Hitting the Brakes at DaimlerChrysler; TI’s Chip Bet Pays Off

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

DaimlerChrysler (DCX)

Jim: Don’t buy

Mike: Don’t buy

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Mike: This is a company, Jim, whose story now appears to be, “It seemed like a good idea at the time.”

Jim: No kidding. You’re undoubtedly referring to November 1998, when the German company that makes Mercedes-Benz cars, Daimler-Benz, bought No. 3 U.S. car maker Chrysler for $36 billion.

Mike: It was the largest industrial merger up to that point.

Jim: When the merger was announced the two auto makers made it sound as if the new company was going to be the Mercedes-Benz of corporate efficiency, technology and global reach. Instead, what we have here is a rusted, beat-to-hell Plymouth.

Mike: Yeah, one of the remarkable facts about DaimlerChrysler is that the combined company’s total stock market value today is less than Daimler’s own market value before the merger.

Jim: Wall Street is so fed up with this company that the stock has plunged from about $100 a share at the time of the merger to the low $50s today, wiping out nearly $50 billion in market value. Its stockholders must feel like they were carjacked. From their standpoint, this has so far turned out to be one of the worst mergers in corporate history.

Mike: DaimlerChrysler’s chairman, Juergen Schrempp, loves to go around saying that the stock market isn’t giving his company enough credit for what it has done, and for all its great potential.

Jim: Please.

Mike: I look at this company and I see missteps that have mounted faster than the repair bills for my 1995 Chrysler minivan, which was the worst vehicle I’ve ever owned.

And that’s not a random complaint--one of DaimlerChrysler’s problems is that its Chrysler offerings are losing whatever luster they used to have. For one thing, their models are getting very long in the tooth. To move them off the lots, the company is resorting to rebates and other incentives, which are costing them plenty.

Now the question is: Will the new models Chrysler has in the pipeline rescue this company before the economic cycle turns down and many people stop buying cars?

Jim: The Chrysler side of DaimlerChrysler, as you say, is one of the biggest problems here. Just last week, in fact, Chrysler said its U.S. sales for July tumbled 21% from a year earlier. By contrast, those expensive Mercedes-Benz cars, with their fat profit margins, are still selling briskly.

Yet it’s hard to see Chrysler mounting any sort of strategy to better challenge rivals General Motors and Ford.

Mike: Especially while the economy is still relatively strong.

Jim: Exactly.

Mike: Now, another reason Daimler bought Chrysler was to tap into what was supposed to be Chrysler’s great technology. But was that ever really a tremendous asset for the company, given that Chrysler nearly went bankrupt in the late 1970s and was saved by only a huge U.S. government loan? I mean, how much could that technology be worth to Mercedes?

Jim: Another reason for the merger was to place Daimler in more segments of the global car market, not just the luxury corner.

Mike: But that broadened car line just means the company is selling Chryslers for less money with slimmer profit margins.

Jim: Right. Finally, Daimler expected to save huge sums--something like $3 billion a year--by eliminating overlapping overhead costs, boosting its purchasing power with suppliers and so forth. But that hasn’t happened yet, either.

Mike: You’re right, that was a big part of the pitch. But they’ve discovered that you can’t really merge these two companies into one. It’s like mixing chalk and cheese. One side speaks--guess what?--German, and the other side is as American as apple pie.

So now what they’re talking about is extracting cost savings by cutting back on both ends. Great. That will give us a Chrysler where there are fewer people on the job, fewer happy executives and auto workers and, meanwhile, fewer people at Mercedes as well. This is a recipe for a car wreck.

Jim: It seems clear neither of us would buy this stock.

Mike: My Chrysler minivan was a crummy enough vehicle when it was new. The last thing I would contemplate is buying another one, especially with a stripped-down corporation behind it. So why would I want its stock?

Jim: I actually think Schrempp is a smart guy and might reach most of his goals some day. But not any time soon, and if you buy the stock you’re going to fight the tape for a long time.

