Checking Out Chase but Avoiding Planet Hollywood's Orbit

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

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Chase Manhattan (CMB)

Chase Manhattan Monday: $46.81

Jim: This is the nation's biggest banking company, Mike, and I'll say right off that this is a great stock, even though bank stocks have taken a drubbing lately.

Mike: I'd buy it, too, and one reason is because the banks are so beaten up.

Jim: Which makes Chase a bargain.

Mike: Exactly. In fact, every time I look at Chase and see it's trading for only 10 or so times earnings, it gives me heart that we're nearing a bottom in the stock market's slump. I find it very hard to believe that a stock of this caliber should sell that low.

Jim: Chase, with about $385 billion in assets, was formed by the 1996 merger of the old Chase Manhattan and Chemical banks, both based in New York. To see why Chase is well run, just look at its return on average assets. That's the benchmark in banking, because it measures how profitably a bank is using the assets at its disposal. If it's 1% or higher, you're earning your keep.

Mike: What is it for Chase?

Jim: It's been running slightly above 1% for nearly two years now, and it keeps improving, which is especially notable considering that Chase has been digesting Chemical during that time--not an easy task.

Mike: Particularly given the pain and suffering that occurs when you merge two cultures. So why has Chase been slugged so badly with the rest of the banks?

Jim: The banks are getting creamed because they have loans and other exposure to Asia, Russia and Latin America, whose economies are rapidly becoming basket cases. But this is a huge overreaction by Wall Street, which is probably due to two things: The rest of the stock market is falling sharply as well, and many people vividly recall how big banks took it on the chin in the 1980s with bad loans to South America and other locales.

Mike: But the situation today is quite different.

Jim: Absolutely.

Mike: The exposure isn't as bad this time, and it's being better managed by the banks. Chase has been steadily reducing its foreign credit exposure, and even though the exposure it has left could pull its earnings down, it isn't as bad as the stock market would have you think.

Jim: Oddly, this all seems lost on investors. Chase is selling in the mid-40s, so that's a 38% drop since June 30! They've wiped out almost $25 billion of Chase's market value. The devastation has been even worse at Chase's cross-town rival, Citicorp.

Mike: Crazy. But that overreaction will end soon. On top of that, we're now facing the prospect of an interest-rate cut by the Federal Reserve, and possibly a coordinated round of cuts by the industrial world. Japan may have started the round with its own recent rate cut.

Jim: People are expecting lower interest rates to help those foreign economies get back on their feet. Which would give the bank stocks a lift, both because a rebound in those economies would ease the banks' credit risks there, and because lower rates would simply cut their cost of doing business.

Mike: Right. The bad news is already in many of these stocks, and any surprises from here are going to be on the upside.

Jim: I'm not saying Chase's exposure overseas is a nonissue. Remember, that's why banks charge interest--for the risk of lending their money. There's plenty of risk it will get burned by bad loans. But overall Chase is a solid stock in any portfolio, and when rates do come down further, Chase will be rewarded for being well-managed and profitable despite its lumbering size.

Mike: Agreed. There are some banks I wouldn't touch because their record is frightful, but Chase isn't one of them. Chase domestically is top-notch, and it's going to benefit from whatever remedial actions the industrial nations take overseas.

Jim: BUY

Mike: BUY

Planet Hollywood International (PHL)

Planet Hollywood Monday: $4.06

Jim: Going from the penthouse to the cellar, we move from Chase to Planet Hollywood, the glitzy restaurant chain started by Arnold Schwarzenegger, Sylvestor Stallone, Bruce Willis and others.

Mike: Jim, investing in this mess is like being on the business end of a Schwarzenegger pasting. Hasta la vista, baby.

Jim: All that glamour helped this stock win Wall Street's favor when it went public in '96. But guess what? The business and the stock have tanked, even though Planet Hollywood now has nearly 90 restaurants, about half of which are franchised.

Mike: That's part of the problem. If there was only one Planet Hollywood restaurant--say in Hollywood, just to pick a location at random--it would be a huge success and a perennial tourist attraction. Then if you got a T-shirt or a leather jacket from Planet Hollywood, it would be pretty cool.

Jim: Which is why there aren't 90 Russian Tea Rooms, I suppose.

Mike: That's right. All that movie bric-a-brac that makes Planet Hollywood what it is would be pretty top shelf.

Jim: You mean it isn't now?

Mike: I had occasion last year to visit a Planet Hollywood in Sydney, Australia, and let me tell you the memorabilia is beginning to look a little ragged. Pretty soon, instead of the sunglasses Arnold Schwarzenegger wore in "Terminator 2," you're going to be down to Tom Arnold's socks from "The Stupids."

Jim: What amazes me is that investors are so stupid as to keep falling for these "themed" concepts in restaurants. Having movie stars flack for your restaurant goes only so far. After that, the food and the ambience better be damned special. But it rarely is.

Mike: Which brings me to a comment that an analyst made about this company the other day. It's a classic among dopey Wall Street remarks, and goes a long way toward explaining why these "pros" end up confusing investors more often than they help.

Jim: What did this person say?

Mike: That one reason Planet Hollywood is struggling--it lost $1.4 million in the second quarter--is because "it has a value/quality perception issue among customers."

Jim: In other words, the food sucks . . .

Mike: . . . and it's too expensive.

Jim: That explains why the stock has plunged 80% in the last 12 months alone, and now trades around $4 a share.

Mike: After it went public in '96 at $18.

Jim: Right. And it exploited the hype that Arnold and Sly and the others provided. When it went public, the stock jumped as high as $32 and had the biggest first-day trading volume for a Nasdaq IPO at the time. It moved to the Big Board last year.

Mike: And now?

Jim: They posted the second-quarter loss in August, and said things won't get much better for the rest of the year. Their same-store sales--that vital stat in retailing that measures sales of stores open at least a year, and in Planet Hollywood's case it refers to company owned stores--has been dropping by double digits for a few quarters now. That's very bad.

Mike: And I haven't heard much about how management plans to improve matters, other than vague promises to boost sales and cut costs.

Jim: They did name a new president recently, one Bill Baumhauer. He used to run Unique Casual Restaurants Inc., which runs the Fuddruckers burger joints, among others.

Mike: Look, Planet Hollywood is basically an advertising stunt, one that's run out its string. The concept was mercilessly diluted by a management that opened a Planet Hollywood wherever there was a vacant lot, which doesn't exactly make it a unique dining experience.

Jim: I'd suffer through another Bruce Willis movie before I'd buy this stock.

Mike: Me too.

Jim: DON'T BUY

Mike: DON'T BUY

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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.

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