Nanotechnology

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>>> GE Bulls Finally Have More Than Hope on Their Side
And that’s a nice change.


Bloomberg

By Brooke Sutherland

January 29, 2020


https://www.bloomberg.com/opinion/articles/2020-01-29/ge-earnings-justify-bulls-faith-in-turnaround


Now, GE just needs to keep the momentum going.

General Electric Co.’s shares have traded more on hope than hard math over the past year, but it looks like CEO Larry Culp’s turnaround efforts are starting to yield real results.

Free cash flow is the key number to watch when the company reports earnings, and GE said Wednesday that it generated $2.3 billion from its industrial businesses over the course of 2019. That exceeded the high end of GE’s guidance range, which was updated twice over the course of the year from an initial call in March for free cash flow to be at best zero. Was Culp sandbagging expectations, or setting a low bar to start with and artfully managing to a positive surprise? 1 It’s a fine line, but either way, the strategy worked. GE shares climbed more than 50% in 2019 and shareholders were still wowed enough by Wednesday’s results to send the stock up an additional 10%.

A lot of that optimism has to do with GE’s forecast for 2020. The company is projecting free cash flow will at least roughly match 2019’s performance and potentially rise to as high as $4 billion. That would still fall below what GE generated in 2018 amid depressed results, but would represent significant progress nonetheless, and exceeds most analysts’ estimates. The company plans to hold a meeting with investors this coming March to lay out its outlook in more detail. On the earnings call, however, Culp let a few details slip.

The beleaguered power and renewables units will likely continue to burn cash in 2020, with power improving from the negative $1.5 billion in cash flow in 2019 and renewables seeing a deterioration from the negative $1 billion the unit saw last year. Aviation will be flat to up from the $4.4 billion level of 2019, with the return of Boeing Co.’s 737 Max the biggest source of variability. That leaves health care as the one question mark. We already know the unit will be losing cash flow from the biopharma business that’s being sold to Danaher Corp. Without biopharma, the health-care division would have generated about $1.2 billion in cash flow in 2019 and GE had previously guided for an increase in 2020. Taking all of that together, GE should be able to fall well within its guidance range, but the potential to rack up a similar string of outsize positive surprises is arguably more limited this year.

Roaring Fourth Quarter

A surge in free cash flow at the end of the year put GE ahead of its goal for the year and lends support to its 2020 outlook

NOTE: Initial 2019 outlook and 2020 forecast reflects the midpoint of the range.

Boeing’s Max is the biggest source of volatility for GE’s guidance, Culp said on the earnings call, and the company is currently modeling for a mid-2020 return of the jet, in line with Boeing’s most recent “best estimate.” Boeing also reported earnings today and, based on that timeline, announced a fresh $5.2 billion in charges tied to compensation for airlines and additional production costs. The company also said it anticipates $4 billion in “abnormal costs” for restarting production of the jet. That brings the total bill for the Max crisis to more than $18 billion, before accounting for any fines or legal penalties from numerous lawsuits and government investigations.

GE makes the engines for the Max through its CFM International joint venture with Safran SA and expects to see its shipment rate cut in half in 2020 amid the production halt. Asked about the $1.4 billion drag on free cash flow from the Max grounding in 2019, outgoing Chief Financial Officer Jamie Miller implied free cash flow would have been that much higher without that impact. In that case, arguably 2020 results could also be higher, but there are a lot of moving pieces here and it feels like GE is being more prudent than deliberately conservative.

Cart Before the Horse

GE has outperformed many industrial peers. But it's expensive relative to even it's rosier prospects

The shift from optics to fundamentals is a welcome one. Culp’s task now is to keep the momentum going. In contrast to this time last year — when expectations could hardly have been much lower for GE — there’s now a fair amount of optimism reflected in the shares. After the stock pop on Wednesday, the company is currently valued at about 28 times its expected 2020 industrial free cash flow of at most $4 billion. That compares with about 20 times at Honeywell International Inc. and about 18 times for Emerson Electric Co. Put another way, much of GE’s anticipated progress in this multi-year turnaround is already priced in to the stock. But so far, Culp has proved the skeptics wrong and the optimists justified. So maybe there’s more room yet for hope.