Mike: Looking at this stock’s chart, I’ll have to admit I’m sorely tempted to step in and buy the shares, because they’ve been beaten up so badly. But what terrifies me is that DaimlerChrysler is actually at the crest. If it can’t move metal with rebates in what remains a generally strong car market, when will it?

And if the Federal Reserve isn’t finished raising interest rates--and thus car loan rates--one wonders how much worse the sales picture could get for DaimlerChrysler.

Jim: Not only that, but DaimlerChrysler’s stock is still selling for nine times its expected per-share earnings for 2000. That sounds cheap, but unbelievably, that’s a higher price-to-earnings multiple than Wall Street is awarding GM and Ford. So one might even say that despite its collapse, DaimlerChrysler’s stock is still overpriced!

Texas Instruments (TXN)

Jim: Buy

Mike: Buy

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Jim: I must be getting old, Mike--

Mike: Just older, Jim.

Jim: --because the first thing that Texas Instruments makes me think of is those calculators--which it still makes--that had so many buttons that I never really bothered to try to figure out how to use them.

Mike: In the old days, those calculators used to cost about as much as a personal computer does today. Now they just about give them away with Cracker Jacks.

Jim: Exactly. But of course, TI’s main business is chips. Semiconductors, that is.

Mike: It’s just about the only business it has kept.

Jim: And even in that arena, it has kept only certain kinds of chips. Texas Instruments is an example of a large company that made a big gamble that paid off. It decided that a key area of focus would be so-called DSP chips, or digital signal processors. Even though these chips have been around for a while, they are now used in all the wireless gadgetry that is becoming so commonplace today.

Mike: DSPs have been called the eyes and ears of computing devices. These are the chips that read images, sounds and other media signals and interpret them for their host device, whatever it is--your car, cell phone, camera, PC--and then help the device determine what to do, whether it’s to display or manipulate an image, play a music clip, pass on a call to you or deliver your creditors a busy signal.

Jim: TI is the leader in this business, with about 45% of that growing market. To get to that point, TI got rid of a lot of unrelated businesses in the last few years, businesses that had combined annual revenue of some $4 billion. And it was a deft move. The stock has been gangbusters, soaring more than 160% over the last 18 months.

Mike: It has handily outpaced the rest of the chip industry and the Standard & Poor’s 500 index. In the last year, despite the big tech stock plunge in spring and another slide in July, TI shares still have returned about 60%.

It even pays a dividend. When’s the last time we had a stock like that?

Jim: A tech stock that pays a dividend? You’re kidding me. Though the funny thing is that TI’s biggest business in terms of revenue continues to be non-digital, or analog, chips.

Mike: That’s because digital chips need analog chips to help them work.

Jim: Precisely. And thus the analog business gives TI’s product line the breadth that a lot of DSP customers need and like to get from one vendor. TI also just enhanced its analog unit by agreeing to buy a company called Burr-Brown for nearly $8 billion in stock. That outfit makes converters, amplifiers and other esoteric gizmos that complement the chips. The deal would make TI a big player in that area as well.

So do you like the stock?

Mike: I do like the stock, in part because it hasn’t had a happy time of it lately. After all, this is a volatile technology stock. It sank 13% in the two weeks ended Friday, as chip shares in general sold off. On the other hand, it’s still ahead of the game for the year. I think this is a strong company, one that has made the right decisions; it has the bull by the horns in the market for DSP processors.

Jim: I agree.

Mike: TI is also a leader in digital photographic technology. It’s a forward-looking company that reminds me in some ways of Hewlett-Packard, which has also had its problems lately. But I like TI’s odds.

Jim: I do, too. I like the stock because the price has dropped back. After peaking in March, it has lost about 40% of its value. It’s now trading at about 47 times estimated 2000 earnings per share, which for a highflying chip stock is relatively attractive.

I also agree the bet on DSP chips was a smart one. That area is only going to create a bigger jackpot down the road as the whole world goes digital. And I think TI is right smack in the middle of it.

Mike: That’s right. It’s sort of the anti-Napster, isn’t it? This is a company that actually makes money from a technology that pulls digital material out of the ether.

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes

.com) covers the markets and corporate financial trends. Hiltzik (michael

.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

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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).