Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik discuss the merits of individual stocks and other investments.
MediaOne Group (UMG)
MediaOne close Friday: $43.63
Jim: Know what's the first thing MediaOne Group should do, Mike?
Mike: Change its ticker symbol?
Jim: Exactly what I was thinking! You're scary.
Mike: MediaOne has the weirdest symbol this side of Woolworth, which has Z.
Jim: Actually, Woolworth changed its name to Venator Group--don't you love these names they come up with?--so that's now got the Z. Anyway, why does MediaOne have UMG?
Mike: Call it a historical artifact. MediaOne is a cable TV company that used to be called US West Media Group because it was owned by the Baby Bell phone company US West. Just recently it became a stand-alone company, and some readers have asked us to check it out.
Jim: It's got a big presence in Los Angeles, and overall it's the nation's third-biggest cable operator.
Mike: Right. It's got 4.9 million basic cable subscribers--as well as an odd, and hard to value, partnership with Time Warner Entertainment, another cable company. The joint venture is supposed to have a footprint covering nearly 30% of all U.S. households.
Mike: Meaning it owns the rights to offer cable to geographical regions that encompass 30% of all U.S. households.
Jim: But MediaOne wants to be much more than a cable company when it grows up. It loves to brag about "broad band," which basically means it can shove all sorts of telecommunications and computer services to customers through its cable lines. But then, every cable and telecom firm is promising that. Isn't that why AT&T; agreed this summer to buy TCI?
Mike: Yep. "Broad band" is the buzzword with this group.
Jim: And speaking of jargon, reading the financial results of the cable industry is like reading "Alice in Wonderland." For instance, nobody cares about earnings--so forget about using conventional yardsticks with these stocks. The business, and the analysts who follow it, are obsessed with cash flow instead.
Mike: For a very good reason. They have a ton of debt and no profits.
Jim: Right. And cash flow is everything, because it determines whether they can keep servicing, or paying off, their debt.
Mike: They're burdened with debt because they're spending a fortune building their infrastructures--fiber-optic lines, coaxial cables, transmission facilities, you name it. So to a great extent, if you invest in the cable business, you're investing on faith. You believe the cable operators' predictions that one day they'll have profits because they'll have all the infrastructure they need. Most think they'll hit the black shortly after the year 2000. After that, it's gravy.
Jim: Meantime, the brokerage A.G. Edwards says that MediaOne lost $878 million last year and will lose $789 million this year.
Mike: Can't you say anything nice?
Jim: Sure. MediaOne not long ago sold its wireless business--that's mostly cell phones--to AirTouch, which gave them a nice bit of cash to repurchase stock, buy another company or reinvest some other way. And it's a well-run enterprise.
Mike: So we agree the stock's a buy?
Jim: Yes, but not for the reasons I just mentioned. I'd buy it strictly as a takeover play. There's merger frenzy these days in cable, which is a big reason why MediaOne, at around $44, already has shot up more than 50% so far this year, and it's doubled over the last 12 months, despite the stock market's slump in recent weeks. Our colleague Sallie Hofmeister reported last week that Microsoft co-founder Paul Allen is taking a look at MediaOne. So I expect someone will buy them sooner rather than later and--presto!--all those concerns about MediaOne's sorry financial shape will disappear.
Mike: Of course, merger frenzies sometimes happen because buyers believe there's untapped value in the targets. So Paul Allen and I have at least one thing in common. Anyway, in the recent past, cable companies have been great investments.
Jim: Yes, but we're looking ahead.
Mike: Fine. Their business is expanding. They're getting more customers. They're getting higher subscriber rates, because they seem to have snookered Congress in allowing them to raise rates well above inflation. And in that group, you have to give MediaOne a very good look.
Jim: Nothing like having a monopoly in each of your markets to help things out.
Mike: Yes, and don't forget: The AT&T-TCI; deal raised the bar for cable acquisitions. It instantly made cable firms more valuable.
Jim: Except that ever since AT&T; said it would pay $37 billion for TCI, everyone's been screaming that AT&T;'s Mike Armstrong overpaid--big time. So maybe these valuations for MediaOne and others aren't as high as everyone thinks.
