Russell, born on this date in 1872:
"Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric."
May 17, 2005
The “Sock Guy” in China—and a Lot of Other Spots on the Globe
Last fall during a trip to China, I met the "Sock Guy," as I’ll call him, on a hotel elevator in Shanghai. Coming down for breakfast, we were on the elevator with a group of young people with identical backpacks; they were clearly in the hotel for a conference of some kind. He asked what the conference was about, and I heard a familiar twang.
"Hey, Kentucky," I said.
"Hey, how’d you know?," he said.
He was kidding, of course. I gave my twang away the precise moment I opened my mouth. It turns out we were both born in the same little area of south central Kentucky.
Neither of us had other people to meet for breakfast, so we ate together. Over fried eggs as good as the Waffle House can serve, we compared notes on why two Southern boys like us might have a chance meeting in a Shanghai hotel elevator.
At one point, it seems, the "Sock Guy" was the "Drug Guy." As a young man his first job was in pharmaceutical sales, driving all over south Georgia. (That’s another interesting story.) One of his best friends, in the sock business, was driving a much better car, so he decided to jump into that industry.
"I’m a great example," he said, "of youth and foolishness being a matched set."
He’s been in the brutally competitive sock business for roughly three decades now. (I admire him for that fact alone.) His company is a major supplier to several U.S. retailers, and at the time we met he had plants in Central America, Central and Southeast Asia, and Africa. He was in Shanghai to investigate buying or building a plant in China.
I asked him about the lifting of textile quotas, due to occur at the end of 2004, and what effect it would have on his various plants around the world. As for his plant in Africa, "it’s done," he said. The productivity in his operation there wasn’t high enough to meet the competitive pressure sure to come when Chinese companies had an open market in the U.S.
"What about your operation—and other plants owned by the competition—in Central America; will they make it?" I asked him.
"It will be tough," he said, a comment loaded with studied understatement. "But you’ve got to be flexible."
He went on to explain: he must have multiple plants across the world to be able to move production to the lowest cost, best quality location. The competition was too brutal. The retailers buying his product demanded it. They could move their business to another supplier if their prices were better or the quality was poor.
The reimposition of quotas on Chinese textiles announced last week by the U.S. Department of Commerce doesn’t apply to socks; they cover cotton blouses and knit shirts, cotton trousers, and both cotton and synthetic fiber underwear. Nonetheless, I thought about the "sock guy" when I heard about these quotas.
In her book The Travels of a T-Shirt in the Global Economy, Georgetown Professor Pietra Rivoli estimates there are over 40,000 garment factories in China alone. How many of these plants have sister locations in other countries around the globe, knowing that the battle over textile trade is not a skirmish but a long-term guerilla campaign? How many of these plants in China are not actually Chinese-owned, but owned by a number of the same American companies asking for reimposition of quotas?
The Sock Guy personifies the answer. Flexibility is his watchword. It’s the key to survival in a brutally competitive global economy.
It also means that the world is a touch more complicated than the act of slapping limits on imports of Chinese-produced underwear would imply.
Quote of the Day for Tuesday, May 17, 2005
Today's quote is from presidential biographer Merle Miller, born on this date in 1919:
"Everyone has his burden. What counts is how you carry it."
May 16, 2005
Splintering in U.S. Asian-American Television Follows the Hispanic Trend
We’ve discussed the balkanization of television media for the U.S. Hispanic demographic, a trend one expects for a population of 40 million.
Sunday’s Washington Post had an article on the same trend already beginning in the U.S. Asian-American demographic, an attractive one, yet a population of only 12 million nonetheless.
Around a half-dozen English-language, 24-hour networks targeting Asians have either launched or announced plans to launch in the last year. Comcast, for example, offers AZN Television.
Given the obstacles inherent in such an operation (different languages, just to mention one), it says something about the lengths to which Comcast, for example, is willing to go to differentiate itself from its satellite competitors.
Quote of the Day for Monday, May 16, 2005
Today's quote is from Aristotle:
"You will never do anything in this world without courage. It is the greatest quality of the mind next to honor."