To put that in perspective, consider that about a month before GE gave its initial comments on 2019, uber-bear JPMorgan Chase & Co. analyst Steve Tusa was forecasting $2.5 billion in industrial free cash flow for 2019 -- meaning the actual results are actually weaker than what even he had expected heading into the year.

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>>> IBM’s New CEO Is Mastermind Behind Cloud Strategy for Growth


By Olivia Carville

January 31, 2020


https://www.bloomberg.com/news/articles/2020-01-31/ibm-s-new-ceo-is-mastermind-behind-cloud-strategy-for-growth?srnd=premium


Krishna takes the reins after eight years of shrinking revenue

Big Blue has lagged behind nimbler rivals in cloud computing


In July of 2017, International Business Machines Corp. executive Arvind Krishna walked into a routine meeting with senior leaders and delivered a surprise pitch that changed the course of the iconic 108-year-old company’s future.

For months Krishna, the head of IBM’s cloud computing division, had been thinking about a way to connect clients’ most important data, which was often held on private servers, to public cloud servers run by others including IBM, Amazon.com Inc. and Microsoft Corp. Finally he proposed a way, creating IBM’s so-called hybrid multi cloud strategy.

The company was coming off of 19 consecutive quarters of shrinking revenue and lagging far behind rivals in cloud computing, the lucrative new field in business technology, when Krishna stood in front of a crowd of executives, including Chief Executive Officer Ginni Rometty, at the company’s Armonk, New York, headquarters. He ran a live demonstration of some of the hybrid cloud products from his Mac laptop.

“I showed an early version, not yet complete, of what we could do to about 60 or 70 senior leaders from inside IBM,” Krishna said in an interview last year. “I think the light-bulb went off for everybody.” The first question he received from the group was: when will it be ready to go to market?

IBM launched its hybrid cloud product three months later. Rometty called it a “game changer” for the company. Last year, at Krishna’s suggestion, IBM acquired open source software provider Red Hat for $34 billion to further that vision -- a strategy some Wall Street pundits believe will finally breathe life back into Big Blue.

On Thursday, IBM announced that Rometty would be stepping down after almost 40 years at the company and Krishna would be taking over. Though generally respected by her peers, Rometty, 62, inherited many challenges that she was ultimately unable to overcome. During her tenure, revenue and IBM’s valuation shrank by 25%, in opposition to other tech companies and the broader market, which have seen spectacular gains. Rometty, who will step down as CEO effective April 6, will stay on as executive chairman through the end of the year.

Restoring IBM even part way back to its glory days will require a radical transformation, steering the company away from its slow-growing unprofitable legacy businesses and toward the future of modern computing. Analysts say Krishna is up for the task.

Krishna, 57, has spent his entire career at IBM and witnessed the company’s ups and downs as it went from the world leader in computing and IT services to missing the cloud revolution and falling behind nimbler, younger rivals like Amazon.

Krishna’s elevation is reminiscent of the appointment of Satya Nadella, Microsoft’s cloud chief, into the CEO role in 2014. Like Krishna, Nadella also bet big on the cloud and won, boosting Microsoft’s market valuation to more than $1 trillion. IBM shares gained 4.5% Friday after the announcement of the leadership change, valuing the company at about $126 million.

As the new CEO of IBM, Krishna would be a “Nadella-like” leader – calm but deep, firm but unaggressive, said Rishikesha Krishnan, a professor of strategy at the Indian Institute of Management in Bangalore. “If a company intends to make a serious shift or change, he’d be the man.”

Krishnan studied with Krishna at India’s premier engineering school, the Indian Institute of Technology Kanpur. “IQ levels on the campus are high, but even then he stood out as smart and articulate,” Krishnan said.

Soft-spoken, relaxed and accessible, Krishna represents a new leadership style for IBM, which has an entrenched culture of bureaucracy and formalities. On a recent trip to India, he spent hours in the IBM cafeteria chatting to whomever approached him, according to a person who observed the interaction but didn’t want to be named describing a private event. He socialized with team members until the early hours of the morning, answering questions and offering market insights.

Krishna joined IBM in 1990 after studying in Kanpur and obtaining a Ph.D. in electrical engineering from the University of Illinois Urbana-Champaign. With vast industry knowledge and a tendency to speak at a rapid pace, Krishna can be hard to keep up with but is known for a willingness to simplify complex terms.

