Circuit City Shares Not a Best Buy; Verizon Payoff on Horizon
Circuit City Stores (CC)
Jim: Don’t buy
Mike: Don’t buy
Mike: This company reminds me of those old commercials where they’d ask: “Is this a breath mint or a candy mint?”
Jim: I can’t wait to see where this goes. Your meaning?
Mike: Well, the ads used to say “both,” but to me Circuit City might be neither. The merchandising strategy at this company seems to be a mystery to its own management. Is it an appliance retailer or an electronics store or something completely different? I’m referring, for starters, to its recent decision to stop selling major appliances and focus on its core electronics goods.
Jim: Right, plus Circuit City now plans to change how its people actually sell the products to customers when they walk in.
Mike: We’ll get to that. Let me also note that this company had the brainstorm one day that since it sells TVs and stereos and refrigerators to people, what would make more sense than selling them used cars?
Jim: We’ll get to that too.
Mike: Boy, we’ve got a lot to get to. Where do we start?
Jim: Well, Circuit City was one of the original “big box” retailers for consumer electronics . . .
Mike: Except all the boxes were someplace out in back.
Jim: We’ll get to that too! Anyway, the chain now has more than 600 stores, but for the past three years this outfit and its stock have been short-circuiting all over the place. I attribute much of that to a competitor called Best Buy, which stole a lot of Circuit City’s thunder.
Mike: That’s right. The stocks of these two retailers have diverged the way a muon particle diverges from an atomic nucleus.
Jim: Took the words right out of my mouth. In the last three years, Circuit City’s stock is up about 50%, but Best Buy’s stock has skyrocketed 22-fold.
Mike: And what’s mystifying is that these companies basically sell the same stuff, so on the surface the stores should be interchangeable. Yet I would go to Best Buy even though there’s a Circuit City just three paces away.
Jim: Why?
Mike: Best Buy seems to have more merchandise, the prices are better and it’s a much easier shopping experience. Which brings us to one of those things we promised to get to.
Jim: You’re referring to how Circuit City kept most of its products in the back, with the stuff up front just for display. So if you bought, say, a portable telephone, you had to stand there while one of the salespeople went to fetch it.
Mike: Well, first you had to track down a salesperson, wrestle him to the floor, drag him by the ear to the stand where your product was displayed, send him out back to get it and then wait while you tapped your foot in frustration. What is this?
Jim: It’s ridiculous, that’s what. So now Circuit City says it’s doing away with all that nonsense, and it’s getting out of big appliances. That business accounted for about 14% of Circuit City’s total sales, but it was getting ripped by the likes of Home Depot, Lowe’s and Sears, Roebuck.
Mike: Circuit City was also shyer about offering those aggressive promotional deals on appliances that are so common elsewhere--you know, no payments for 18 months, and so on. Yes, they’re costly, but they move merchandise. Circuit City decided it was above all that, and so its sales languished. Now guess what? It’s doing the same promotions, I guess to clear out what appliance inventory it has left.
Jim: Circuit City also is remodeling a lot of its stores, which won’t come cheap. And there’s that other division we promised we’d get to: CarMax. It’s a chain of some 40 superstores that sells used cars, and it’s majority owned by Circuit City. The minority interest is held by the public, and CarMax’s stock symbol is KMX. But I don’t see this operation as a big growth engine for Circuit City.
Mike: No. Although CarMax is modestly profitable--I use modest with a lowercase “m”--I’m wondering if the used-car business is much good these days in any case, given how much money people have and how aggressively new cars are being marketed.
Jim: The other day CarMax actually raised its earnings and sales forecast, which gave its stock a bump. In fact, it’s climbed all the way to $4.50 a share from a paltry $2 or so. But as for Circuit City’s stock, it ran up nicely after the holiday selling season and then dropped like a stone. At $26 or so, it’s lost more than a third of its value so far this year. And I wouldn’t buy it.
Mike: Me neither. There’s reason to be nervous going forward, because this sort of retailing isn’t only seasonal, it’s cyclical.
Jim: Meaning it varies with the state of the economy.
Mike: Right, and it’s not a bad bet to say we’re closer to the end of our strong economic cycle than to the beginning. The star of this group is Best Buy, which we’ve recommended. Circuit City has been a laggard, and unless you believe lightning is going to strike and it’s going to get a fast turnaround, I wouldn’t buy the stock.
Verizon Communications (VZ)
Jim: Buy
Mike: Buy
Jim: Now, Mike, here’s a telecommunications colossus that seems to be tripping all over itself.
Mike: Yes, and you know what? I get great satisfaction from watching the slide in this stock.
Jim: How uncharitable. But why?
Mike: It’s not only because I’m a great union supporter and Verizon Communications was involved in a bitter fight with communications unions--
Jim: Right. Some 87,000 workers went out on strike against Verizon two weeks ago, although the majority of them returned to work on Monday after reaching a settlement with the company.
Mike: --but also because the lower the stock goes, the more of a screaming buy I think it is.
Jim: I’ll tip my hand up front too. I’d buy this stock for the long term.
Mike: Verizon, of course, is the offspring of a merger between Bell Atlantic and GTE, the big local phone companies, and includes a joint venture with Vodafone AirTouch for domestic wireless services.
Jim: And now Verizon’s wireless operation is the largest in the United States, with some 25 million customers. I’m one of them.
Mike: Really? How’s your service?
Jim: Reasonably good.
Mike: High praise indeed. “Reasonably good” is about as good as any wireless service gets, as far as I’m concerned, Jim. Anyway, Verizon’s also the largest local telephone company in America, with 60 million lines.
Jim: But I think people are having trouble getting their hands around this company and its outlook, and consequently its stock.
Mike: Give them time. The first ads featuring this bizarre new company name appeared only a couple of months ago. Heck, it takes six weeks for people to learn how to pronounce the damn thing. Rhymes with “horizon,” by the way.
Jim: Thank you. But the stock has lost 20% of its value since the name change on July 3.
Mike: Go for it, let it lose more! Over time this is a good buy. This company has a huge market share, its management has experience in combining regional telephone networks--after all, Bell Atlantic had already absorbed another of the old Baby Bells, NYNEX, and did pretty well with that. This is a good business.
Jim: Unless you happen to be AT&T.;
Mike: On the evidence, this management is smarter than AT&T;’s and certainly doesn’t seem to suffer as much from the legacy of its monopolistic past. This stock, now in the low $40s, is depressed in part because of the strike. But that enhanced the buying opportunity. And guess what: There’s a dividend!
Jim: And a good one, a 3.6% dividend yield that will keep you company while Verizon sorts out its merger and realizes the efficiencies it expects. I’d buy this stock for the long term, though. I don’t think it’s going to reward you quickly.
Mike: I see it starting to recover by the end of the year.
Jim: Right now it’s trading for only 15 times its anticipated per-share earnings for this year. Verizon is diversified between wireless and conventional land lines, and it has big overseas operations. Plus, it recently announced it’s buying control of NorthPoint Communications, a high-speed Internet service provider, and although the market didn’t care for the deal, I see that as giving Verizon a stronger play in the broadband arena. All of that bodes well for this stock.
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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.
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).