Posted by John at 4:28 AM | Comments (0) | TrackBackMay 14, 2005
Outsourcing to Arkansas—a State with the Right Attitude
InformationWeek has an interesting story on startup Rural Sourcing, founded by Kathy White, former CIO at Cardinal Health. The company has two operations so far, one in Jonesville, Arkansas, focused on retail industry supply chain and distribution applications, and in Greenville, North Carolina, which mostly builds applications for healthcare companies in Raleigh.
Rural Sourcing bills at $38 to $45 an hour for programming work, considerably less than a $80/hour Northern California programmer. Although a Java coder in a major Indian city costs about $23, White estimates that the true cost of offshoring such a position is at least $30, including management, travel, and other startup expenses. Given the additional “soft” costs of outsourcing, I have to believe that this narrow a cost differential will help make Rural Sourcing successful—provided the educational infrastructures in Arkansas and North Carolina can provide a ready source of labor.
Economic development officials from Arkansas Governor Mike Huckabee’s office helped with the establishment of the Rural Source operation in Jonesville. Arkansas constituents should be delighted with the economic development philosophy expressed by a quote from one of Huckabee’s spokesmen: “We know we're no longer just competing with other states; we're competing with India and other countries."
With that attitude, states like Arkansas have a much greater chance of success with their economic development strategy. Those with their head in the sand, believing it’s still a “state vs. state” game, don’t have much of a chance.
May 13, 2005
United Community Adds to Franchise Value and Wall Street Barely Notices
We commented earlier this week on the expansion of United Community Banks in Gainesville, Georgia. Instead of paying a costly premium for a existing bank—and justifying the price with cost cutting which potentially disrupts the value of bank’s business—UCB has assembled a team of fifty bankers to start a de novo operation. Most of this team is coming from Regions Financial.
Bank stock specialists Keefe, Bruyette & Woods has some significant analysis on UCB’s initiative. KBW estimates this expansion will cost a few pennies in earnings for this year because of start-up expenses, branch openings, and the natural lag time between hiring people and their bringing in business. Within three years, however, this expansion will add about $.08 to $.11 to annual earnings.
Stated another way, for only about a 2% hit to earnings near term, UCB is loading up about 7% or so of accretion to earnings a couple of years out. Moreover, the amount of this accretion will only grow as the Gainesville operation continues to expand and matures.
The discounted value of this annual accretion, according to KBW, adds about $1 to UCB’s franchise value immediately.
This estimate is conservative, in our view, because of an element impossible to quantify but real nonetheless. Companies like UCB which have the “halo effect” necessary to attract 50 bankers at a pop are by definition able to attract other experienced producers which in turn add to franchise value themselves.
None of this excites Wall Street, of course. We stand to be corrected, because we don’t stand around the sell-side research water cooler all day long, but we’ve seen a grand total of three comments on UCB’s Gainesville expansion. Mind you, United Community is (ostensibly, anyway) covered by nine Wall Street analysts.
This reaction is typical. Wall Street invariably pays a lot more attention to acquisitive companies and their targets than to companies focusing on internal growth and smaller, “bolt on” acquisitions. The former is much more profitable for Wall Street (think underwritings, M&A advisory fess), while the latter is significantly more lucrative for shareholders.
Posted by John at 9:39 AM | Comments (0) | TrackBackQuote of the Day for Friday, May 13, 2005
Today's quote is from Denis Waitley:
"Get excited and enthusiastic about your own dream. This excitement is like a forest fire--you can smell it, taste it and see it from a mile away."
May 12, 2005
The Underlying--and Unchanging--Reason Behind Banking Consolidation
Smith Barney recently issued a report on bank CEO compensation with some startling conclusions. A high correlation between CEO compensation and bank size continues to exist. Moreover, very little correlation exists between three year earnings per share growth or three year stock price performance.
As you slowly recover from those shockers, consider this: Smith Barney believes this correlation "adds to the allure of doing acquisitions." Can we pause for a Claude Rains moment?
In fairness to the analysts at Smith Barney, this finding comes as no shock to them, and they have reported this same finding in their annual review of bank CEO compensation for as long as I can remember. Moreover, the results of Smith Barney’s look at this issue are confirmed by numerous other studies, such as this one from a professor at Indiana University.
