Stories From the Front: Stories and Cases in Business Performance
With the refresh on current Economic and Market news in place it's time to dive into applying the
ecology to evaluating the outlook for business. We have an interesting choice here - continue topdown by sharing some recent stuff we've found on top-down principles, which would continue our approach. Or take it more bottom-up. We're going to do that because there's so much stuff floating around we'll end up with three separate postings on traditional businesses, technology and Finance. Which'll give us a chance to take a deeper dive on various aspects of each domain. But before we dive in let's add in some more economic and market news update, at last a tad. You'll find some more in the readings but AP just updated its economic stress map (which if you'll click thru will take you to the interactive, online version). You might also want to listen to this morning's PBS interview with David Wessel of the WSJ:Businesses Reluctant To Hire New Workers.
We've sampled the stress map monthly at four points from Dec07 to now(which would be Dec09) and you can read it clockwise. The point AP makes is that the stress is HIGHER than it was, which is a natural cyclic timepath and explains all the sturm und drang in the political arena. We also had multiple conversations with friends and neighbors over the weekend and the general take is that people are worried about jobs, cutting back their spending, thinking about selling their houses and facing major credit/debt problems. The things that are not in the data are a likely next wave of foreclosures, increasing debt problems, major problems with small businesses and worse problems with state and local budgets that are offsetting federal stimulus spending. Not to mention a whole host of international problems giving the markets big time jitters, as detailed in the readings (including a much more detailed YouTube of Jim Chanos assessment of China!).
Business Outlook: the Retail Industry
Our constantly harped on theme is that businesses need to adapt to the new normal, adopt new operational and innovation strategies and improve their performance mangement and governance. We've also argued that most businesses are lagging in their responses. Let's put that another way - every business is facing major structural changes at every level from the firm to the Industry to the global economy to geo-poitics and doesn't appear, on the best available evidence that we've seen, to be doing what needs to be done. Let's take the Retail Industry as the exemplarly case in point (exemplar in the sense of example not in the sense of ideal!). Bloomberg did us the favor of taking an outstanding look at the elephant in the room for the last decade - the fact that Retail is grossly over-stored. If you'll click on thru the graphic you'll be taken to another interactive graphic that will allow you to play with their model. Given the economic context of extended weakness PLUS the hidden anectoral evidence the outlook has to be judged as very poor.
Value-investing, the PFE Case and Investing Strategy
In the readings you'll find a bunch of other stories and cases from Harley's struggles with financing, to a slew of stuff on Toyota (wow, can you imagine - the poster child of well-managed company!), Hershey's continued struggles with dysfunctional executive leadership, a bunch of stuff on major shakeups and shakeouts in the Healthcare Industry and the really good story of the Fung brothers of Li and Fung who have managed to not only roll with the punch and more. How they've managed that is well worth studying - especially if you know that Li and Fung have been worldwide poster children for adaptive innovation for decades. You'll also find a link to the FT's "View From the Top" interview with Indra Nooyi of PepsiCo and a set of TechTicker interviews with a friend of our Vitality Katsenelsen, of Active Value Investing fame, discussing the market outlook, China and especially value investing in a range-bound market and taking PFE as his exemplar. We've seen Vitaliy's analysis and it's about as thoughtful and long-range a piece of fundamental analysis as we've ever read. The catch is that he argues that PFE is worth investing in because the PE's discount a total lack of effectiveness in drug development and they have great cash flow. So if anything pops on their huge R&D investments it's all gravy. Our problem - having looked at how badly broken the big pharma development methods are and knowing some folks in the Industry, we're not so sure that revenue is sustainable in the future. On the one hand you ought to look into both views, on another you ought to consider the tradeoffs and on the gripping hand we can split the difference. In the intermediate term Vitaliy's value-analysis probably has a lot of merit but in the long-term we think our breakage assessment will eventually triumph (the analogy that comes to mind is a few years back when we poopoohed Lamberts real estate-base financial engineering at Sears; a view since born out big time but one that took a few years to ripple on thru).
So let's consider PFE as investors via some longer-term stock charts. The 10Yr chart is here while the 5Yr chart is shown. You need to look at the 10Yr to see how bad the overall performance is while some mid-term distortions make the PEs hard to read so look at the 5yr here. And consider that each and every case study could/should be considered the same way. Now given volatile but flat earnings a PE of 10 is indeed still cheap but the question is, is it cheap enough? On the whole, once the market sorts out we'd have to say it might be well worth while putting PFE on your watch list for the next 18 months to 5 years. In the readings you'll find some other stuff on Healthcare, the Steel Industry and Oil. We've pointed out that Oil is going thru a major structural shakeup but, in the book of unintended consequences, the stillbirth of Healthcare Reform looks to provide a major and bigger shift in the HC Industry as well! We think that the Industry, and business in general, are going to bitterly regret not getting behind reform and really pushing.
A Final Word from Indra
And just to end on a slightly cheerful note we'll point you to Indra's interview where she discusses Pepsico's strategic outlook, globalization and corporate social responsibility as well as her impressions of Davos. We were delighted and relieved to hear that her views on Davos are nearly identical to our take and even more delighted that her views on how corporations should deal with the body public are entirely in line with our channeling of Drucker's Principles. On the operational, strategic, innovation and public/geo-political fronts we'd have to judge that Pepsi gets a 5 on our performance assessment ranking (that's another hint btw!).
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