In an interview last February, Krishna was asked to describe hybrid-cloud computing in two sentences. He gave a thorough and speedy analysis of the intersection between public cloud, private cloud, data centers, applications, existing infrastructure and other technical terms. At the end of his answer, Krishna said: “Now that wasn’t quite two sentences, but it was no more than two minutes.” He then laughed, adding “was that all intelligible?”

IBM’s hybrid cloud strategy was “a long time coming,” Krishna said. “Maybe we should have done it a year or two earlier, but then there’s this question of would the world be ready? I think if we’d done it in 2015 it might’ve been too early.”

Others disagree, saying one of the main criticisms against Rometty was not launching IBM’s transition soon enough. IBM has a lot of catching up to do in the trillion-dollar cloud market where Amazon and Microsoft are far out in front, followed by Alphabet Inc.’s Google. They are all developing similar software in the hybrid-cloud market too. While IBM gained ground with the Red Hat purchase, the fierce competition with such formidable rivals won’t leave much room for error.

Former longtime IBM employee and historian James Cortada, a senior research fellow at the University of Minnesota, said hybrid cloud represents the company’s third radical transformation in its history. In the 1950s IBM moved from tabulating equipment to computers; in the 1990s it shifted to software and services; and now hybrid is the future. “Rometty initiated that next fundamental transition or transformation for the company, but that went too slowly for a lot of people,” Cortada said.

Krishna will also benefit from a strong partner in Jim Whitehurst, the 52-year-old CEO of Red Hat who was elevated to IBM president, the first time the company has given an executive that title on its own.

Whitehurst has been running a smaller but much faster growing company at the cutting edge of cloud migration, said Stifel Nicolaus & Co. analyst David Grossman. The combination of the two of them sets up a “very interesting and complimentary team.”

Together, Krishna and Whitehurst bring software to the core of the company.

“Now the two top dogs running IBM are cloud purists,” said Steve Duplessie, founder of Enterprise Strategy Group. “The old IBM died a while ago and they had to change. This lets them remake themselves before it’s too late.”

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>>> GE’s stock soars after earnings, as CEO Culp says turnaround is ‘gaining traction’


MarketWatch

By Tomi Kilgore

Jan 29, 2020


https://www.marketwatch.com/story/ges-stock-soars-after-earnings-as-ceo-culp-says-turnaround-is-gaining-traction-2020-01-29?siteid=yhoof2&yptr=yahoo


GE shares reach 15-month high on heavy volume; BofA analyst Andrew Obin turns bullish on upbeat free cash flow outlook

Shares of General Electric Co. climbed toward a more than one-year high Wednesday, after the long-struggling industrial conglomerate reported profit, revenue and free cash flow beats, and commentary from Chief Executive Larry Culp suggested the worst is behind the company.

After calling 2019 a “reset” year, Culp capped his first full calendar year in charge of GE by saying on the post-earnings conference call with analysts that he was seeing “evidence of momentum” across the company. “Despite areas of volatility in aggregate, we have a positive trajectory in 2020,” Culp said, according to a transcript provided by FactSet.

While 2019 was the “year one” in a multi-year transformation, he said the “lean transformation” was gaining traction this year.

The stock GE, -0.39% shot up 10.0% on heavy volume by Wednesday afternoon, on track for the highest close since October 2018. Volume spiked to 181.8 million shares, more than triple the full-day average of about 55.8 million shares, and enough to make the stock the most actively traded on major U.S. exchanges.

The stock has now run up 42% over the past three months and 51% the past 12 months. In comparison, the Dow Jones Industrial Average DJIA, +0.04% has gained 6.4% the past three months and has rallied 17% the past year.

Bank of America analyst Andrew Obin was quick to turn bullish on GE, citing an improved trajectory for free cash flow (FCF) in 2020 after years of being weak. He said GE’s guidance for industrial FCF of $2 billion to $4 billion this year was “materially higher” than his forecast of $1.8 billion. The FactSet consensus was $1.22 billion.

Obin raised his rating on GE to buy from neutral and boosted his stock price target to $16, which is 24% above current levels, from $12.

“GE’s turnaround will likely have ups and downs, but [the] company is making progress on key FCF drivers,” Obin wrote in a note to clients.

