Recently, the manager was reading a Fortune magazine special report on leadership. Well, there was nothing wrong with the piece, except it should have been a special report on "management", not leadership.
See, managing is quite different from leading. You can be a great leader, even if you suck at managing, but you cannot be a great manager if you cannot lead.
So here's the manager's ABCs of inspirational leadership in the twenty-first century. Master these basics and..... congratulations, your leadership development test has just begun.
L - Learn to play Chess and speak more than one language
E - Expect and embrace criticisms
A - Admit your weaknesses, not your limitations
D - Decide, Delegate, and Discipline
E - Encourage individual failures and take blame for organizational failures
R - Recognize individual achievements and credit followers with organizational successes
S - Set challenging but achievable goals
H - Humor will get you a long way
I - Institutionalize communication up and down the chain
P - Practice what you preach
Saturday, November 17, 2007
Friday, November 09, 2007
Water Please, Not Coke!
Atlanta, Georgia, HQ for soft-drink giant Coca-Cola, made the headlines a few days ago for something that’s a harbinger of things to come for all cities around the world. It’s about to run out of water, literally. In fact, unless the city takes drastic action - read mandatory rationing - it may run out of potable water in a matter of months! Here’s the soundbite from Carol Couch, the director of the Environmental Protection Agency (EPA) Division in Georgia: “Without any intervention, we are likely to run out of water in three months." Well, that was about a month ago so…sure you know what I’m thinking.
Guess what? Georgia is not alone. Cities all over the Southeastern US are sounding the same alarm about the dearth of freshwater resources due to a sustained drought. Have you heard the one about Florida butting heads with Alabama and Georgia over Florida’s desperate attempt to draw water from a shared river basin?
Dry, Dry, West
Oh, don’t even talk about California and the dry, dry, west. They already have voluntary rationing in Long Beach, and the last I heard, city officials say they may have to go mandatory to wake people up. The Colorado River, which is the lifeblood of the Southwest, is drying up and with it freshwater supplies for millions of west coasters in California, Arizona, Nevada, Texas, and Utah.
Water War I
Wait a minute. This is not just an American problem. Egypt is ready to go to war with Sudan and Ethiopia over the River Nile. The Jordan River basin remains a flashpoint because it serves Israel, Palestine, Jordan, Syria, and Lebanon. The Chinese are fretting about how they’re going to meet the water needs of 1.5 billion people in 2050 and the UN says “tensions and disagreements over water are erupting along the Mekong River in Indochina as well as around the Aral Sea in Eastern Europe.” Many analysts have for years been predicting the next World War will be over water. That’s a scary thought.
Planet Saltwater
Okay, so you get the picture. Whether or not it’s global warming the world is facing acute water shortages. Therefore, as an individual investor how can you make money from the impeding water crisis. Well, remember Samuel Taylor Coleridge famous complaint that “Water, water everywhere, nor any drop to drink."
You see, the world is running out of freshwater supplies but we’re not running out of water. Actually, water covers about 97% of the earth’s surface. The only problem is that the bulk of this is saltwater, and around the world now, there are companies investing billions of dollars to make this saltwater potable for human consumption. You’d be wise to invest in these companies not now but right now.
Play it Safe
This “water services” space, which comprises companies that provide potable water, water treatment and other technologies and services related to water consumption, is poised for phenomenal growth. Companies that stand to benefit from this growth range from well-known names like GE (US) and Suez (France) to smaller companies from India, China, South Korea, Brazil, and so on.
The water services industry is primarily a high-growth, small to medium-cap space so it is better to play it through an index fund or Exchange-traded Fund (ETF), which are baskets of individual stocks of companies involved in similar businesses. It is too risky to play the sector with a single stock, say, GE, for two reasons. First, most of the companies do not derive all of their revenue from water services. Therefore, you’d be getting too much of what you don’t want with a single stock play. Second, the industry is very capital-intensive so you don’t want to put your money in just one firm in case it goes bust.