Like all corporate CEOs, bank CEO compensation is based on peer groups. With banks, the composition of those peer groups are invariably based on asset size. Such is the case in spite of the fact that most bankers who run those institutions, when speaking to investors, talk about how unimportant asset size is a metric of performance.
A few days ago I was with the retired Chairman of a major bank, and he was talking about the difference between his institution now versus when he was in charge.
"I tell them (senior management) that this place is getting big enough that you can hide," he said. "It was pretty hard for me to do that."
Big enough to hide, to insulate the top guy from blame. Big enough—in assets—to justify a bigger paycheck.
It’s little wonder than so many de novos have been formed in recent years with a "build to sell" business plan. The banking entrepreneurs forming these institutions know how the game is played. While the volume of m&a may wax and wane and prices paid may vary from year to year, there’s one constant: the CEOs of potential acquirers have incentives to pay a little extra or fudge a little on the projections to get a deal done. Doing so adds more balance sheet assets, and bolsters documentation used by the compensation committee of the board.
Posted by John at 4:55 AM | Comments (0) | TrackBackQuote of the Day for Thursday, May 12, 2005
Today's quote is from Mary Kay Ash, who launched a cosmetics empire after she "retired" and was born on this date in 1918:
"Aerodynamically, the bumble bee shouldn't be able to fly, but the bumble bee doesn't know it so it goes on flying anyway."
May 11, 2005
Hispanic Media Family Feud Flares Up--Again
Televisa and Univision are at each others throats—again. While the pretext for the current fight is payment of royalties on programming, control is the real issue.
These two companies are joined at the hip both operationally (Televisa has programming, Univision has the distribution) and legally, which an agreement designed to handcuff one to the other. It’s hard to see how the jockeying, in the short run, will amount to anymore than just that.
As we’ve noted before, the real issue for Univision (probably more so than Televisa) will be dealing with the caterpillars. Even Telemundo, as well established as they are, can take some bites from the Univision foliage, as evidenced by this recent deal with Wal-Mart.
Quote of the Day for Wednesday, May 11, 2005
Today's quote is from dancer and choreographer Martha Graham, born on this date in 1894:
"You are unique, and if that is not fulfilled, then something has been lost."
May 10, 2005
China and India Seeking Ties That Bind
My recent trip to China coincided with Chinese Premier Wen Jiabao’s visit to New Delhi, which received extensive coverage in the Chinese media. Premier Wen’s visits with Indian Prime Minister Manmoahn Singh were heavily focused on improving cooperation and trade ties. The groundwork was laid, in fact, for developing a free trade agreement between the two countries.
In a recent essay (pdf) for the Far East Economic Review, Pramit Mitra and Drew Thompson of the Center for Strategic and International Studies offer some interesting observations on the changes in the relationship between China and India which are occurring. Although the implications of this relationship are significant, Mitra and Thompson argue that both countries fundamentally value their relationship with the U.S.:
At present, both and India and China value their independent relationship with the U.S. more than their bilateral relationship with one another, and Mr. Wen’s visit to India is unlikely to fundamentally change that. What it is likely to do is reinforce the pragmatic cooperation that India and China have embarked upon. Both India and China share the aspiration of a world order that is multipolar and takes greater account of their role. They also realize that there is much to be gained in cooperating and expanding commerce and trade relations and ensuring that the troublesome issue of border disputes remains on the backburner. Both China and India now place a higher priority on increased trade relieving their massive domestic poverty and unemployment problems.
Mr. Wen’s visit indicates that India and China, in the immediate future at least, are headed toward greater pragmatic cooperation, but not toward any broader alignment on foreign policy. Overall, this is good news for regional peace and stability. Reinforcing this trend is both countries’ strong relations with the U.S. Improved China-India ties should ultimately produce a kind of “soft” balance of power between the three countries, with each nation protecting its own interests by aligning with the others on an issue-by- issue basis in a grand hedging strategy.
All three are confronted by a crucial issue which ties them quite closely: dependence on foreign energy supplies for economic prosperity.