GE also said it expects industrial revenue to grow “organically” in the low-single-digit percentage range in 2020, industrial profit margin to expand organically in a range of zero to 75 basis points (0.75 percentage points) and adjusted earnings per share in the range of 50 cents to 60 cents. The FactSet EPS consensus was 67 cents.

The outlook for 2020 includes assumptions that Boeing Co.’s 737 MAX planes, which have been grounded since March 2019, and which GE builds engines for, will return to service in mid-2020, as per Boeing’s latest guidance.

For the fourth quarter, GE reported net income that fell to $538 million, or 6 cents a share, from $575 million, or 7 cents a share, in the year-ago period. Excluding non-recurring items, such as losses from non-operating benefits costs, BioPharma deal expenses and unrealized gains, adjusted earnings per share rose to 21 cents from 14 cents, beating the FactSet consensus of 17 cents, as industrial profit margin improved to 6.4% from 1.8%.

Total revenue fell 1.0% to $26.24 billion, above the FactSet consensus of $25.67 billion.

Within GE’s business segments, aviation revenue grew 6% to $8.94 billion to beat the FactSet consensus of $8.84 billion and renewable energy revenue rose 2% to $4.75 billion to top expectations of $4.44 billion.

Power revenue nudged up to $5.401 billion from $5.381 billion, but was below the FactSet consensus of $5.478 billion, while healthcare revenue inched up to $5.402 billion from $5.398 billion, to come up shy of expectations of $5.462 billion.

BofA’s Obin said the power business’s performance “was welcome” after a relatively weak third-quarter, while strength in the aviation business also contributed to his bullish view.

GE Capital, which completed asset reductions of about $8 billion during the quarter, and $12 billion in 2019, swung to a profit of $6 million from a loss of $177 million.

CRFA’s Jim Corridore reiterated his buy rating on GE and raised his price target to $14 from $12, saying he believes GE is “making strides” in its business transformation.

“Overall, we think the quarter showed solid improvement, and we think GE is on the right trajectory,” Corridore wrote.

Culp said he was planning to provide a “detailed” 2020 outlook by business segment on March 4, when it holds its investor call.

He also addressed those who may still be skeptical that the reported results for 2019 formed a platform to deliver “long-term profitable growth”:

“This year, much of our substantial progress was in areas less visible to those of you outside of GE,” Culp said. “This starts with how we run the company on a daily basis. We’re in the early days of a lean transformation developing leaders capable of identifying and solving problems alike, establishing standard work and embracing values of candor, transparency and humility.”

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Energy Transfer - >>> Warren Calls On Perry To Step Down From Energy Transfer Board


Bloomberg

By Rachel Adams-Heard

January 17, 2020


https://www.bloomberg.com/news/articles/2020-01-17/warren-calls-on-perry-to-step-down-from-energy-transfer-board?srnd=premium


Democratic presidential candidate calls board seat ‘unethical’

Ex-Energy Secretary Perry was appointed to board on Jan. 1

Democratic presidential candidate Elizabeth Warren is calling on former U.S. Energy Secretary Rick Perry to step down from the board of the general partner that controls Dallas-based pipeline giant Energy Transfer LP.

In a letter dated Jan. 16, Warren said Perry’s decision to join the board is “unethical” because Energy Transfer lobbied the Department of Energy he oversaw. The company is led by billionaire Kelcy Warren, who isn’t related to Elizabeth Warren.

“As Energy Secretary for the first two years of the Trump administration, you were one of the chief architects in planning and executing the federal government’s energy policy,” Warren wrote. “This is exactly the kind of unethical, revolving-door corruption that has made Americans cynical and distrustful of the federal government.”

Energy Transfer is “pleased to have Former Secretary Rick Perry as a board member of our general partner,” Vicki Granado, a spokeswoman for the company, said in an email. She said the company wouldn’t provide additional comment on board members.

Perry, a two-time U.S. presidential candidate who was Texas governor for more than a decade, was appointed to the board of LE GP LLC on Jan. 1. Energy Transfer is structured as a master limited partnership. The limited partner -- Energy Transfer LP -- is publicly traded, while the general partner is closely held, with Kelcy Warren controlling a majority stake.