There are about four or five ETFs focused on the water industry but the manager personally is invested in the PowerShares Global Water Portfolio ETF (PIO), which currently holds 40 international stocks that generate at least 50% of their revenue from water or water-related services. PIO currently is the most international of the ETFs. Companies are added or removed from this fund regularly (rebalanced) to make sure they all meet the minimum 50% revenue requirement and thus remain focused on water services.
So talk to your broker or investment adviser about water. Invest in water now so when mandatory rationing comes to a town near you, it would not feel so bad to go without a shower for a couple of days!
Thursday, July 12, 2007
Shorts Slaughtered!
OMG! If there's any proof that it pays to be a long-term, buy-and-hold investor, today's action on the Street is it. It was a broad market rally, not just a Dow wow wow. The volume of stocks traded was also higher than usual, which gave today's surge some credibility and suggested there may be follow-up mini-rallies in the coming days.
Had you panicked and got out of the market on Tuesday when the indices tanked, then you are probably licking your wounds right now. And if you sold short Tuesday, thinking it's just going to be a summer of discontent as usual, then you are probably not going to have a good weekend.
Yes, the market often goes south in the summer but that doesn't mean it will always go down each summer. Besides, the manager's never really understood the whole "sell in May and go away" mantra. Okay, so maybe in the summer investors take more money off the table to get away from it all but I think it's a self-fulfilling prophecy that often accentuates normal market gyrations during the summer.
It works something like this: The summer is coming. Oil prices start to rise because summer is the peak driving season. Investors panic because they fear higher oil prices will hurt consumer pocketbooks. So investors start to take money off and hedgies and traders start to sell short big time. Corporate executives start to exercise options as their stocks bleed from all the selling. Investors get more panicky as executive sales could mean bad Q2 results and/or depressing forward guidance. So this induces more bloodletting. And so it goes.
However, as today's rally indicates, the market often defies gravity, which sends the shorts into a buying frenzy - and the market soaring - as they rush to cover their positions. So just like the manager never gets depressed about down days on the Street, the manager doesn't get euphoric about days like today. It all evens out in the long-term as the folio grows.
That said, if you must play the market short-term, the manager believes options - calls, puts, and their variants - offer a saner way to do this than short-selling, whether naked or not. It's even better when you play options on the stocks you hold long-term. That way, you don't have to borrow stocks to sell short. The bottom line, though, is that it pays to stay in the market long-term. Otherwise, when the proverbial tide goes out, you will be found out swimming naked.
Had you panicked and got out of the market on Tuesday when the indices tanked, then you are probably licking your wounds right now. And if you sold short Tuesday, thinking it's just going to be a summer of discontent as usual, then you are probably not going to have a good weekend.
Yes, the market often goes south in the summer but that doesn't mean it will always go down each summer. Besides, the manager's never really understood the whole "sell in May and go away" mantra. Okay, so maybe in the summer investors take more money off the table to get away from it all but I think it's a self-fulfilling prophecy that often accentuates normal market gyrations during the summer.
It works something like this: The summer is coming. Oil prices start to rise because summer is the peak driving season. Investors panic because they fear higher oil prices will hurt consumer pocketbooks. So investors start to take money off and hedgies and traders start to sell short big time. Corporate executives start to exercise options as their stocks bleed from all the selling. Investors get more panicky as executive sales could mean bad Q2 results and/or depressing forward guidance. So this induces more bloodletting. And so it goes.
However, as today's rally indicates, the market often defies gravity, which sends the shorts into a buying frenzy - and the market soaring - as they rush to cover their positions. So just like the manager never gets depressed about down days on the Street, the manager doesn't get euphoric about days like today. It all evens out in the long-term as the folio grows.
That said, if you must play the market short-term, the manager believes options - calls, puts, and their variants - offer a saner way to do this than short-selling, whether naked or not. It's even better when you play options on the stocks you hold long-term. That way, you don't have to borrow stocks to sell short. The bottom line, though, is that it pays to stay in the market long-term. Otherwise, when the proverbial tide goes out, you will be found out swimming naked.
Sunday, June 10, 2007
CNBC $M Challenge: Plenty Guts, Tough Glory!
The worst-known portfolio manager battled over a million other players in the CNBC Million Dollar Portfolio Challenge that ended May 25th. In the end the manager finished top 2% in the first round and was on track for a top 1% finish in the second round - results yet to be announced.
