Challenges Ahead for CompUSA; Giant Telmex Holds Its Own
Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
CompUSA (CPU)
Jim: These must be frustrating times at CompUSA, Mike. The company is the biggest retailer of computer gear, with about 210 superstores in 80 major markets, and annual revenue of $5 billion. It sells a product and technology that’s exploding in popularity. Yet this outfit and its stock are a mess.
Mike: Yeah, in high tech we’re used to seeing parabolic curves in stock prices, but we’re not so accustomed to seeing them lead straight down. Sad to say, that’s what CompUSA’s stock has done.
Jim: Incidentally, for those who hadn’t noticed, the company’s ticker symbol is the acronym for central processing unit, which is the chip at the heart of a computer.
Mike: What I’ve noticed is that CompUSA is on its way to becoming a victim of the high-tech boom.
Jim: Why?
Mike: Because the products it’s selling are plummeting in price. Not only that, these are products and devices that particularly lend themselves to being bought over the Internet rather than at brick-and-mortar stores like CompUSA’s. You could even argue that buying computer equipment over the Web makes more sense than buying books online.
Jim: You’ve hit on the two main problems at CompUSA: The prices of its merchandise, and hence its profit margins, are falling. And it’s getting clobbered by outfits selling PCs online, including PC makers Dell Computer and Gateway. By the way, for full disclosure, I’ll note that I own a few shares of Dell, with an emphasis on the word few.
Mike: Duly noted.
Jim: Moreover, CompUSA also is getting hurt by big consumer-electronics retailers such as Best Buy that often sell PCs at even lower prices. The result: Comp-USA time and again has failed to meet Wall Street’s sales and earnings expectations, or has outright lost money.
Mike: Which has repeatedly sent its stock into a nose dive.
Jim: Correct. This stock went public in late 1991 at $3.75 a share, after adjusting for subsequent splits. It reached the mid-30s in 1997, but now trades for just $8 or so.
Mike: This is a company that’s caught in a very dismal secular trend.
Jim: There you go with those fancy words again.
Mike: They translate into tiny profits for CompUSA.
Jim: Know what? I’d still take a flier on this stock, purely as speculation.
Mike: Really? Well, let me make my case for staying far away from it. CompUSA tries to appeal to more sophisticated PC users, in contrast with Best Buy, which is looking for the entry-level buyer.
Jim: True.
Mike: Yet I think that as computer users get more sophisticated, they’re even less likely to visit Comp-USA as opposed to other distribution channels such as the Web. So I see CompUSA sitting there with a lot of very costly real estate, not to mention a lot of unsold inventory, and being passed by.
Jim: But it’s planning some things that I think will give the stock a pop. For instance, it’s moving to revamp its stores so that they sell more digital cameras and other high-tech gadgets, and not just computers.
Mike: Oh, you mean it’s going to sell all the stuff that Best Buy already beats them on? What a great strategy.
Jim: Well, you can’t argue with Best Buy’s results! Anyway, Comp-USA also is investing heavily in its own Internet sales site while trying to take costs out of its conventional stores. It’s got great brand recognition. I also believe PC prices are soon going to stabilize, and, when they do, CompUSA will start posting quarterly results that will show nice gains from their depressed levels of late. That will lift the stock.
Mike: PC prices might stabilize, but CompUSA’s old profit margins aren’t coming back, because computers and related gear are becoming commodity products like never before. That means retailers like CompUSA must find very inexpensive ways to sell these goods.
Jim: I also think you’ve delineated the PC market too narrowly, Mike. There is room in the market between the entry-level buyer that goes to Best Buy and the PC geek that can handle all purchases over the Net or the phone. That still leaves lots of buyers who want the human service that a CompUSA provides.
Mike: Assuming CompUSA is up to the task.
Jim: Actually, it’s plowing more money into employee training. Plus, don’t be surprised if CompUSA starts closing some of its less profitable stores.