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>>> Moody’s downgrades Ford credit rating to junk status


CNBC

SEP 9 2019

Associated Press


https://www.cnbc.com/2019/09/09/moodys-downgrades-ford-credit-rating-to-junk-status.html


Moody’s Investors Service has downgraded Ford’s credit rating to junk status.

The service says it expects weak earnings and cash generation as Ford pursues a costly and lengthy restructuring plan.
The ratings service said Ford’s outlook remains stable, but its cash flow and profit margins are below expectations and the performance of peer companies in the auto industry

Moody’s Investors Service has downgraded Ford’s credit rating to junk status.

The service says it expects weak earnings and cash generation as Ford pursues a costly and lengthy restructuring plan.

Ford responded with a statement saying that its underlying business is strong and its balance sheet is solid.

The rating for Ford’s senior unsecured notes and its corporate family dropped to Ba1, the top rating for debt that’s not investment grade. It had been Baa3, the lowest investment grade rating.

Ford’s fight to remain an American icon

Moody’s says it expects Ford’s restructuring to extend for several years with $11 billion in charges and a $7 billion cash cost.

The ratings service said Ford’s outlook remains stable, but its cash flow and profit margins are below expectations and the performance of peer companies in the auto industry. “These measures are likely to remain weak through the 2020/2021 period including a lengthy period of negative cash flow from the restructuring programs,” Moody’s Senior Vice President of Corporate Finance Bruce Clark wrote in a note to investors Monday.

Ford’s erosion in performance happened while the global auto industry was healthy, Clark wrote. Now the company and CEO Jim Hackett must address operational problems as demand for vehicles is softening in major markets, he wrote.

The company has $23.2 billion in cash, which is more than its debt, according to Moody’s. The stable outlook reflects Moody’s expectation that the restructuring will contribute to gradual improvement in earnings, profit margins and cash generation, Clark wrote.

Ford said it has plenty of liquidity to invest in its future.

“We are making significant progress on a comprehensive global redesign — reinvigorating our product lineup and aggressively restructuring our businesses around the world,” Ford’s statement said.

The statement said Ford already is addressing operating inefficiencies and problems with its China business.

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HSBC - >>> Hong Kong Turmoil Threatens Banking Giant


BY JAMES RICKARDS

NOVEMBER 27, 2019


https://dailyreckoning.com/hong-kong-turmoil-threatens-banking-giant/


Hong Kong Turmoil Threatens Banking Giant


Most investors recall how the global financial crisis of 2008 ended. Yet how many recall the way it began?

The crisis reached a crescendo in September and October 2008 when Lehman Bros. went bankrupt, AIG was bailed out and Congress first rejected and then approved the TARP plan to bail out the banking system.

The bank bailout was greatly magnified when the Fed’s Ben Bernanke and other bank regulators guaranteed every bank deposit and money market fund in the U.S., cut rates to zero, began printing trillions of dollars and engineered more trillions of dollars of currency swaps with the European Central Bank to bail out European banks.

This extreme phase of the crisis was preceded by a slow-motion crisis in the months before. Bear Stearns went out of business in March 2008. Fannie Mae and Freddie Mac both failed and were taken over by the government and bailed out in June and July 2008.

Even before those 2008 events, the crisis can trace its roots to late 2007. Jim Cramer had his legendary, “They know nothing!” rant on CNBC in August. Treasury Secretary Hank Paulson tried to bail out bank special purpose vehicles in September (he failed). Foreign sovereign wealth funds came to the rescue of U.S. banks with major new investments in December.

Still earlier, in June 2007, two Bear Stearns-sponsored hedge funds became insolvent and closed their doors with major losses for investors.

Yet even those late-2007 events don’t trace the crisis to its roots.

For that you have to go back to Feb. 7, 2007. On that day, banking giant HSBC warned Wall Street about its Q4 2006 earnings. Mortgage foreclosures had increased 35% in December 2006 compared with the year before. HSBC would take a charge to earnings of $10.6 billion compared with earlier estimates of $8.8 billion.

In short, the 2008 financial crisis began in earnest with a February 2007 announcement by HSBC that unforeseen mortgage losses were drowning the bank’s earnings. At that time, few saw what was coming. The warning was considered to be a special problem at a single bank. In fact, a tsunami of losses and financial contagion was on the way.