Anyway, CNBC, you outdid yourself with this challenge! Thank you for the 10-week "vocational training" course in trading.
Do you know how many traders and hedgies will have come out of this?!
I won the competition - against myself!
I look forward to the next edition. Big up CNBC!
Anyway, CNBC, you outdid yourself with this challenge! Thank you for the 10-week "vocational training" course in trading.
Do you know how many traders and hedgies will have come out of this?!
I won the competition - against myself!
I look forward to the next edition. Big up CNBC!
Tuesday, February 20, 2007
IPhone or Not, I Still Prefer Adobe to Apple
Ever since Apple (AAPL) announced it was getting into the smartphone business, many analysts have yapped about how the IPhone – or whatever it ends up getting called – will take competitors to the cleaners. PPPPleaseeee! I’m so tired of the claptrap that I feel compelled to offer my take on AAPL’s decision by revisiting my most favorite tech duel of the moment: ADBE vs. AAPL.
The duel is rooted in the early days of the folio. Back in October when I wanted to spice up the folio with a tech stock more volatile, relative to the S&P, than MSFT (Beta 0.71) but less so than EBAY (Beta 3.91) – ADBE (Beta 2.31) and AAPL (Beta 2.40) were the prime candidates on a list of 25 IT firms examined; yes, full-throttle Google was considered but I can’t quite see through the maze of how it makes money. Naturally, AAPL’s smartphone decision has prompted me to reexamine my allegiance to ADBE.
My Friend’s Enemy is……
Currently there are about one billion internet users around the world. But there are even more mobile phone users, reportedly 2 billion and growing faster than internet users. One of the major technological shifts currently afoot is the shift of desktop content and digital software to mobile devices. I’ve said before and I’ll say it again: ADBE has such a commanding share of the computer digital software market, ceteris paribus, that it’s better placed than many competitors to make a killing in this increasingly unwired world of ours.
Right now AAPL’s competition with ADBE is limited to the latter’s Creative Suite product, which includes the ubiquitous Flash Player. AAPL’s foray into smartphones could lead to more cooperation with ADBE, thereby building on existing software licensing partnerships. But the move is likely to bring more head butts with ADBE than kisses.
The adoption of Flash Lite technology, which is ADBE’s signature product for mobile devices, has been particularly strong over the past year. The firm announced last week that the number of Flash Lite enabled devices shipping worldwide has tripled since January 2006, to reach more than 200 million, most prominently in Japan as a result of a partnership with NTT DoCoMo. The Japanese lead the world in mobile phone technology so you know whatever “blows up” there usually takes off elsewhere. Sorry I digress for a New York minute.
The success of Flash Lite has been driven by ADBE’s key relationships with players like Nokia, Motorola and Samsung. These are the 400 pound gorillas AAPL will be going up against with the IPhone. I know AAPL’s reputation and success are built on market disruption but I have a feeling it’s about to bite more than it can chew.
A Good Swimmer in Shark-infested Waters
With a return-on-equity of about 25% - ADBE’s ROE is 14% - and strong brand recognition AAPL is a tempting stock. Macs are flying off the shelves and IPods keep getting more nanos, shuffles and whatever else. But is AAPL getting drunk off IPod juice? I mean, it may have 75% of the portable digital musical player market but the smartphone market is a much more competitive landscape.
Sony took the blowout by the IPod on the chin perhaps because it had other businesses to fall back on and it wasn’t a “do or die” with the Walkman. But the smartphone business is the bread and butter for pure players like RIM and Palm, and increasingly so for handset OEMs like Motorola, Nokia and Samsung. Actually, Samsung and LG Electronics have already unveiled “IPhone killers.” In fact, LG’s version uses ADBE’s Flash technology to enhance user experience. These firms will not lay the red carpet for AAPL.
Some have argued that AAPL intends to target the “high-end” of the smartphone market to avoid much competition. Well, what exactly is the “low-end” of the market? These phones typically retail for over USD500! AAPL is going to go from a market it dominates – portable digital music - to a market where it’s just another player. Its profit and operating margins are definitely going to come under pressure.