Posted by John at 6:53 AM | Comments (0) | TrackBackThe Importance of the Hispanic Community to Atlanta Business
Just a quick scan of this week’s major stories alone in the Atlanta Business Chronicle indicates the importance of the Atlanta Hispanic demographic to the business community:
Posted by John at 1:31 PM | Comments (0) | TrackBack1. One article covers the efforts of Cingular Wireless to expand its reach among Hispanics. Cingular COO Ralph de la Vega notes that Cingular has the leading market share (25%) in the Hispanic community and seeks to maintain that leadership.
In addition to de la Vega, incidentally, Cingular has two other Latinos in its executive suite: Joaquin R. Carbonell III, executive vice president and general counsel, and Thaddeus Arroyo, chief information officer.
2. PepsiCo Inc. and Atlanta-based Diaz Foods, one of this country’s largest Hispanic food distributors, are tussling over Diaz’s imports of Pepsi products bottled in Mexico. Diaz projects total revenue of over $100 million this year, much of which comes from importing food and beverage products from not only Mexico but South America as well.
3. Yesterday we referenced a Chronicle article on the banking turmoil in suburban Hall County. Part of the reason for Hall County’s rapid expansion has been the Hispanic demographic. Census data suggests that 60% of Hall County’s growth is coming from newcomers moving to this area, and two-thirds of that are due to immigrants, mostly Latinos.
Posted by John at 4:48 AM | Comments (0) | TrackBack
Quote of the Day for Tuesday, May 10, 2005
Today's quote is from historian Ariel Durant, born on this date in 1898:
"If you have character, endeavor, personality, courage, and the capacity for concentrated labor, you will do what is your destiny--and perhaps, even do it well."
Posted by John at 4:09 AM | Comments (0) | TrackBack
May 9, 2005
Gainesville Bankers Swimming to UCB, Part 2
Most banking acquisitions involve paying a multi-million dollar premium. This price is negotiated with a board of directors, whose interests quickly become focused solely on how much they’ll get for their stock, for an institution full of lenders and customer service personnel who didn’t ask to be acquired.
These employees, the guts of the organization, suddenly find themselves dealing with changes in policies, rates, and fees, they are asked to defend. The acquirer spends very little time and effort in actively retaining and motivating these key people.
They are susceptible to being poached by competing banks, and customers often follow. Consequently, the invariably rosy forecasts used to justify the large acquisition premium become a noose around the neck of the acquirer.
If the deal is big enough, the acquirer either has to admit the deal didn’t turn out as planned, or more frequently, find another acquisition to divert Wall Street’s attention. The fertilizer pile gets higher and higher, as shareholders of The South Financial Group, for example, have recently discovered.
While United Community Banks has been an active acquirer, they have also maintained a structure and philosophy which has produced demonstrable organic growth in the banks they acquire. (They’re one of the few banks we know of which actually discloses such information.)
Even better than actually delivering on growth in acquired banks, however, is getting the same growth without having to pay an acquisition premium. What a shareholder friendly way to expand!
It’s little wonder than UCB, at roughly 17 times what they’re likely to earn in 2005, trades at a premium to its peers.
The aforementioned South Financial Group? This company trades at roughly 13 times expected 2005 earnings, a difference which means millions.
United Community Banks, despite an asset size only one-third of the South Financial Group, has a market capitalization one-half as big. The market indeed understands the difference.
Posted by John at 6:21 AM | Comments (0) | TrackBack
Gainesville Bankers Jumping in the Water and Swimming Out to the UCB Boat
The Georgia banking franchise at Regions Financial got a lot thinner in the last week or so, as United Community Banks pulled off one of the biggest liftouts you’ll see in regional banking.
In a press release dated Saturday, April 30, United Community announced the addition of three senior bankers in Gainesville, Georgia. Gainesville is the country seat of Hall County, just outside of Atlanta. Over the last decade or so, Hall County’s growth—the country has doubled in population in the last 25 years—places it in among the fastest growing counties not only in Georgia but in the nation.
These three bankers were the senior leadership from the local outpost of Regions Financial in Gainesville. The “grapevine talk” was that Regions was pretty sore about losing these three gentlemen, as they were leaders of the Gainesville operation and excellent bankers.