Is history about to repeat? Is HSBC about to lead the world into another mortgage meltdown?

Of course, events never play out exactly the same way twice. Any mortgage problem today does not exist in the U.S because mortgage lending standards have tightened materially including larger down payments, better credit scores, complete documentation and honest appraisals.

HSBC’s mortgage problem does not arise in the U.S. — it comes from Hong Kong.

Almost overnight, Hong Kong has gone from being one of the world’s most expensive property markets to complete chaos. The social unrest and political riots there have generated a flight of capital and talent. Those who can are getting out fast and taking their money with them.

As a result, large portions of the property market have gone “no bid.” Sellers are lining up but the buyers are not showing up. At the high end, owners paid cash for the most part and do not have mortgages. But HSBC has enormous exposure in the midrange and more modest sections of the housing market.

High-end distress also has a trickle-down effect that puts downward pressure on midmarket prices.

IMG 1

Your correspondent during my most recent visit to Hong Kong. Behind me are the hills of Hong Kong leading up to “the Peak,” the highest point in Hong Kong. Homes on the hills below the Peak are among the most expensive in the world. Due to recent riots, they are in danger of becoming “stranded assets” with no buyers due to capital flight and fear of worsening political conditions.

It’s important for investors to bear in mind that mortgage losses appear in financial statements with a considerable lag once the borrower misses a payment. Grace periods and efforts at remediation and refinancing can last for six months or more. Eventually, the loan becomes nonperforming and reserves are increased as needed, a hit to earnings.

Property price declines and mortgage distress that started last summer as the Hong Kong riots worsened will not hit the HSBC financials in a big way until early 2020. The HSBC stock price may be floating on air between now and then. But the reckoning with a burst bubble in Hong Kong will be that much more severe when it hits.

Another threat to the HSBC stock price comes from Fed flip-flopping on monetary policy. Throughout 2017 and 2018, the Fed was on autopilot in terms of raising short-term interest rates and reducing the base money supply, both forms of monetary tightening.

Suddenly, in early 2019, the Fed reversed course, lowered interest rates three times (July, September and October) and ended its money supply contraction.

The result was that a yield-curve inversion (short-term rates higher than longer-term rates) that emerged in early 2019 suddenly normalized. Short-term rates fell below longer-term rates. That is extremely positive for bank earnings and bullish for bank stock prices.

Now the Fed may be ready to flip-flop again. In their October 2019 meeting, the Fed’s FOMC indicated that rate cuts are on hold. This means that short-term rates may stop falling, but longer-term rates will continue to fall for other reasons including a slowing economy. The yield curve may invert again. This is a negative for bank earnings and a bearish signal for bank stocks including HSBC.

Will history repeat itself with a mortgage meltdown at HSBC leading the way to global financial contagion?

Right now, my models are telling us that the stock price of HSBC is poised to fall sharply.

This is due to the anticipated mortgage losses (described above), but also to an inefficient management structure, repeated failures to reform that structure and management turmoil as a new interim CEO, Noel Quinn, attempts to repair past blunders without the job security or support that comes with being a permanent CEO.

When Noel Quinn accepted the job of interim chief executive of HSBC in August, he had one condition. He told Chairman Mark Tucker he did not want to be a caretaker manager who would keep the bank chugging along until a permanent successor was appointed, according to people briefed on the negotiations.

Instead, Mr. Quinn, a 32-year veteran of HSBC, has embarked on a major restructuring of Europe’s largest bank.: He wants to rid the lender of its infamous bureaucracy while reducing the amount of capital tied up in the U.S. and Europe, where it makes subpar returns. To do so, he will have to slash thousands of jobs.

Investors are understandably skeptical. This is the third time the bank has attempted a big overhaul in a decade, following similar efforts in 2011 and 2015. But returns still lag behind global peers such as JPMorgan despite HSBC’s unparalleled exposure to high-growth markets in Asia, which accounts for about four-fifths of profits.

The stock has declined 11% in a year when stock markets were rallying robustly. Most of the drawdown occurred in August and was a direct response to the worsening political situation in Hong Kong.

While this drawdown is notable, it mostly reflects political anxiety and is not reflective of the mortgage losses that are just beginning to enter the picture. Once the reserves for mortgage losses are expanded to meet the rising level of nonperformance, look out below.