The smartphone business is definitely a growth area for IT firms with the right value proposition. But unless you are already a mobile hardware manufacturer, the best bet seems to be in software development and content creation for mobile devices. AAPL is going to find this out the hard way.
Watch Your Tech
Why not just hold both stocks and close shop? I guess I could but such a move will make the folio too overweight in tech stocks for my liking. More importantly, it will break my cardinal rule to keep the folio no more than 25% weighted in tech. To be a good investor one must exercise discipline no matter the temptation. Right now the folio is 24% weighted in tech – MSFT 16%, EBAY 3% and ADBE 5%; the S&P is 15% weighted in tech.
Cardinal rule aside, the bottom line is this: I see AAPL’s foray into mobile handset manufacturing as bearish for the stock. Just because one is a good warrior doesn’t mean one can fight any war!
The duel is rooted in the early days of the folio. Back in October when I wanted to spice up the folio with a tech stock more volatile, relative to the S&P, than MSFT (Beta 0.71) but less so than EBAY (Beta 3.91) – ADBE (Beta 2.31) and AAPL (Beta 2.40) were the prime candidates on a list of 25 IT firms examined; yes, full-throttle Google was considered but I can’t quite see through the maze of how it makes money. Naturally, AAPL’s smartphone decision has prompted me to reexamine my allegiance to ADBE.
My Friend’s Enemy is……
Currently there are about one billion internet users around the world. But there are even more mobile phone users, reportedly 2 billion and growing faster than internet users. One of the major technological shifts currently afoot is the shift of desktop content and digital software to mobile devices. I’ve said before and I’ll say it again: ADBE has such a commanding share of the computer digital software market, ceteris paribus, that it’s better placed than many competitors to make a killing in this increasingly unwired world of ours.
Right now AAPL’s competition with ADBE is limited to the latter’s Creative Suite product, which includes the ubiquitous Flash Player. AAPL’s foray into smartphones could lead to more cooperation with ADBE, thereby building on existing software licensing partnerships. But the move is likely to bring more head butts with ADBE than kisses.
The adoption of Flash Lite technology, which is ADBE’s signature product for mobile devices, has been particularly strong over the past year. The firm announced last week that the number of Flash Lite enabled devices shipping worldwide has tripled since January 2006, to reach more than 200 million, most prominently in Japan as a result of a partnership with NTT DoCoMo. The Japanese lead the world in mobile phone technology so you know whatever “blows up” there usually takes off elsewhere. Sorry I digress for a New York minute.
The success of Flash Lite has been driven by ADBE’s key relationships with players like Nokia, Motorola and Samsung. These are the 400 pound gorillas AAPL will be going up against with the IPhone. I know AAPL’s reputation and success are built on market disruption but I have a feeling it’s about to bite more than it can chew.
A Good Swimmer in Shark-infested Waters
With a return-on-equity of about 25% - ADBE’s ROE is 14% - and strong brand recognition AAPL is a tempting stock. Macs are flying off the shelves and IPods keep getting more nanos, shuffles and whatever else. But is AAPL getting drunk off IPod juice? I mean, it may have 75% of the portable digital musical player market but the smartphone market is a much more competitive landscape.
Sony took the blowout by the IPod on the chin perhaps because it had other businesses to fall back on and it wasn’t a “do or die” with the Walkman. But the smartphone business is the bread and butter for pure players like RIM and Palm, and increasingly so for handset OEMs like Motorola, Nokia and Samsung. Actually, Samsung and LG Electronics have already unveiled “IPhone killers.” In fact, LG’s version uses ADBE’s Flash technology to enhance user experience. These firms will not lay the red carpet for AAPL.
Some have argued that AAPL intends to target the “high-end” of the smartphone market to avoid much competition. Well, what exactly is the “low-end” of the market? These phones typically retail for over USD500! AAPL is going to go from a market it dominates – portable digital music - to a market where it’s just another player. Its profit and operating margins are definitely going to come under pressure.
The smartphone business is definitely a growth area for IT firms with the right value proposition. But unless you are already a mobile hardware manufacturer, the best bet seems to be in software development and content creation for mobile devices. AAPL is going to find this out the hard way.
