BID FOR A GIANT AUTO MAKER : Ticker Shock : INVESTORS : NEWS ANALYSIS : In Chrysler, Kerkorian Sees Mileage Others May Be Missing
Kirk Kerkorian makes a takeover bid for Chrysler Corp. Billionaire Warren Buffett accumulates 9.8% of American Express. Famed investor Michael Price takes a 6.1% stake in Chase Manhattan Corp.
The common thread in each case: A savvy investor evidently sees value in the shares of a major American company--exactly the kind of blue-chip stocks that have led Wall Street’s spectacular rally this year.
Is one message here that the U.S. market overall is still undervalued, even with the Dow Jones industrial average hovering near 4,200?
Some Wall Street pros see it that way. “There is plenty of room for stocks to go higher,” argues market strategist Suresh Bhirud at Bhirud Associates in Stamford, Conn. “My upside target remains 4,500 for the Dow.”
Like many bulls, Bhirud believes that the “soft landing” scenario for the U.S. economy--which assumes moderate growth for the rest of the year, with stable or lower interest rates--is a recipe for rising corporate profits.
And if profits go higher, stock prices can too, the bulls’ camp contends. The typical U.S. blue-chip stock, they note, is currently priced at about 15 times estimated 1995 earnings per share. When the economy and interest rates have provided ideal conditions in the past, that average “price-to-earnings” ratio has risen closer to 20.
What’s more, stock bulls note that 1995 has seen a rush back to U.S. shores by American investors who had poured billions of dollars into foreign markets in 1993 and ’94. With the plunge in many of those markets last year and so far this year, many domestic investors are showing a new appreciation for relative stability of U.S. multinational companies.
But some money managers, even if comfortable with the U.S. market overall, believe that big moves by Kerkorian, Buffett, Price and other veteran investors say less about the broad market than about the specific attraction of companies in certain out-of-favor industries.
As more investors have come to bet that last year’s interest rate rise would eventually slow the economy’s pace, Wall Street has herded into a fairly narrow group of classic “growth” stocks: companies such as Coca-Cola, McDonald’s and Philip Morris, whose earnings tend to grow at a predictable rate whether the economy is hot or cold.
Left behind, meanwhile, have been the so-called cyclical stocks, typically industrial and financial services companies whose sales and earnings tend to be squeezed when economic growth weakens and-or when interest rates rise.
Chrysler stock, for example, peaked at $63.50 more than a year ago, just as the Federal Reserve Board began raising short-term interest rates to slow the economy. While Kerkorian held on to his shares, many other investors bailed out, driving the price as low as $38.25 earlier this year, a 40% drop from the peak.
By definition, that is what cyclical stocks do: They rise and fall with economic cycles that largely determine the ebb and flow of their earnings.
In part, what Kerkorian appears to be arguing with his $55-a-share takeover bid for Chrysler is that investors have overestimated the effect of a weaker economy on Chrysler’s future earnings. Other big Chrysler shareholders agree with that view.
Seth Glickenhaus, who owns 5.3 million Chrysler shares through Glickenhaus & Co. in New York, contends that Wall Street has valued Chrysler at a ridiculously low level that pays too much attention to a slowing economy and very little to Chrysler’s management, products, finances and efficiency.
“This stock was the most outstanding value on the New York Stock Exchange,” Glickenhaus gushes. Even now, Chrysler’s price-to-earnings ratio--and that of the other two U.S. auto giants--is about 5, or a third that of the average U.S. blue chip.
Even more important than bottom-line earnings, Kerkorian and other pros may be attracted to value stocks for their cash flow, the real money they generate before accounting charges.
The dramatic restructurings that many industrial companies underwent in the early 1990s have made them exceptionally efficient, some analysts say. That has substantially boosted their cash flows, in many cases leaving them with money they haven’t quite figured out how to use.
“When you talk about the cash these enterprises generate, their stocks are cheap,” says Howard Gleicher, money manager at Palley-Needelman Asset Management in Newport Beach.
But if all such “value” stocks are great buys, why does the market price them at such relatively low levels--until the likes of a Kerkorian or Buffett shows up?
The simple answer is that many investors are “momentum” players: They invest with market trends rather than fight them, and they take a relatively short-term view of the market.
Thus, even if many portfolio managers see true long-term value in Chrysler’s current stock price, most don’t want to ride it through any downturn or stagnancy that may accompany worries about slower car sales and slower earnings growth. They would rather wait to buy at the start of the next upturn in car sales.
Kerkorian, in making a takeover offer, may be trying to force other world auto companies to see Chrysler’s value and bid for it. Or he may feel that at this price, and given Chrysler’s cash flow, he’s getting a great bargain buying it for himself.
MORE CHRYSLER COVERAGE
* Kerkorian launches surprise bids. A1
* The teaming of Kerkorian, Iacocca. A1
* Labor relations will be an issue. D2
* Bid grabs attention at auto show. D2
* Auto maker’s comeback story. D2
* Bid sparks modest stock rally. D3
