Not Tempted by Apple, and Is Rockwell in a Hard Place?
The Times today continues a new feature, Stock Exchange, in which staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.
Apple Computer (AAPL)
Apple close Monday: $34.44
Mike: You know what’s interesting about Apple? This is a golden opportunity to buy stock in a religion.
Jim: One of the few opportunities, I believe.
Mike: And not just any religion. This one comes with its own pope and its own Grail. I’m alluding, of course, to its CEO, Steve Jobs, and its main product, the Macintosh personal computer.
Jim: This religion even has its own devil, Microsoft.
Mike: The question is whether this is the most profitable religion to invest in.
Jim: Not to me. And before we go any further, let me say I don’t want to hear from any of the Apple apostles who get angry whenever someone criticizes their company.
Mike: The zealots’ case, of course, rests on the assumption that the world needs a counterbalance to Microsoft. Whether you believe that’s true or not, the question is whether Apple is any longer well-positioned to provide that counterbalance.
Jim: Look, let’s first give Apple credit: This company was all but written off 12 to 15 months ago because PCs using Microsoft’s Windows operating system were blowing the Macintosh away. But Jobs, the Apple co-founder who returned as chief executive, stopped the bleeding. He put the company back in the black and is ready to trot out some new machines. Because of that, the stock is around $35, double its price of a year ago.
Mike: But where do we go from here? In the education market, a traditional Apple stronghold, its market share has dropped by nearly half in three years, from 47% to 27%. In laptops, business and home PCs, its market share is 5% or less, which gets it lumped on most charts with “others.”
Jim: Any improvement on that small base is going to look good.
Mike: Right. Apple’s profit chart reminds me of how I once heard an economist describe the economy of Zaire. He said to think of it as a point on the rim of a bicycle wheel rolling downhill--periodically it’s going to look as if it’s moving up, but the general trend is distinctly down.
Jim: That’s Apple. I just don’t see the Macintosh market share growing significantly in the next few years, and you can only get so far cutting costs and reorganizing the business. It’s true they are bringing out some exciting new products, including a whole line of speedy Powerbooks. And isn’t there a new desktop machine on the horizon?
Mike: There is, and it’s a good illustration of Apple’s strengths and weaknesses. The new desktop is called the iMac, which is a version of a so-called Internet computer in that it’s optimized to function as a terminal of the Internet. The iMac has gotten very respectful reviews from the computer press, in part because of its snazzy design--it comes in a very appealing teal-and-white case that will certainly set it apart physically from the dull run-of-the-mill PC.
Jim: I wasn’t aware that lots of PC buyers were complaining about the color scheme of their machines. All I ever hear them talk about is processing speed, memory and whatnot.
Mike: Remember, ergonomics and design have always been a very large part of the Macintosh’s appeal--including the appeal of its user interface.
Jim: English, please?
Mike: How it feels to use, and how it looks. This reflects Steve Jobs’ world view, and there’s no denying that as a visionary, Jobs has had a powerful and on the whole positive effect on the computer industry. But as a leader at Apple, he’s been something more of a mixed blessing. As inspiring as he can be, he’s never had to run a major company, particularly one in a crisis, without strong adult supervision around.
Jim: He tried, but Apple threw him out in the mid-1980s when it got to be a major company.
Mike: Now here’s the iMac. It’s got a lot of features that are well ahead of the market, but it lacks some that I think are indispensable in the market. For example, it comes without a floppy disk drive, which means you have to buy an add-on at additional cost that makes the iMac uncompetitive in price with standard PCs.
Jim: This is quintessential Jobs. The product is visionary, but it requires that the customer catch up to Steve Jobs’ vision.
Mike: That’s so. Given the commoditization of the PC market, I don’t see how the iMac is going to carry Apple beyond the first couple of quarters after it goes on sale. This is a big reconstruction job, and I think that the three quarters of profits that we’ve seen recently are only the first steps in what could be a very, very tough slog.
Rockwell (ROK)
Rockwell close Monday: $41.56
Jim: Mike, numerous readers asked us to review Rockwell International, and I can see why. Once a leading player in aerospace, the company has hit bottom lately and taken its investors along for the ride.
Mike: This is a case of the incredible shrinking company, isn’t it?
Jim: Yeah. The first thing Rockwell should do is change its name, because for many people, the name “Rockwell” conjures up a company that no longer exists.
Mike: “Rockwell” to me means the company that built the space shuttle and the B-1 bomber.
Jim: Right. But it sold those operations and the rest of its aerospace group to Boeing nearly two years ago. The guy running the place then, Don Beall, also dumped its truck-axle and printing-press lines. Too boring, too slow-growth for his taste. He wanted to be where the action is, in high-tech.
Mike: What did he keep?
Jim: Three things. One is industrial-automation gear, automating factory floors and the like. Another is avionics, those high-tech guts in airplanes. And a semiconductor business that makes modem chips.
Mike: So what’s the problem?
Jim: All three are hurting. The chip business, in fact, is doing so badly that Rockwell and Beall’s successor, CEO Don Davis, announced in June that they’re going to dump that business too, by spinning it off.
Mike: If they can do it without creating a taxable event for their shareholders...
Jim: Right. Meantime, Rockwell is slashing costs and restructuring yet again to stop the bleeding, so it’ll incur charges against earnings of some $600 million this year. Care to guess how investors have reacted to all of this?
Mike: They’ve been asking where the parachutes are stowed, no doubt.
Jim: You got it. The stock has now plunged 22% since Jan. 31. But that’s not the worst of it. Rockwell now trades around $43, $44 a share. Near the end of ‘96, when it was shedding aerospace, it sold for $52.
Mike: I don’t like this stock. For starters, how much credibility do you give a bunch of guys whose unique management philosophy is: When trouble occurs, rush for the exits. They don’t have any sense of how to compete, except by bailing out.
Jim: I agree; they don’t seem to have any overarching strategy or vision for this company. And after they get rid of the chip business, they’ll be left with two operations without much in common.
Mike: So you’d avoid the stock too?
Jim: This might surprise you, but no, I’d buy it.
Mike: Surprise doesn’t begin to explain my reaction.
Jim: Rockwell looks to me like a liquidation play. One way or another, I think its last two pieces are going to get split up too. Then I think those two pieces, plus the chip business that’s getting spun off, will be worth more than 44 bucks.
Mike: But as I read the figures, it looks like Rockwell’s book value is about $22 a share. So how do you make the argument that the parts are worth more than the whole?
Jim: The last two groups--automation and avionics--are soft right now, but they’re not bad businesses. Neither is the modem-chip line that will soon be spun off. Eventually they’ll rebound, and, whether they’re bought by outsiders or end up as separate public companies, together they’ll be worth more than $44.
Mike: I’m skeptical. We’re talking about breaking up a company into two pieces--neither of which is performing well, both of which face strong problems, and that are going to be sold off or spun off at the very bottom. These pieces are like shark chum: The buyers will see the opportunity to do a lot better but won’t pay a premium for either unit.
Jim: Rockwell won’t sell if they don’t get a premium price.
Mike: I don’t know. These guys are so risk- and competition-averse that God forbid something comes up that represents a real threat to either of their remaining businesses--they’ll dump what’s left in a split second and explain to stockholders that their strategic vision was always to be in ... whatever--sock darning, maybe.
Jim: Wait a minute. Let’s not forget that, before 1996 and Rockwell’s dismemberment, Beall and Davis produced a 20% average annual return for five straight years. So give them some credit. But I have to admit, those returns raise the question of why they decided to mess with this company in the first place.
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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz @latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.