Watch Your Tech
Why not just hold both stocks and close shop? I guess I could but such a move will make the folio too overweight in tech stocks for my liking. More importantly, it will break my cardinal rule to keep the folio no more than 25% weighted in tech. To be a good investor one must exercise discipline no matter the temptation. Right now the folio is 24% weighted in tech – MSFT 16%, EBAY 3% and ADBE 5%; the S&P is 15% weighted in tech.
Cardinal rule aside, the bottom line is this: I see AAPL’s foray into mobile handset manufacturing as bearish for the stock. Just because one is a good warrior doesn’t mean one can fight any war!
Friday, February 02, 2007
CostCo Flies Under the Radar in January
On Wall Street they say as January goes so does the rest of the year for the stock market – 85% of the time that is. Since the S&P ended January on a banger a blowout for stocks this year may be in the offing, if you happen to be in the right sectors of course. The folio is very diverse across sectors and market capitalizations so I’m assured a spot on any gravy train.
How much gravy I get to scoop is another matter. If January is any indication I’ve my work cut out for the rest of the year; on gains I ended January in the dog house:
Nasdaq 2.01%
S&P 1.41%
Dow 1.27%
Worst-known 1.06%
Is COST Riding the Minimum Wage Bill?
I support a higher federal minimum wage. It’s a well established fact that the federally mandated minimum wage, which has been stuck at $5.15 since 1997, hasn’t kept up with the rise in the nation’s productivity, much less with inflation – it should be about $6.75 as of January 2007 had it kept up with inflation. By 2009 Congress wants it to be $7.25, which is roundabout where it will need to be by then to keep up with inflation – assuming a 3% annual rate of inflation.
So what would Americans do with all this new money coming in? Since Americans hardly save the money is likely to be spent at consumer discretionary stomping grounds like CostCo.
Although COST has been trending higher since it broke a key resistance level back in October it didn’t really take off until the second week of January when economic data showed that the national average hourly earning rose more than expected. So it’s fair to say investors view rising hourly earnings as bullish for consumer discretionary stocks.
With Congress set to mandate a rise in the federal minimum wage I think COST is getting a minimum wage “bounce”. In January it had the biggest gain when measured by moving average (MA) of Returns to Date (RTD):
Change in MA of RTD (12/29/06 to 1/31/07)
COST +4.71%
NHP +3.60%
MSFT +2.28%
IWR +1.93%
PG +1.03%
IJR +0.51%
EFA +0.01%
EEM -0.83%
BAC -1.33%
ADBE -2.63%
PBW -2.88%
IGE -3.74%
EBAY -4.82%
SLV -8.74%
In December and January while many on the Street were fixated on techs it seems smart money was moving into discretionaries perhaps in anticipation of a rise in the minimum wage.
How much gravy I get to scoop is another matter. If January is any indication I’ve my work cut out for the rest of the year; on gains I ended January in the dog house:
Nasdaq 2.01%
S&P 1.41%
Dow 1.27%
Worst-known 1.06%
Is COST Riding the Minimum Wage Bill?
I support a higher federal minimum wage. It’s a well established fact that the federally mandated minimum wage, which has been stuck at $5.15 since 1997, hasn’t kept up with the rise in the nation’s productivity, much less with inflation – it should be about $6.75 as of January 2007 had it kept up with inflation. By 2009 Congress wants it to be $7.25, which is roundabout where it will need to be by then to keep up with inflation – assuming a 3% annual rate of inflation.
So what would Americans do with all this new money coming in? Since Americans hardly save the money is likely to be spent at consumer discretionary stomping grounds like CostCo.
Although COST has been trending higher since it broke a key resistance level back in October it didn’t really take off until the second week of January when economic data showed that the national average hourly earning rose more than expected. So it’s fair to say investors view rising hourly earnings as bullish for consumer discretionary stocks.
