Takeover Talk Sustains Lehman Bros.; Amdocs’ Performance Gains Momentum
Lehman Bros. Holdings (LEH)
Jim: Buy
Mike: Buy
Mike: Up first today, Jim, is one of the best-known brokerage houses on Wall Street.
Jim: Yep, the House of Lehman, which traces its roots to the 19th century.
Mike: Which brings up an interesting point. This firm has morphed into so many forms in the last few years, under so many types of ownership, that it almost belongs in the cast of “X-Men.”
Jim: This is one of the oldest of what used to be called the “wire houses” on Wall Street, started by German-Jewish immigrants in the days when most established brokerages were so-called white-shoe firms.
Mike: Which wouldn’t let Jews through the doors.
Jim: It’s interesting that for all of the permutations it has gone through, Lehman still stands as an independent brokerage.
Mike: Among other things, this company went in and then out of the revolving door at American Express, which owned it for a few misbegotten years. A key question now is whether there’s another such door in Lehman’s near-term future.
Jim: Well put. There’s no brokerage that is the subject of more takeover speculation. Frankly, I’m of the opinion that it is only a matter of time until Lehman is acquired by a larger brokerage or a bank.
Mike: Speculation, at least lately, has tended to focus on potential buyers among big foreign banks, which have been snapping up U.S. brokerages this year.
Jim: I see Lehman as a strong buy for two reasons. First, I do believe the firm will be acquired, probably within the next 12 months. Second, even if it isn’t acquired, Lehman is running on all cylinders and posting strong operating results.
We should note that the firm says it plans to stay solo.
Mike: Do you believe them?
Jim: No. That’s what these guys always say, right up until the moment they sell out. The point is, the name of the game for these Wall Street firms is capital--having the money to do all the things they want to do globally in underwriting, trading, etc. If you are going up against the likes of Merrill Lynch and Goldman Sachs, you must have the capital to compete. And I suspect Lehman will decide sooner or later it needs the deep pockets of a bigger institution.
Mike: I agree with you. And continuing my recent record of being the last bull on Wall Street . . .
Jim: Boy, I’ll say. I believe you’ve put buy recommendations on the last 10 stocks we’ve reviewed.
Mike: Well, when better than at a market bottom? Assuming this is the bottom, which it may or may not be. Lehman shares are now off 27% from their recent peak. I think that Lehman, its protestations notwithstanding, is poised to be taken over. That prospect is certainly going to support its stock price from here.
Beyond that, Lehman has got its hands in every market that a big investment firm must be in, and it has done very well.
Jim: Good point. We should mention some of its key markets.
Mike: Well, Lehman is very strong in bond trading. Now, if interest rates come down, as many people think will happen as the economy slows, you may see more companies and municipalities floating new bonds. That’s good for Lehman.
Jim: Lehman also is strong in investment banking--not just helping companies raise cash by selling stock or bonds, but also providing merger advice. Lehman is also big in the private equity market, bringing big investors together with capital-needy companies.
Mike: So it’s doing a lot of things right.
Jim: Now you know, Mike, one of my gripes about brokerage stocks is that they seem so tied to the ups and downs of the stock market. Which is why I have shied away from a couple of brokerage stocks in the past.
Mike: You’re changing your tune?
Jim: This time, yes. Over the last five years, while the blue-chip Standard & Poor’s 500 index has gone up 147%, Lehman stock has soared 580%. Yet it still trades for only about 10 times the company’s expected per-share earnings for 2000. So the stock not only has a great track record, it’s also cheap and a screaming buy.
Amdocs (DOX)
Jim: Buy
Mike: Buy
Jim: Our next stock requires a little disclosure from you, no?
Mike: Yes, I’m a shareholder in Amdocs. Though it’s not worth bragging about being a shareholder in anything these days. In fact, I’m underwater at the moment with my Amdocs shares, by not a little bit.
Jim: I can see why. This stock was trading above $90 this spring, but it’s now in the mid-$60s.
Mike: Well, I didn’t buy it at $90, and I didn’t buy it at $50, either. But I still like the stock.
Jim: So what’s Amdocs’ story?
Mike: It has a very strong franchise. Amdocs develops programs to help telecom companies bill their customers. Now, because we’ve all been getting phone bills for as long as we’ve known how to stick an index finger in the phone dial, you may think that ain’t much.
Jim: Actually, given how phone bills look today, I wonder if Amdocs and its ilk couldn’t do a better job. You looked at your PacBell bill lately? You almost need a tutorial before you can sort it out.
Mike: The point is, the telecom industry has evolved from being your grandfather’s phone company to the confusing melee of service providers we have today. You can now pick your telecommunications carrier almost on a call-by-call basis. You can call somebody on your cell phone. You can call somebody on your home phone and use your standard long-distance carrier. You can dial a 10-10 number and use another carrier.
Jim: True, I’ve done that. So they all need Amdocs to pull together the billing, right?
Mike: To be more accurate, the only way any of these telecom companies is going to make money is by offering you--the dialer--a whole bunch of services, many of which you haven’t seen before. Anything from Web access on your wireless phone to call waiting to caller ID, you name it. And the phone company must know which of these services you’re using and how much to bill you for it.
That’s where Amdocs comes in. Now if you look at the roster of customers that uses Amdocs--
Jim: It’s very impressive.
Mike: You begin to see the scale of the market. It’s got Pacific Bell Wireless. It’s got SBC Communications--
Jim: The parent of Pacific Bell.
Mike: Right. It’s got Vodafone. It’s got Cell Comm, which is an Israeli company, which we’ll get to in a minute. It’s got British Telecom.
Jim: We should also note that SBC, in addition to being a huge customer, is a big stockholder of this company, with a stake of about 21%. But you’re right, this company has built momentum by signing up some marquee names.
Mike: As we speak, the telecom sector is in very bad odor among investors. It had a great run starting about a year ago but many telecom stocks have recently plunged. That’s because telecom companies have a lot of capital spending ahead of them, but it isn’t clear if they all can afford it. And if the telecom firms catch colds, will their suppliers get tuberculosis?
Jim: We know their investors are already sick.
Mike: Even so, there’s no question that the telecom business overall is going to grow. Many of these companies will have more users and will need a way to charge users for more and different things. So Amdocs has a franchise that is going to grow no matter what you think of the rest of the telecom industry.
Jim: I agree, Amdocs is a very good stock to own. Look at the company’s own performance. It’s posting earnings and sales gains in the high double digits. It also has an excellent balance sheet.
Mike: Now there’s one other aspect of Amdocs that’s relevant at the moment. This is basically an Israeli company. It was founded in Israel, but its headquarters nominally is in St. Louis, because like many other Israeli companies, Amdocs perceived that it needed to be close to its main market, which is the United States.
Jim: And they picked St. Louis?
Mike: In any case, Avi Naor, Amdocs’ chief executive, lives in Israel and the research and development is done principally there. I suspect Amdocs’ share price has been hurt somewhat in recent weeks because everyone fears what’s happening in the Middle East. But I think that’s misplaced.
Jim: I do, too. I’d go with Amdocs’ performance, which is very, very impressive. Consider that just three years ago, its sales were about $290 million. In its fiscal year that ended Sept. 30, sales were expected to hit $1 billion. Even though this hasn’t been a great investment for you so far, Michael, Amdocs’ current price makes a great entry point for an investor.
Mike: Well, I’m a long-term stockholder.
Jim: Good, you have to be in this case. The stock, even though it’s off its peak, still trades at a rather lofty 77 times Amdocs’ estimated 2000 earnings per share. Even so, that’s a reasonable premium to pay for a company with this kind of rapid sales and profit growth.
*
Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment.