If losing these three caused soreness, then Regions must be in traction by now. As word of these departures spread and the plans to open a bank for United Community became apparent, a number of the trio’s former colleagues sought to join the new effort. After only five days, United Community issued another press release, announcing ‘acceleration” of its Gainesville expansion plans with the hiring of fifty bankers. We understand that most—although not all—of these professionals came from Regions.
[Continue reading "Gainesville Bankers Jumping in the Water and Swimming Out to the UCB Boat" by following this link.
Posted by John at 6:10 AM | Comments (0) | TrackBack
Quote of the Day for Monday, May 9, 2005
Today's quote is from the great Spanish philosopher Jose Ortega y Gasset, born on this date in 1883:
"Life is a series of collisions with the future; it is not the sum of what we have been, but what we yearn to be."
Posted by John at 4:29 AM | Comments (0) | TrackBack
May 6, 2005
Forget Potential Return: Base It on Basis
For most investors considering an investment, whether public or private, potential return consumes much of the deliberation.
Cost basis, in fact, is a much more important consideration. In other words, are you paying a price which reflects all sun and no clouds, much less rain? If so, it’s highly likely that the price doesn’t adequately reflect the risk of thunderstorms, and you’re assuming more risk than apparent.
If you establish a cost basis low enough, even involuntary liquidation can be profitable. That’s the philosophy of Benjamin Graham in one sentence.
To use an extreme example: when I began my career 24 years ago, many regional bank stocks were not just selling below stated book value, but below book value adjusted downward just about any negative contingency you could conjure. In other words, these banks were selling below (in some cases ridiculously under) liquidation value under just about the worst circumstances one could reasonably imagine.
I was too much of a puppy in the business to have a full appreciation for the pregnancy of this moment in time. Historic double digit interest rates didn’t matter; a looming default by Mexico was meaningless. Whatever further bad news the future held in store, short of Armageddon, was reflected in the share prices of these banks.
The basis was so right, in fact, that the return on that basis more than took care of itself. Thanks to failing interest rates and an improving economy, bank stocks went on a tear which in a few short years garnered their investors a handsome multiple of their 1981 basis.
The importance of cost basis is illustrated beautifully by Jeremy Siegel, professor at Wharton Business School and an excellent writer on the financial markets. Nick Swartz, Editor of Tech Central Station, asks Siegel during an interview about a comparison he drew in his latest book between Standard Oil of New Jersey (what is now Exxon Mobil) and IBM:
Siegel: The growth trap is falling into a pattern of just buying companies with what you think are the fastest growing earnings, and ignoring the price. It is so important to realize that when you're paying a higher than usual price, you're already putting up for those higher earnings. In fact, I find that the faster growing companies often give poorer returns for investors; those investors that chase after those fast growing companies actually suffer worse returns than those that buy slower growing companies at reasonable prices.
Schulz: You have an excellent illustration of this in your book. In a section on history's best long-term stocks you bring readers back to 1950 to look at two stocks. You look at an old industry lion, Standard Oil of New Jersey. And then, you look at a new economy, juggernaut, IBM. And you look at these companies in 1950 right before there was going to be this great computer revolution and a digital and technological boom in the United States. From an investor's perspective, what did you find when you looked at those two?
Siegel: This surprised me. Even though IBM won, hands-down, on all the growth parameters that Wall Street looks at -- earnings per share growth, market value growth, sales -- it fell behind Standard Oil of New Jersey in terms of return for investor. And the two reasons for that: IBM sold at more than twice the price-earnings ratio of Standard Oil and had less the half the dividend rate. So when you put those two together, over the next 53 years, Standard Oil of New Jersey -- and this is even before the very latest run-up in oil prices, because I ended my first data set in 2003 -- out-performed IBM even though IBM was one of the fastest growing companies in the world.
This principle applies not only to public markets, but to private investments as well. It even applies to start-ups. Even in a brand new business, the smaller your invested capital relative to the size of the opportunity, because of the economics of the business, for example, the better risk is contained, by definition.
Posted by John at 6:10 AM | Comments (0) | TrackBack
AirTran, XM Satellite Radio, and Wichita
I was in Memphis yesterday and was too jammed to be able to post. I flew back late last night on an AirTran plane offering XM Satellite Radio, the second AirTran flight I’ve been on with this feature.
