Seagram, Kaufman & Broad: Something to Build On?
Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Before We Start ... . .
Jim: It’s an honor to have you as my partner on these pages any day, Mike, but especially so today because of the Pulitzer Prize awarded to you and our colleague Chuck Philips. Congratulations, pal!
Mike: Thanks, Jim. It’s been a privilege to work with Chuck, and of course with you, too.
Seagram (VO)
Jim: Maybe this company should rename itself, Mike, given all its changes.
Mike: As long as it doesn’t change its elegant ticker symbol, which memorializes one of its most famous products, Seagram’s VO whiskey.
Jim: Seagram remains a global distiller of spirits and wines, including Chivas Regal, Absolut Vodka and others. But its CEO, Edgar Bronfman Jr., has been remaking it into an entertainment giant.
Mike: That’s right. This all started a few years ago when young Edgar persuaded his father and other relatives who ran the place to dump Seagram’s 24% stake in DuPont Co.
Jim: Seagram sold that stock in 1995 for nearly $9 billion, giving Edgar Jr. the money to buy entertainment properties.
Mike: Some people think he should have stayed put: That much DuPont stock today is worth $16 billion. But that’s hindsight. The big question now is Bronfman’s ability to manage the entertainment assets he acquired by buying MCA Inc. from Japan’s Matsushita Corp. in 1995 for $5.7 billion.
Jim: Why don’t you tick them off?
Mike: First there’s Universal, whose movie studio has by any measure fallen on hard times.
Jim: You mean it’s had a string of flops.
Mike: Now, I’m trying to be charitable. It also owns, of course, the Universal City theme parks here and in Florida, and it recently bought PolyGram Records.
Jim: For the mind-boggling sum of $10 billion, part of which it financed by selling the Tropicana orange-juice business to PepsiCo for $3 billion.
Mike: Right. Incidentally, Seagram is a Canadian company, but all the figures we’re using are in U.S. dollars.
Jim: And there’s been one other Bronfman move. In a complex deal last year, Seagram spun off its Universal TV assets, such as cable-TV channels, to media mogul Barry Diller but retained 45% interest in the resulting Diller company, now called USA Networks Inc.
Mike: One way to interpret that deal was to think of Edgar Jr. buying Barry Diller as his TV executive, because he gets Diller’s unquestioned skills at running entertainment properties.
Jim: OK. But after we add all of this up, where are we with Seagram?
Mike: This is a sensitive subject in Hollywood, but it’s hard to find a top entertainment executive who is as disrespected as Edgar Bronfman Jr.
Jim: That’s not easy to do.
Mike: Let’s just say that studio chiefs around Hollywood simply don’t think Edgar Jr. is in their league.
Jim: He’s been called a Hollywood dilettante.
Mike: And there’s no question that Universal Studios has had its troubles. Last year was a disastrous one for this studio, and its market share dropped to the 4%-5% range. Its flops included “Babe: Pig in the City,” the sequel to the original “Babe,” which was a huge moneymaker. But the second “Babe” just did not fly, in part because, according to Hollywood wisdom, it was mistakenly marketed as a children’s picture, which it isn’t.
Jim: Hmm, a pig that couldn’t fly. All of this was why Universal Studios Chairman Frank Biondi and film chairman Casey Silver got kicked out last fall. Meantime, Seagram’s booze business has been weak in Asia. So, Seagram’s stock had struggled; it’s gained about 69% since early ’96 while the Standard & Poor’s 500 index has more than doubled.
Mike: But the stock has risen sharply since last fall.
Jim: True. The betting is that Seagram’s Asia business is improving. There’s optimism that Seagram will thrive in recorded music with PolyGram. Seagram has a new theme park opening in Orlando, called Islands of Adventure. So the stock, which dropped below $30 last October, now trades in the low 60s.
Mike: It seems the Wall Street establishment has suddenly gotten religion about Seagram.
Jim: Not me. I’m still with the unwashed.
Mike: Really? I’d buy the stock.
Jim: I’m surprised, but the floor is yours.
Mike: Think of it this way: PolyGram is expected to be an even bigger force in music for at least the next couple of years. Also, Universal’s theme-park business will probably get a bump from all the publicity and excitement surrounding Islands of Adventure.
Jim: It better. Seagram’s got a ton of start-up costs to pay off.