With Congress set to mandate a rise in the federal minimum wage I think COST is getting a minimum wage “bounce”. In January it had the biggest gain when measured by moving average (MA) of Returns to Date (RTD):
Change in MA of RTD (12/29/06 to 1/31/07)
COST +4.71%
NHP +3.60%
MSFT +2.28%
IWR +1.93%
PG +1.03%
IJR +0.51%
EFA +0.01%
EEM -0.83%
BAC -1.33%
ADBE -2.63%
PBW -2.88%
IGE -3.74%
EBAY -4.82%
SLV -8.74%
In December and January while many on the Street were fixated on techs it seems smart money was moving into discretionaries perhaps in anticipation of a rise in the minimum wage.
Friday, January 19, 2007
P&G: An Elephant Starts to Dance
Do you know that elephants can dance? Well I didn’t until a strategy professor at B-school recommended for bedtime reading Lou Gerstner’s business classic, “Who Says Elephants Can’t Dance?”, which details how as CEO Gerstner gave comatose IBM the kiss of life in the early 1990s.
Amongst other things Gerstner got rid of Big Blue’s “untouchables” culture – at the time many employees felt IBM was too big for clients to mess with; eliminated the internecine divisional rivalries; aligned performance incentives of division managers with the performance of the whole firm – rather than with individual divisions; and took a gamble to make Big Blue a more services-oriented company – services is now the biggest and second most-profitable division!
Big Apples and Oranges
No, PG is nowhere near where Big Blue was in 1993 when Gerstner took the helm, and the two companies are obviously not in the same line of business. It’s just that Gerstner’s tale reminds me of the danger of complacency that iconic firms face when they get very big.
By any measure PG was already big in 2005. For instance, 16 of its brands each generated at least $1bn annually in global sales. The acquisition of Gillette in January 2005 made the firm even bigger. However, it made investors somewhat skittish.
When a big company gets even bigger through a major acquisition Wall Street starts to wonder if the acquisition is a signal that organic growth, which excludes mergers and acquisitions, has lost steam. For a multinational with commanding market share a lack of organic growth may be symptomatic of complacency because such growth really speaks to how innovative a company continues to be.
Unloved Staples
Anyway PG has underperformed the S&P over the two years since the announcement of the acquisition. From January 28, 2005, when the deal was announced, to January 16, 2007, PG has returned about 20%, compared with 22% for the S&P and 3% for competitor Johnson and Johnson (JNJ), which sports a higher dividend yield.
However, large cap consumer staples have not been in favor on Wall Street over the past two years so it is unclear whether PG’s underperformance has been due largely to concerns about the digestion of Gillette - would it go smoothly and can management really squeeze out revenue and cost synergies of “about $14bn to $16bn”? - or to a general snub of consumer staples (also called non-cyclicals) - as the table of price appreciation for the S&P and consumer staples below indicates.
Whatever PG’s malaise has been since the $57 billion purchase of Gillette the consumer staples giant has started to “dance” over the past six months or so, and “late-to-the-party” analysts and investors have taken notice. What has got investors salivating over PG? I think it’s these three factors: Deeper foray into the health-care sector, faster-than-expected integration of Gillette, and a renewed emphasis on collaborative innovation.
Notice I don’t mention falling oil prices. That falling oil prices will benefit PG – in form of lower raw material costs - is a no-brainer. But falling oil prices come and go so it’s not a fundamental, strategic benefit.
A "Healthy" Blue Chip
PG is a “blue chip”, which means it’s one of these big companies that investors have come to rely on for slow but steady growth, stable earnings, and stellar dividend payments in a bull or bear market – just think the Dow Jones 30! What do you get when you add a fast-growing sector such as health-care to a blue chip? You get moolah – bigger earnings and dividends.
Competitor JNJ has better gross and operating margins than PG because of its health-care operations. By health-care I don’t mean Olay or Band-Aid. I’m talking pharmaceuticals and medical devices. As I see it JNJ is primarily a health-care company with a personal care business – pharmaceuticals and medical devices accounted for over 80% of revenues in 2005. On the contrary PG is primarily a personal care company with a health-care business – health-care accounted for about 1.5% of 2005 revenues.
