An Internet Stock That Isn’t and the Peril in a Lucent Overhang

FedEx Corp. (FDX)

Jim: This outfit started as Federal Express and then created a holding company called FDX, which was the parent of FedEx, and now it has just changed the parent’s name back to FedEx. This name nonsense, to me Mike, points up an identity crisis that’s part of what’s ailing this company, wouldn’t you say?

Mike: Yes. If FedEx stopped worrying about its name and started doing better in the delivery game, it might be much further ahead.

Jim: And we’ll get to that. But first, FedEx stock recently got caught in the Internet frenzy--and came out on the wrong end.

Mike: It’s the Internet stock that wasn’t.

Jim: Why don’t you explain.

Mike: Sure. In fact, I have an L.A. Times story here about this episode by one James F. Peltz--hey, that’s you!

Jim: That’s my real job.

Mike: Anyway, the story deftly explains how for a brief, shining moment last year FedEx was seen as an Internet play. The idea was that if everyone was buying merchandise on the Web, someone had to deliver it.

Jim: Go on.

Mike: And who better than the company that pioneered the way to absolutely, positively get it there overnight?

Jim: Except pretty soon everyone discovered that delivering Web-bought goods really wasn’t a big part of FedEx’s business. Most of that business is shipped over two to three days, and thus the bulk of it is handled by United Parcel Service.

Mike: And the U.S. Postal Service. What happened here was that the stock market was looking for a way to play the delivery aspect of e-commerce; at the time, FedEx was the only stock in town.

Jim: Right, but then UPS went public last November in one of the biggest initial public stock offerings in U.S. history. It stole a lot of the thunder from FedEx’s stock. Plus, the slump in FedEx’s stock price began even before UPS went public. People began realizing that this whole Internet buzz surrounding FedEx was mostly hot air.

Mike: Now, it’s true that FedEx is involved in the Internet.

Jim: Big time, but not in terms of shipping books or CDs or auction junk. It primarily uses the Web to help businesses make shipments to businesses, and it’s heavily involved in what’s known as logistics. That’s a dull name, but it basically means FedEx helps companies store and transport their merchandise and supplies--and the Net plays a big role in helping FedEx do that, too.

Mike: Well, you don’t have to have a sexy name to be a good industry. I mean, look at waste hauling!

Jim: Or auto parts.

Mike: Look, here’s what’s interesting to me: The Internet might be a key to FedEx’s future, but it’s also a threat, especially to the segment that FedEx pioneered and once owned almost outright--overnight delivery of documents.

Jim: You’re talking about e-mail, of course.

Mike: Right, you take a document, format it with pictures and what have you, and shoot it to your correspondent via e-mail. In fact, I delivered my entire book to my publisher that way.

Jim: You never miss a plug. Anyway, this stock performed admirably in recent years, though it trailed the broader market somewhat. But it’s been stuck in the trenches for the past 12 months, having risen only 7% or so.

Mike: And now it’s in the low $40s, or about 19 times its expected per-share earnings for its fiscal year ending in May.

Jim: So what’s your call?

Mike: I admire FedEx as a company. I think its chairman and founder, Fred Smith, made a real difference in American business when he created Federal Express some 25 years ago. And it’s entirely possible that the company will be able to remake itself to adjust to all of the problems and changes in its market.

Jim: But ...

Mike: That being said, I don’t think FedEx is there yet, and I’d pass.

Jim: Me, too, and let me use one simple statistic to help explain why. Despite all of the changes that FedEx has gone through, it’s still generating the same earnings power it had a decade ago. It earns between 3 and 4 cents per dollar of revenue, after tax. Yet now it faces the stiffest competition in its history from UPS and others. What does that say about its growth prospects?

Mike: There is the logistics angle.

Jim: Yes, but every trucking and transportation firm in the country seems to be rushing into that market.

Mike: There really is something amazing about FedEx. A quarter-century ago, Smith was one of the most forward-looking executives in American business. Federal Express saw a new market and seized it. Now, already, it’s in danger of becoming a dinosaur.

Vitesse Semiconductor Corp. (VTSS)

Jim: Next we have Vitesse Semiconductor, which is based in our backyard in Camarillo, Mike, and it’s one of those companies they say gives the “GaAs” to the world of technology.

Mike: Now, our readers who hold engineering degrees are probably going to chuckle when they read that esoteric pun, but we’ll have to explain it.

Jim: OK. GaAs is chemical-notation shorthand for ...

Mike: Gallium arsenide, which is the main component in the chips that are Vitesse’s main business. In contrast to conventional silicon chips, these are super-fast processors, and their biggest use at the moment is in telecommunications.

Jim: Right.

Mike: By the way, is there anything you’d like to disclose about Vitesse?

Jim: Only that I owned a few shares last year and made a little money on it. But that shouldn’t surprise anybody. From about 1992 to ’96 this company was really a little outfit and the stock went nowhere. And then, boy, in ’96 the world came to Vitesse and some of these other gallium-arsenide companies. Vitesse’s stock has since soared like a rocket, and split a few times.

Mike: And in contrast to FedEx, with its price-to-earnings multiple of 19, Vitesse has one closer to 80.

Jim: And that’s probably its biggest drawback.

Mike: There’s also the fact that this is a company with a limited number of customers, which makes it very vulnerable to a downturn by one of them--say, just to pick a name out of a hat, Lucent Technologies.

You know, for the very first time in my life, when I was researching Vitesse I read the phrase “Lucent overhang.”

Jim: That’s because when Lucent announced a month or so ago that it was suffering a slowdown in its business, Vitesse started sneezing. Now, look, I could have made the argument two years ago that this stock had gotten ahead of itself and shouldn’t have been bought.

Mike: And you would have left a bushel of money on the table.

Jim: Exactly. But I still wouldn’t buy this stock today, because it’s just too rich. If it does pull back, I’d be more inclined to buy it. But look what happened to Lucent recently, and Lucent is many times Vitesse’s size and has a lot more lines of business.

Mike: Hmmm. In contrast to you, the investment principle that I would apply to Vitesse is the old respected one of in-for-a-penny, in-for-a-pound.

Jim: Meaning?

Mike: Meaning that we liked Lucent--which I now own, by the way.

Jim: True. I especially like Lucent today, because it’s lost a third of its value in recent weeks, making its price a lot more reasonable.

Mike: I liked Lucent before that, and I still like it. And it seems to me that if you accept that the business of Lucent and Cisco Systems and their ilk will grow like wildfire, then you should like Vitesse, which is producing some of the basic building blocks of their networking and telecommunications technology.

Jim: You make a valid point. I’m just going to diverge with you just a little bit ...

Mike: You mean you’re diverging a lot. You’re saying no and I’m saying yes.

Jim: Well ...

Mike: Can’t diverge much more than that.

Jim: Look, Lucent stubbed its toe and lost a third of its value in less than a month.

Mike: Right. But we’re on the back end of that now.

Jim: If Vitesse had lost a third of its value in the past month, I would probably be recommending the stock. But it hasn’t, and so to me it’s still overpriced.

Mike: In any event, Vitesse will be able to make up any Lucent overhang through its relationships with other customers.

Jim: But you’ve already conceded that Vitesse has a limited number of customers!

Mike: Yes, but Vitesse is expanding its product line. We talked about gallium-arsenide chips, but it’s also going into CMOS processors, which are based on the more conventional silicon oxide technology going into most of our computer chips.

Jim: To borrow your old phrase, this is a case where I love the company and I’m just not wild about the stock, at this price anyway.

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.” 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).

Federal Express

Monday: $39.56

Vitesse Semiconductor

Monday: $43/50