Gemstar Still Shines; Black & Decker Has the Tools to Restructure

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Gemstar International Group (GMST)

Jim: So explain to me, Mike, how this company with less than $200 million in annual revenue gets Wall Street to give it a market value of more than $6 billion?

Mike: Geez, and it’s not even an Internet company. Gemstar, a Pasadena firm started by its chief executive, Henry Yuen, develops so-called electronic programming guides, the most familiar of which is VCR Plus.

Jim: Which Yuen concocted in 1988 after being frustrated that he couldn’t program his VCR to tape a baseball game.

Mike: It’s one of the countless technologies that people have cooked up over the years to make VCRs and the recording of television shows comprehensible to the average human being. And VCR Plus has been the most successful.

Jim: But Gemstar really doesn’t manufacture anything, in the normal sense.

Mike: Correct. But it does hold patents on its valuable technology, which it licenses to makers of VCRs and TVs, TV networks and cable systems, Internet companies and so forth.

Jim: That’s how it makes its money, by collecting licensing fees from those folks. Also, Gemstar spends a lot of time and money protecting its dozens of patents, to keep the competition at bay.

Mike: Right. And its costs stay low, because it’s got only 160 or so employees and no massive need for raw materials or other capital gear.

Jim: Now, to answer my original question, Gemstar has been a hot stock because it’s expected to be in the thick of the coming interactive-TV revolution. Its alliances, including one just announced with America Online to provide AOL’s programming guides, has only added to the froth that’s pushed its stock so high.

Mike: It’s currently trading in the mid-60s.

Jim: Or a whopping 79 times earnings.

Mike: Gemstar is also a somewhat controversial firm. Among other things, Yuen has been criticized for getting extravagant pay packages in the tens of millions of dollars.

Jim: You’re right. But let’s face it--his stockholders have little to complain about.

Mike: You mean because they’ve gotten theirs too?

Jim: Look at the wealth Yuen has created. A year ago, the stock market valued Gemstar at about $2 billion. Today, it’s $6.5 billion. Gemstar also has no long-term debt.

Mike: But let me interject just a little bit of reality into this discussion.

Jim: Please do, because I wouldn’t buy this stock.

Mike: Really? Then you’re going to be disappointed. I would buy it, because this whole area of electronic programming guides is going to expand tremendously. There are going to be many more entrants into this market. There are going to be new ways to use the guides as we get more into the technology known as broadband, which our readers know we’ve discussed in the past.

Jim: Basically shoving lots more data, at higher speeds, into consumers’ TV sets or computers.

Mike: Right. In fact, we’ve already seen a couple of devices that depend on electronic programming guides to help viewers order movies, schedule recordings and download TV programs. These are already on the market. On the other hand, Gemstar is going to face a lot more competition.

Jim: Which I see as a big liability for this stock.

Mike: Still, the overall market is going to get a lot bigger. The day is not far away when everybody with a TV set also will have an electronic programming guide on that set.

Jim: Built in.

Mike: Built in and licensed, if not from Gemstar, then from one of its newly minted rivals.

Jim: Fine, but I’ve got a problem with Gemstar’s price. The stock has simply risen too high too fast, and I don’t see how it can maintain that streak when its competition is getting more fierce. The stock is just too pricey in light of its prospects. And once Gemstar starts to disappoint on the growth side, I see this stock getting whipsawed. There is one big caveat to my argument, though.

Mike: Only one?

Jim: Gemstar already has spurned one takeover offer, and I wouldn’t be surprised if it gets another.

Mike: I agree the stock is expensive. But when a market absolutely explodes in popularity and new competition comes in, you’ll probably get consolidation. And I think, as you said, that Gemstar may get another takeover bid.

Jim: Which exploding market are you referring to?

Mike: The market for electronic programming guides, and for set-top boxes that have that technology.

Jim: In other words, TV boxes that let you do all sorts of new and wonderful things when it comes to choosing and recording your favorite programs.

Mike: That’s right. But I would watch this stock like a hawk. And I’m not really wild about Henry Yuen’s propensity to, well. . .

Jim: Get his?

Mike: Right. But at the moment, I’d buy the stock.

Black & Decker (BDK)

Mike: Now, here’s a stock for the man’s man.

Jim: Right, power tools and lawn mowers. But Black & Decker actually makes lots of other items. Things like locks, fasteners and household appliances such as the Dustbuster. In fact, one of its units is Price Pfister in the San Fernando Valley, which makes bathroom fixtures.

Mike: Faucets and knobs.

Jim: Yep. Another unit is the DeWalt line of high-end power tools aimed at the serious builder, and it’s been a smash. So put together, Black & Decker does about $4.5 billion a year in sales, with about 40% of that overseas. But right now, it’s in the middle of a giant restructuring.

Mike: True. This company was a big disappointment for much of the 1990s, so it’s been reorganizing to cut costs. That’s meant closing plants, cutting jobs, getting rid of non-core assets.

Jim: Don’t you just love that phrase, non-core assets? To me, it’s executive code that would translate into: “You know that big diversification plan we touted? It flopped. So now we’re cutting our losses.”

Mike: Until they decide to diversify again seven or eight years from now.

Jim: Right, when they fall in love again with “synergy.”

Mike: It’s about the same schedule that the public schools follow, you know, when they go from being centralized to decentralized and back again. As I learned from seeing “The Lion King” on Broadway, it’s part of the great circle of life.

Jim: Anyway, Black & Decker needed to do something. It never quite recovered from gobbling up Emhart Corp. for $2.7 billion a few years ago, and it still has far too much debt. It’s also had management problems. Just recently, the head of its flagship power-tools division, Joseph Galli, left in a huff because it was clear he wouldn’t get the chief executive’s job as soon as he liked.

Mike: In fact, the current CEO, Nolan Archibald, is pretty much in the prime of life, being 55 or so, and he’s not ready to give up the job. If you want to be uncharitable, he saw Mr. Galli as a threat. If you want to be charitable, he saw him as unnecessary.

Jim: So Mr. Galli was sent packing. But despite that hassle and Black & Decker’s lackluster performance--the shares trade for about the same price as they did a year ago--I’d still buy this stock.

Mike: Me too.

Jim: Here’s why I like it: Black & Decker still has great brand recognition, and it’s a marketing powerhouse in its field. It’s also adept at rolling out popular new products, such as its flexible SnakeLight flashlights or VersaPak system of batteries.

Mike: They’re batteries that can be used interchangeably in different Black & Decker tools. You know, the laptop-computer industry could take a page from that book.

Jim: Exactly. Also, this restructuring will keep cutting the company’s debt costs, which will generate more cash flow to help Black & Decker’s cause. Plus, with the stock in the high-50s, it trades for only 18 times ’99 earnings, so it’s pretty cheap.

Mike: Don’t you love its swarm teams?

Jim: You’re referring to its teams of salespeople?

Mike: Super salespeople, maybe. These teams go out with demo models of everything Black & Decker makes. They visit construction sites and other places where big men gather, and show the items off and lend them out. Black & Decker takes selling seriously and it’s very good at it.

Jim: Places where men gather?

Mike: In fact, what’s interesting about its DeWalt line of professional power tools is that, for all of the whining that U.S. companies do about Japanese competitors stealing their markets, DeWalt climbed past Makita of Japan and took over as No. 1 in the U.S.

Jim: Now I really wish Black & Decker had finished this restructuring earlier, because then it would have taken better advantage of the strong housing and construction markets we’ve had in recent years. Even so, this company and its stock are poised for a nice jump in the months ahead.

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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.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Gemstar, Monday: $66.13

Black & Decker, Monday: $58.50