Mike: I think that’s inevitable.
Jim: Me too, because it will help lower their costs and get rid of some of that real estate you talked about. Now look, will CompUSA’s stock shoot back up to $30 a share? No. But at $7 or $8, a decent move could generate a tidy profit for investors.
Mike: I’m deeply skeptical. I like CompUSA; I like going to its stores and reading its ads. But the truth is, I can find what I need at a lower price at Best Buy or find it more conveniently on the Web. So this is a company that’s got a lot of challenges, and it’s going to be a long time before CompUSA meets them convincingly.
Telmex (TMX)
Mike: Up next is Telefonos de Mexico, or as it’s commonly known, Telmex. It’s the biggest telephone company in Mexico, and its ADRs, or American depositary receipts, trade on the New York Stock Exchange.
Jim: Remind our friends what an ADR is.
Mike: An ADR simply represents the company’s actual shares and serves as a trading vehicle for a foreign company’s stock on U.S. markets.
Jim: Right. Now, you can think of Telmex as the AT&T; of Mexico . . . .
Mike: Which means Telmex probably has a lot of dissatisfied customers out there.
Jim: . . . that is, the old AT&T; when it was Ma Bell.
Mike: Oh, then it’s got not dissatisfied customers but infuriated customers. Beyond its main business, though, Telmex also is known as a proxy for investing in Mexico.
Jim: In fact, that’s why we’re looking at Telmex, because the Mexican stock market has soared this year on the heels of an economic rebound down south. Telmex itself, after dropping to the mid-30s last August, has since more than doubled and now trades in the high 70s, or about 17 times its expected ’99 earnings.
Mike: Although in recent days it’s suffered sort of a hiccup, because of concerns resurfacing about the economies in Mexico and Latin America.
Jim: Right, and anyone buying Telmex should always be ready for those kinds of concerns. As for Telmex itself, it entered a brave new world in 1997 when Mexico deregulated its telecommunications industry.
Mike: And gave Telmex all the competition it could handle.
Jim: Telmex is holding its own, though, which is just one reason why I’d buy this stock. Its operating profit last year rose 19%. Revenues also are climbing, and they reached nearly $9 billion last year at current exchange rates.
Mike: I’d buy Telmex too. Not only is it a good time to invest in this bellwether of the Mexican stock market, this is a solid yet nimble giant, one that’s growth-oriented and has done some very smart things lately.
Jim: You’re alluding to its alliances with U.S. companies?
Mike: Yep, and these are alliances that in some cases are reaching outside the conventional telephone industry. For instance, it’s joined with SBC Communications--one of the Baby Bells--to buy wireless provider Cellular Communications of Puerto Rico. That’s a good move, because wireless is especially important in emerging nations struggling to build their land-line infrastructures.
Jim: That’s not all. SBC, of course is the parent of Pacific Bell . . .
Mike: Oh, so it’s got a lot of satisfied customers here in Southern California!
Jim: . . . and that means it’s a major provider of service to Latinos in California and Texas. That’s also why SBC is attractive to Telmex. Here’s another reason: SBC also is buying another Baby Bell, Ameritech, which will offer Telmex’s links with SBC even more geographic reach.
Mike: One reason SBC bought Pacific Bell in the first place was because of the close relationship between California and Mexico, and the business that Pacific Bell was doing with Telmex.
Jim: I also see the onset of competition in Mexico spawning a ton of new demand for services--whether they be wired or wireless--to Telmex’s benefit.
Mike: So do I. Telmex will benefit from being in a region where a rising tide is going to lift all boats. But it’s floating pretty well already.
Jim: Investors shouldn’t kid themselves, though. This is a volatile stock and the benchmark for a volatile stock market. So buy Telmex, but don’t worry about every gyration.
Mike: Right, because there will be lots of them.
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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. Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.
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CompUSA
Friday: $8.13
Telmex (TMX)
Friday: $79.94