Mike: You're too shortsighted. Cable companies are the quintessential survivors. Everybody expected they would be victims of new technology. In fact, they've proved able to absorb new technologies and get ready to offer a much wider range of services to the average customer.
Best Buy (BBY)
Best Buy close Friday: $46.13
Jim: Mike, next we come to Best Buy Co. They're one of the leading retailers of consumer electronics, household appliances, software and CDs.
Mike: To be precise, they're the No. 2 consumer electronics retail chain in the country. And you know what stands out for me about this company?
Jim: I know what stands out for me, but go ahead.
Mike: In Best Buy we have one company you can honestly call an unalloyed beneficiary of the Asian economic crisis.
Jim: Really? Because I think this stock is a classic candidate to sell short.
Mike: I'd be long on Best Buy, particularly over the next few quarters, which will bring us through the Christmas selling season. If you're in the consumer electronics business, what you're selling are Asian-made goods. Economists have been predicting for some time now that, thanks to the weakness of Asian currencies, a tidal wave of low-priced Asian merchandise is coming at us. Right now I believe we're standing at the edge of the water. Between now and Christmas there's going to be ferocious price-cutting by the Sonys of this world.
Jim: Which means you're expecting consumer electronics sales to go through the roof this holiday season.
Mike: I'm expecting them to be very strong. Plus, given where interest rates are today, retailers like Best Buy have great ammunition to combat any softness they discern in sales--they're going to hammer the consumer with all sorts of credit deals of the kind that we saw two years ago, when you could buy computers and refrigerators alike at Christmas 1996 and not have to pay a dime for them till Christmas '97. So I think that it's reasonable to expect that companies like Best Buy and its competitors are going to have strong seasons between now and the end of the year.
Jim: Slow down. Some 18 months ago this company was on the ropes.
Mike: I wouldn't deny that they have a checkered past.
Jim: A year or so ago they made a spectacularly wrong guess about computer sales and got stuck with loads of inventory.
Mike: Thanks in part to Intel, whose Pentium II microprocessor made a lot of plain-vanilla Pentium computers obsolete.
Jim: So Best Buy now keeps its inventories a lot leaner. That's a big cost cutter. Apparently they have also retrained their sales staff to be more informed and helpful to the bewildered customer.
Mike: The result is a huge turnaround.
Jim: Sure, sales and profits are growing--including "same-store" sales, which is the No. 1 benchmark in the retail business.
Mike: That's right. They're running gains of between 13% and 18% per quarter this year in stores open at least a year, a measure that leaves out newly opened locations, which would otherwise skew the numbers. Those are huge jumps. And just recently, they forecast fiscal second-quarter profits that blew away analysts' estimates. So what's wrong with that?
Jim: Only that Wall Street has badly overreacted with this stock, which currently trades around $46. Over the last 12 months, Best Buy is up, get this, around 400%--that's fivefold--even though the stock market's in the dumper. So now it's selling for about 28 times what the Street expects this company to earn for its fiscal year ending next February. That's too rich, even if the Street hikes its expectations for Best Buy.
Mike: But for a company in the electronics and appliance business, I'm not sure that that sort of multiple is entirely out of line.
Jim: And you're recommending this stock based primarily on the buying spree you expect this holiday season?
Mike: That's right. In the near future, this company is going to chalk up very good gains, and I think Wall Street will reward it even more. Think of it in terms of a requited love affair.
Jim: I couldn't agree with you less. There's no way that I would buy a retail stock, even a good one, that's just gone up some 400% in the last 12 months. You know what this company's profit margin is? One penny per dollar of sales. And this is the classic retail problem. Here these guys are supposedly among the best in the business, they've got a stock that has outraced any reasonable valuation, and they're still sitting there like any other supermarket chain--earning a penny on every dollar of sales. And this is when things are cooking. I say it probably won't get much better, and even if they have a decent Christmas selling season, this stock is headed for a fall.
Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at email@example.com; James Peltz can be reached at firstname.lastname@example.org. Or write to either at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.