Since margins in health-care are higher than margins on personal care products, PG could improve its margins by expanding its health-care business. And that’s exactly what it’s been doing. Recently in December it formed a multi-million-dollar joint venture with a leading global developer of advanced diagnostic devices to develop and manufacture medical diagnostic devices, which is a huge money-making business for JNJ. Then just two weeks ago it bought a stake in a private provider of health-care services in Florida. As PG expands its health-care business expect competition with JNJ to heat up.
Razor-sharp Integration
The merger of two conglomerates is never easy, even when there are few overlaps: it's now widely accepted that the merger of AOL and Time Warner in 2001 was a huge blunder. According to observers “familiar with the matter” the integration of Gillette has been much faster than anticipated, bearing in mind that PG operates in over 80 countries while Gillette operated in just as many if not more countries.
To me what really signaled the rapid pace of the integration was the announcement last week or so to fold Gillette’s Blade and Razor and Braun businesses into the Health and Beauty business unit, and the Duracell battery business into Household Care, effective July 1 – nine months after the official completion of the merger on October 1, 2005! This can only mean one thing: that $14bn in revenue and cost synergies that PG touted way back in January 2005 should start to really fatten the bottom line from the latter part of this year. Can I get an Amen?!
Innovate or Die
Finally investors are salivating over PG because of a growing emphasis on “collaborative innovation”. In the consumer products business you have to innovate or die and PG is already big on innovation. Now, rather than depend heavily on products developed entirely in-house the firm plans to partner more with suppliers, entrepreneurs and even competitors to develop new products that can be brought to markets faster.
This strategy was adopted six years ago under the pseudonym “Connect and Develop” but lately some Wall Street analysts have dubbed it the “Go-to-Market (GTM)” approach. I think the successes of the newest “Mr. Clean” lines, which employed GTM, have made PG management really take notice of the potential of this strategy. More products should emerge from the GTM “academy” in the foreseeable future, some of which will probably end up as global billion-dollar brands like Pampers or Gillette; I just hope quality is not compromised.
Like I said before, investors have held off somewhat on PG over the past few years due to concerns about the integration of Gillette and/or a general rotation out of staples. With Gillette almost fully digested the company has started to dance again.
Historically PG’s been viewed as a slow-growth, “defensive”, not too sexy, stock. But its health-care division is expanding fast. This may make PG a little more volatile in the distant future – with a corresponding rise in its Beta (or measure of volatility relative to the S&P) – but it certainly could give it more oomph to command a higher valuation than JNJ. When PG reports fiscal Q2 2007 results on Tuesday, January 30, keep an ear out for some dance tunes!
Amongst other things Gerstner got rid of Big Blue’s “untouchables” culture – at the time many employees felt IBM was too big for clients to mess with; eliminated the internecine divisional rivalries; aligned performance incentives of division managers with the performance of the whole firm – rather than with individual divisions; and took a gamble to make Big Blue a more services-oriented company – services is now the biggest and second most-profitable division!
Big Apples and Oranges
No, PG is nowhere near where Big Blue was in 1993 when Gerstner took the helm, and the two companies are obviously not in the same line of business. It’s just that Gerstner’s tale reminds me of the danger of complacency that iconic firms face when they get very big.
By any measure PG was already big in 2005. For instance, 16 of its brands each generated at least $1bn annually in global sales. The acquisition of Gillette in January 2005 made the firm even bigger. However, it made investors somewhat skittish.
When a big company gets even bigger through a major acquisition Wall Street starts to wonder if the acquisition is a signal that organic growth, which excludes mergers and acquisitions, has lost steam. For a multinational with commanding market share a lack of organic growth may be symptomatic of complacency because such growth really speaks to how innovative a company continues to be.
Unloved Staples
Anyway PG has underperformed the S&P over the two years since the announcement of the acquisition. From January 28, 2005, when the deal was announced, to January 16, 2007, PG has returned about 20%, compared with 22% for the S&P and 3% for competitor Johnson and Johnson (JNJ), which sports a higher dividend yield.