Mike: Moreover, Bronfman makes a convincing case that Seagram now relies less on the volatile motion picture business, which is now a poor relation in this company. So in the end, I’d say this stock has a ways to go.
Jim: Not me. First, let me say that I don’t think any movie executive should be putting down Edgar Jr., given how often they’re shown the door because their product flops. Still, Edgar Jr. has made an enormously expensive gamble that has yet to pay off.
Mike: It will take time.
Jim: Fine, but Universal Studios is still a big question mark. Who knows when its next hit will arrive? And even though PolyGram is the big player in recorded music, that industry overall is flat.
Mike: I do have a problem with how Bronfman seems to have the inability to choose and keep decent executives, particularly at Universal Pictures. But that’s not true in music, which he’s put in the hands of Doug Morris, a proven talent.
Jim: But all of the maneuvering also has left Seagram with $10 billion of debt. That’s doesn’t give them much room for error. And the stock’s jump in recent months makes me even more disinclined to buy Seagram today.
Kaufman & Broad Home (KBH)
Jim: This is the nation’s largest home builder. It’s based in Los Angeles, and its co-founder, Eli Broad, once ran not only this firm but also the financial giant SunAmerica. Today he’s a billionaire and one of L.A.’s civic big shots.
Mike: Broad, pronounced as in “road.”
Jim: My favorite Broad story is the time he bought a $2.5-million painting with his credit card, which also carried frequent-flier miles for every dollar charged. He donated those to charity.
Mike: Now, as some of our readers pointed out to us, Kaufman & Broad is, well, an interesting stock.
Jim: This stock epitomizes that old Wall Street saw that a stock is only worth what someone is willing to pay for it. This company has been on a tear, yet its shares are in the dumps.
Mike: In fact, one of Merrill Lynch’s analysts remarked recently that he’s followed the home building industry for 30 years and never has seen a bigger gap between its fundamentals, which is to say the industry’s health, and the prices of its stocks.
Jim: In even plainer English, it means . . .
Mike: When are investors gonna wake up to a good thing?
Jim: Exactly. Kaufman & Broad is hitting on all cylinders, yet the stock refuses to reflect that. The company’s homes are selling well, and it’s gobbling up other builders of single-family houses to pad its growth.
Mike: And to cut its reliance on the California market.
Jim: Right. So in its fiscal first quarter ended Feb. 28, Kaufman & Broad’s sales shot up 63% from a year earlier, and its earnings doubled. Lots of analysts tout the stock as a “buy.” And what’s happened? The stock has dropped 30% over the last 12 months and now trades in the low 20s for--get this--seven times earnings.
Mike: I suspect the stock stays under pressure because people are convinced that the economy’s fundamentals are peaking and thus so is Kaufman & Broad’s strength. With the economic boom wearing whiskers, people are worrying about their job security again, which could mean fewer home sales. The one action that most reflects people’s confidence in the future is buying a house for some outlandish six-figure sum.
Jim: Agreed. It’s the pervasive fear that things can’t stay this good. But I’m not sure what’s fueling the concern. U.S. housing starts in February, the most recent month available, jumped 1.1%--the biggest monthly gain in 20 years. And it appears the housing market will stay strong in the foreseeable future.
Mike: At the same time interest rates remain low.
Jim: Look, let’s drop all this economic mumbo jumbo. Investors thinking about buying Kaufman & Broad shouldn’t have to worry about whether they’re going to guess right about the direction of interest rates, which no one can do.
Mike: Least of all the experts.
Jim: Even so, I wouldn’t buy this stock.
Mike: You mean we’re at odds again?
Jim: Sorry, but this is a simple case of not wanting to fight the tape. If Kaufman & Broad’s stock can’t benefit from the company’s sizzling performance of the last two years, when will it? Here’s an outfit that’s an industry leader in size and growth, and its stock is off nearly one-third for the past year.
Mike: Some would say that’s a perfect point for a value investor to step up to the plate.
Jim: No, the perfect point should have been a year or two ago, as Kaufman & Broad was about to pick up the pace. Yet you’d have little to show for your investment. Why should I be more confident today?
Mike: Because eventually people will catch on. The institutional investors have been beating the drum for this company for a long time, and eventually it’s going to sink in. And when it does, you’re going to get a nice pop in this stock.
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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Seagram
Monday: $63.50
Kaufman & Broad
Monday: $22.81