What a win-win marketing opportunity for both companies. XM Satellite Radio has a virtually unobstructed hour with a confined group of potential customers. AirTran is able to use this offering to enhance its service to customers and offer more than just lower fares.
I’m as free market as anyone, but I can understand why the city of Wichita and the local chamber of commerce are subsidizing AirTran’s service in that market. It strikes me as a wise investment in economic development.
Posted by John at 5:46 AM | Comments (0) | TrackBack
Quote of the Day for Friday, May 6, 2005
Today's quote is from A.P. Giannini, founder of Bank of America, born on this date in 1870:
"The glad hand is all right in sunshine, but it's the helping hand on a dark day that folks remember to the end of time."
Posted by John at 4:52 AM | Comments (0) | TrackBack
May 5, 2005
Quote of the Day for Thursday, May 5, 2005
Today's quote is from Søren Kierkegaard, born on this date in 1813:
"Boredom is the root of all evil--the despairing refusal to be oneself."
Posted by John at 4:47 AM | Comments (0) | TrackBack
May 4, 2005
The Road Ahead for Chinese Manufacturing: Not as Broad, Not as Wide
As with any complicated subject, the topic of "China" is apt to be over-generalized, and generalizations are dangerous and misleading. The country, like our own, is full of both winners and losers, contradictions operating side by side,
China is indeed the elephant being touched at different spots by several blind men. All of them think they’re touching a different animal, and none of them know they’re touching an elephant.
China is not, as the title of a recent book implied, China Inc., a slickly-run monolith with all cogs operating in perfect synchronization. (In fairness to author Ted Fishman, his book makes these points quite well, although his book is misleading titled, in my view.)
A commentary in the latest China Business Review, a publication of the U.S. China Business Council, makes the point beautifully. Min Chen, who doubles as a management professor and an international corporate development officer, succinctly sums up the state of China’s manufacturing sector:
Fears about broad [Chinese] manufacturing dominance are not really founded on solid ground, however. China, in absolute terms, is far from a real world factory. At the turn of the twenty-first century, it generated less than 5 percent of the world's manufactures by value, in contrast to the United States' 20 percent and Japan's 15 percent. And although manufacturing output has been growing rapidly, domestic companies still concentrate on low-value goods. China's steel output, for example, has long ranked first in the world by quantity, but most of production is low-quality construction steel. The country must import high-grade steel for its high-tech and automotive industries. For China's top 200 export-oriented companies, 74 percent of export value was realized through processing only. If the world is a factory, China is still largely an assembly workshop.
China’s economic challenge is not inconsiderable. The country’s next manufacturing leap, if you will, involves a movement toward high-tech and high-value added products while at the same time fighting a depleting pool of cheap labor, a intermittent supply of energy (because of shortages), and rising land, materials, labor, and energy costs.
I’ve met with Chinese manufacturing companies that are clearly well-managed enterprises which appear ready to meet these challenges and move up to a higher value-added level of operation. I’ve also met with companies in China which have no long term hope.
The perception in much of the United States, fanned by protectionists, is that China is one giant labor pool which can be wildly thrown into competition against any company or industry. The reality is not only different, but much more complicated.
Posted by John at 2:49 PM | Comments (0) | TrackBack
What a Bengali Poet Has to Say About Detroit Automakers
Bengali poet and 1913 Nobel laurate Rabindranath Tagore wrote: “A mind all logic is like a knife all blade. It makes the hand bleed that uses it.”
Logic is making the income statements of Detroit automakers bleed. A U.S. News & World Report story on hybrid vehicles points out that the fuel cost savings, relative to the higher sticker price, for some of these automobiles takes longer to recoup than the average American will own the car.
For most American consumers, including my Toyota Prius-owning partner, its not all about logic. As U.S. News points out, Prius buyers are drawn to factors like the car’s “cutting edge” image and the desire to help car makers develop fuel saving vehicles.
The latter is particularly illogical, from just a purely economic point of view. Toyota, however, unlike its Detroit peers, remembers its Tagore.
Recall that Detroit logic dictated that consumers wouldn’t pay for airbags, either. They were wrong on that point, too.
