BID FOR A GIANT AUTO MAKER : Ticker Shock : NEWS ANALYSIS : INVESTORS : In Auto Maker, 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.
The message seems to be that even near a record 4,200 on the Dow Jones industrial average, the U.S. stock market overall can present appetizing opportunities for high-profile investors. And for already-bullish Wall Street pros, that kind of affirmation is powerful stuff.
“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.
Combine that with American investors’ recent rush back to U.S. shores--after pouring billions of dollars into foreign markets in 1993 and ‘94--and the stage could be set for a continuing run-up in U.S. stocks this year, optimists say.
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.
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 pace whether the economy is hot, warm 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 brake the economy. While Kerkorian held on to his Chrysler shares--and bought more--many other investors bailed out, driving the price to $38.25 early this year, a 40% drop.
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.
What Kerkorian appears to be arguing with his $55-a-share takeover bid for Chrysler is that investors have overestimated the effects 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 1995 stock price-to-earnings ratio--and that of the other two U.S. auto giants--is about 5, or a mere third that of the average U.S. blue chip.
If the auto companies’ earnings decline in 1996 as the market expects, then the stocks aren’t as cheap as they look. The bull case is that the market will be surprised by the companies’ ability to weather an economic soft landing.
“Chrysler will make money even if car sales diminish to recession levels,” Glickenhaus promises.
Even more important than bottom-line earnings, Kerkorian and other pros may be attracted to such “value” stocks for their cash flow, the real money they generate before accounting charges.
The painful restructurings that many industrial firms underwent in the early ‘90s have made them exceptionally efficient, analysts say. That has substantially boosted their cash flows, in some cases leaving them with money they haven’t 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 stocks’ prospects.
Thus, even if portfolio managers see true long-term value in Chrysler’s stock, most don’t want to ride it through any downturn or stagnancy that may accompany worries about weak car sales and flat or falling earnings. They’d rather sell now and buy back in at the start of the next upturn in car sales.
Typically, value-style investors are willing to buy and hold, patiently waiting through downturns for their stocks to hit new highs. Kerkorian has apparently run out of patience, and would rather have Chrysler all to himself than see the stock languish. Whatever that says about stocks in general, it probably can’t be bad.
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Drive for Success
Billionaire investor Kirk Kerkorian’s massive takeover bid for Chrysler Corp. comes as the nation’s third-largest auto maker is posting its best results ever.
Kerkorian’s Offer at a Glance
* Terms
Tracinda Corp., the holding company of Kerkorian, is offering $55 a share in cash for the 90% of Chrysler stock it doesn’t already own. That values the entire company at about $22.8 billion. Chrysler has about 415 million shares of common stock. Former Chrysler Chairman Lee Iacocca is a partner in the bid.
* Sources of Funds
Equity: Approximately $5 billion. That would include about $2 billion worth of Chrysler stock owned by Tracinda, $50 million in Chrysler stock owned by Iacocca and $3 billion from other investors.
Chrysler cash: About $5.5 billion from the auto maker’s $7.5-billion cash reserve.
Borrowing: About $12.3 billion, including assumption of Chrysler’s current debt. New borrowing would be about $10.7 billion. This could come from bank loans, the sale of bonds or both.
* Timetable
If accepted by Chrysler’s board, the financing would take 30 to 60 days to assemble. The takeover could be completed within six months.
* Stumbling Blocks:
Chrysler’s board could reject the offer, seek a higher offer or seek other bids. If the board rejects the offer, the company has “poison pill” provisions designed to block a hostile takeover. These take effect if anyone acquires more than 15% of the company’s stock. Kerkorian could challenge the provision in court, although he said Wednesday that he would not.
Federal regulatory agencies would have to approve the deal.
Kerkorian must find investors willing to put up $3 billion and lenders willing to lend $10.7 billion.
CHRYSLER’S STRONG PERFORMANCE
Thanks in part to amajor restructuring assembly and component operations and stylish new vehicles, Chrysler reports a record profit of $3.7 billion on revenue of $52.2 billion in 1994
* This figure (Earnings chart) reflects operating earnings before a one-time charge of about $5 billion, mostly for retiree health benefits
* Sources: Bloomberg Business News, Tradelines, wire reports.
* Researched by JENNIFER OLDHAM / Los Angeles Times
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