However, large cap consumer staples have not been in favor on Wall Street over the past two years so it is unclear whether PG’s underperformance has been due largely to concerns about the digestion of Gillette - would it go smoothly and can management really squeeze out revenue and cost synergies of “about $14bn to $16bn”? - or to a general snub of consumer staples (also called non-cyclicals) - as the table of price appreciation for the S&P and consumer staples below indicates.
| 2006 | 2005 | |
| S&P 500 | 13.6% | 3.0% |
| Consumer Staples | 11.8% | 1.34% |
Whatever PG’s malaise has been since the $57 billion purchase of Gillette the consumer staples giant has started to “dance” over the past six months or so, and “late-to-the-party” analysts and investors have taken notice. What has got investors salivating over PG? I think it’s these three factors: Deeper foray into the health-care sector, faster-than-expected integration of Gillette, and a renewed emphasis on collaborative innovation.
Notice I don’t mention falling oil prices. That falling oil prices will benefit PG – in form of lower raw material costs - is a no-brainer. But falling oil prices come and go so it’s not a fundamental, strategic benefit.
A "Healthy" Blue Chip
PG is a “blue chip”, which means it’s one of these big companies that investors have come to rely on for slow but steady growth, stable earnings, and stellar dividend payments in a bull or bear market – just think the Dow Jones 30! What do you get when you add a fast-growing sector such as health-care to a blue chip? You get moolah – bigger earnings and dividends.
Competitor JNJ has better gross and operating margins than PG because of its health-care operations. By health-care I don’t mean Olay or Band-Aid. I’m talking pharmaceuticals and medical devices. As I see it JNJ is primarily a health-care company with a personal care business – pharmaceuticals and medical devices accounted for over 80% of revenues in 2005. On the contrary PG is primarily a personal care company with a health-care business – health-care accounted for about 1.5% of 2005 revenues.
Since margins in health-care are higher than margins on personal care products, PG could improve its margins by expanding its health-care business. And that’s exactly what it’s been doing. Recently in December it formed a multi-million-dollar joint venture with a leading global developer of advanced diagnostic devices to develop and manufacture medical diagnostic devices, which is a huge money-making business for JNJ. Then just two weeks ago it bought a stake in a private provider of health-care services in Florida. As PG expands its health-care business expect competition with JNJ to heat up.
Razor-sharp Integration
The merger of two conglomerates is never easy, even when there are few overlaps: it's now widely accepted that the merger of AOL and Time Warner in 2001 was a huge blunder. According to observers “familiar with the matter” the integration of Gillette has been much faster than anticipated, bearing in mind that PG operates in over 80 countries while Gillette operated in just as many if not more countries.
To me what really signaled the rapid pace of the integration was the announcement last week or so to fold Gillette’s Blade and Razor and Braun businesses into the Health and Beauty business unit, and the Duracell battery business into Household Care, effective July 1 – nine months after the official completion of the merger on October 1, 2005! This can only mean one thing: that $14bn in revenue and cost synergies that PG touted way back in January 2005 should start to really fatten the bottom line from the latter part of this year. Can I get an Amen?!
Innovate or Die
Finally investors are salivating over PG because of a growing emphasis on “collaborative innovation”. In the consumer products business you have to innovate or die and PG is already big on innovation. Now, rather than depend heavily on products developed entirely in-house the firm plans to partner more with suppliers, entrepreneurs and even competitors to develop new products that can be brought to markets faster.
This strategy was adopted six years ago under the pseudonym “Connect and Develop” but lately some Wall Street analysts have dubbed it the “Go-to-Market (GTM)” approach. I think the successes of the newest “Mr. Clean” lines, which employed GTM, have made PG management really take notice of the potential of this strategy. More products should emerge from the GTM “academy” in the foreseeable future, some of which will probably end up as global billion-dollar brands like Pampers or Gillette; I just hope quality is not compromised.
Like I said before, investors have held off somewhat on PG over the past few years due to concerns about the integration of Gillette and/or a general rotation out of staples. With Gillette almost fully digested the company has started to dance again.
Historically PG’s been viewed as a slow-growth, “defensive”, not too sexy, stock. But its health-care division is expanding fast. This may make PG a little more volatile in the distant future – with a corresponding rise in its Beta (or measure of volatility relative to the S&P) – but it certainly could give it more oomph to command a higher valuation than JNJ. When PG reports fiscal Q2 2007 results on Tuesday, January 30, keep an ear out for some dance tunes!
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