Posted by John at 5:29 AM | Comments (0) | TrackBack
Consumers--and their Suppliers--Need Freedom of Choice
British economist John Kay uses British Telecom, among other examples, to explain why choice--even too much choice and even if that choice is not exercised--is important for consumers. The efficiency of producers, as well as their responsiveness to their customers, is enhanced:
When British Telecom lost its monopoly of the UK telephone service, few consumers of any kind and virtually no residential customers switched to an alternative supplier. But the lengthy and long established waiting lists for phones disappeared immediately and call charges fell. The opportunity to take your custom elsewhere may have a dramatic effect on performance even if you do not want to exercise that right and choose not to do so.
The title of the most famous book by the great free market economist Milton Friedman is Freedom to Choose, not Freedom to Change.
The power choice gives a society and its economy, in my view, is one of the most powerful arguments for free trade.
Posted by John at 5:11 AM | Comments (0) | TrackBack
Quote of the Day for Wednesday, May 4, 2005
Today's quote is from Audrey Hepburn, born on this date in 1929:
"Are you bored with life? Then throw yourself into some work you believe in with all your heart, live for it, die for it, and you will find happiness that you had thought could never be yours."
Posted by John at 4:36 AM | Comments (0) | TrackBack
May 3, 2005
Targets are Cheap, So Buyouts and Acquisitions Will Continue
James Altucher's deft opening in his column ($) for today's Financial Times, in just a couple of sentences, explains why the wave of buyouts and acquisitions we’ve seen in recent months will continue:
I want to do a leveraged buyout. I would like to buy a public company.
There are dozens of companies that are cheap enough for me to buy. So, how can I do it? I could go to the bank, borrow money at an interest rate of 5 per cent and buy companies that are growing at 50 per cent a year, that are trading at 10 times cash flows and have no debt. The stock market is littered with these companies - and they will get bought. They will get bought by leverage buyout shops; they will get bought by management teams trying to screw shareholders; and they will get bought by other companies.
It’s just that simple: the economics dictate that private equity funds can make money for their partners by taking companies private. All this whining about the costs of Sarbanes-Oxley is parsley on the plate.
By the way, in addition to being a highly regarded money manger, James is an excellent writer on the financial markets, and his recent book, Trade Like Warren Buffett, is one of the most in-depth examinations you can find of Buffett’s various investment techniques.
Posted by John at 10:51 AM | Comments (0) | TrackBack
This Just In: Twentysomethings “Not in a Saving Mode”
Here’s a newsflash from the Houston Chronicle: Twentysomethings aren’t saving, and student loans are partly to blame. Thought you’d want to know.
Posted by John at 6:36 AM | Comments (0) | TrackBack
Univision Beating the "Big Four" with Increasing Regularity
Yesterday’s Wall Street Journal reported ($) what is rapidly becoming old news: Univision is beating ABC, CBS, Fox, and NBC in the ratings derby with increasing frequency. On nineteen different nights since the current season began in September, Univision has actually finished first among the 18 to 34 age group.
This trend is true in smaller markets which are predominantly Hispanic, such as Albuquerque.
In my view this phenomenon has a lot to do with the lack of fragmentation in Hispanic broadcast media relative to mainstream offerings. This equation is destined to change in coming years as more competition springs up on the Spanish-speaking segment of the dial.
Posted by John at 6:10 AM | Comments (0) | TrackBack
U.S. Heartland Beneficiaries from China's Growing Economy
Contrary to what some uninformed demagoguery about China might have you believe, many states have a vested interest in the continued expansion of the Chinese economy. U.S. exports to China are booming, and China is the fastest growing trading partner for many U.S. states.
The Los Angeles Times recently offered details, noting that total U.S. exports to China more than doubled from 2000 to 2004. California is the leader among U.S. states, exporting $6.8 billion of goods last year.
This phenomenon is hardly confined to the West Coast; the nation’s heartland has plenty of beneficiaries to identify. Missouri is a big winner. A ventilation equipment company in Springfield (yes, a manufacturing company), Loren Cook Company, recently shipped 16 fans weighing four tons each to the Three Gorges Dam.
Exports to China from the state of Missouri have increased by seven times since 1999. China is now the fourth largest market for Missouri products (behind only Canada, Mexico, and Japan), and the top products are chemicals, computers and electronic products, and non-electrical machinery.
Posted by John at 5:42 AM | Comments (0) | TrackBack
Quote of the Day for Tuesday, May 3, 2005
Today's quote is from journalist Jacob Riis, born on this date in 1849:
"When nothing seems to help, I go look at a stonecutter hammering away at his rock perhaps a hundred times without as much as a crack showing in it. Yet at the hundred and first blow it will split in two, and I know it was not that blow that did it, but all that had gone before."
Posted by John at 4:21 AM | Comments (0) | TrackBack
May 2, 2005
Paul Johnson's Five Marks of a Great Leader
Historian Paul Johnson’s latest column for Forbes is an exemplary primer on effective leadership densely packed with wise insights.
The most important leadership trait? Moral courage, with an important caveat: “A single spasm of courage is not enough. It is that which is shown over the long haul that demands the most of a man or woman and ultimately brings the best results.”
Courage in a split second decision could be chalked up to an involuntary response. The resolve to stick to a course of action over an extended period, in spite of the inevitable know-it-alls, doubters, and critics, however, is necessary for any sizeable accomplishment.
I also believe it may take even more courage to stand by people to whom you’ve given responsibility. No one’s decisions are always right. It takes fortitude to stand up for your partners, colleagues, and employees who are under fire and remember why you decided to bring them into your circle to begin with.
Hand in hand with moral courage, says Johnson, is good judgment. Judgment is not defined as intelligence or cleverness, but the ability to make the right decisions on the few big issues that really matter.
Moreover, such judgment, Johnson argues, comes from “not so much from experts but from common people, those who lack the arrogance of power or the desire to show off their intelligence but who nevertheless think deeply about life's trials.” By definition, of course, judgment requires a distinguishing between the “experts” and the “common people” in the first place.
Often the most thought provoking insights I’ve received are from those people who offer no firsthand experience in the subject or situation at hand. Their blissful ignorance gives them no pretense, ego, or preconceived notions, allowing them to offer imaginative, original insights. Those that lead with an opinion, even if often right, are rarely the source of your greatest learning.
Johnson’s other three essential qualities for great leaders are a sense of priority, proper allocation of effort, and a sense of humor.
Posted by John at 5:34 AM | Comments (0) | TrackBack
Quote of the Day for Monday, May 2, 2005
Today's quote is from German poet and novelist Novalis, born on this date in 1772:
"A hero is one who knows how to hang on one minute longer."
Posted by John at 3:46 AM | Comments (0) | TrackBack
May 1, 2005
Rapidly Growing Numbers of Latino Homebuyers Require Flexibility From their Lenders
Sunday’s Los Angeles Times features an extended look at Latino home buying in Southern California and offers some enlightening facts:
--Two-thirds of the Hispanic population in the state is under 35 and entering its peak home-buying years.
--Buyers with Spanish surnames paid a medium price of $382,500 in February for existing homes and condominiums, compared with $425, 000 for all buyers. This 10% gap should continue to narrow as incomes grow in the Hispanic community.
--To serve this market, mortgage lenders are adopt more creative underwriting practices which take into account such factors multiple earners in the household and the tendency to use cash to pay bills.
The trend among U.S. mortgage lenders over the past couple of decades (particularly since the advent of mortgage-backed securities) is to standardize and mechanize underwriting. It’s not clear to me at all that the biggest lenders, whose business has been build on squeezing costs through mechanized lending, will be able to quickly adapt to a market that requires a more flexible operating model.
More Signs of Water Shortages and Struggles
More indicators from today’s newspapers that water, not oil, will be the commodity over which the world struggles most over the next half century or more:
Authorities in Orlando are concerned that water estimates for the aquifer serving the area may be lower than originally thought.
“Tennessee is taking Mississippi’s water,” says a staffer in the Mississippi Attorney General’s office. Consequently, the state of Mississippi has filed a lawsuit against the City of Memphis and Memphis Light, Gas & Water.
Posted by John at 12:31 PM | Comments (0) | TrackBack