So I repeat the question: Is HSBC about to lead the world into another mortgage meltdown?

We might have an answer sometime next year.

Regards,

Jim Rickards

for The Daily Reckoning

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>>> Home Depot stock is still a good investment despite rare misstep: analysts


by Brian SozziEditor

November 19, 2019


https://finance.yahoo.com/news/home-depot-stock-is-still-a-good-investment-despite-rare-misstep-analysts-174731584.html


Wall Street is still in love with Home Depot (HD) as an investment.

But suffice it to say, Tuesday’s trading session for the king of home improvement could be filed under the abnormal column.

Home Depot shares fell about 5% in afternoon trading as third quarter same-store sales rose 3.6%, below analyst forecasts for 4.6% growth. U.S. same-store sales increased 3.8% versus projections for 5.4% improvement. It’s a rare quarterly sales shortfall for Home Depot — and so is the market’s reaction on earnings day.

Earnings came in a penny ahead of estimates at $2.53 a share.

Executives blamed the delayed impact of investments in business — focused on faster delivery of online orders, store remodels and offering new services to contractors — for the sales shortfall.

The company cut its full-year same-store sales outlook to 3.5% growth from 4% previously. It reiterated its full year earnings guidance of about $10.03 a share.

Wall Street by and large came out quickly to defend Home Depot’s stock, long a top play for many strategists. Some have reasoned Home Depot will continue to benefit from favorable dynamics in the housing market, ranging from low interest rates spurring remodeling activity to a pick up in building activity in 2020.

“The macro nature of their business is in better shape,” Gradient Investments portfolio manager Jeremy Bryan said on Yahoo Finance’s The First Trade. Gradient owns Home Depot shares.

To Bryan’s point, U.S. housing starts rebounded in October and housing permits rose to a more than 12-year high, the U.S. Commerce Department said Tuesday.

Others remain bullish on Home Depot’s longer term execution and how it’s doing well in the age of digital shopping.

“We expect some weakness in HD today, given the underwhelming results and likely downward estimate revisions. That said, with HD viewed as among the highest-quality names and with some macro tailwinds, we think the downside damage to the stock could be mitigated,” Nomura Instinet analyst Michael Baker wrote in a note to clients.

Baker’s bullishness was echoed by Jefferies analyst Jonathan Matuszewski.

“3Q comp sales were light, though operating margins in-line with expectations. We believe shares down in the pre-market create a buying opportunity, as we interpret lighter 2H results to be more tied to timing of returns on strategic investments vs. a softer macro picture. These results don't change our view of a favorable industry backdrop with ongoing home improvement center share gains across most categories,” Matuszewski said.

But make no mistake: if Home Depot doesn’t deliver in the fourth quarter, those defending its stock may not be so inclined to do so again.

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>>> Energy Transfer’s Q3 Earnings: What’s Next for Its Stock?


Market Realist

WRITTEN BY VINEET KULKARNI

11-6-19


https://marketrealist.com/2019/11/energy-transfers-q3-earnings-whats-next-for-its-stock/?utm_source=yahoo&utm_medium=feed&yptr=yahoo


Midstream infrastructure giant Energy Transfer (ET) plans to report its third-quarter earnings today after the market closes. The stock has been trading in a narrow range since last month and has lost almost 5% so far this year.

Notably, it has reported significant earnings growth in the last several quarters, although this trend couldn’t boost its stock. Its distributable cash flow and coverage ratio growth will be a key trend to watch today.

Energy Transfer’s earnings

Based on analysts’ estimates, Energy Transfer could report EBITDA of $2.73 billion in Q3 2019. This represents an increase of more than 11% compared to Q3 2018. During its Q2 earnings, the company increased its 2019 full-year adjusted EBITDA guidance range to $10.8 billion–$11 billion from $10.6 billion–$10.8 billion.

According to analysts’ estimates, Energy Transfer’s revenues could decrease by 4% YoY to $14 billion. The midstream company has exceeded analysts’ revenue estimates for four of the last eight quarters.

Management’s upbeat commentary could also boost Energy Transfer stock in the short term. Its capex guidance for Q4 and beyond should be interesting to see. The company reduced its planned capex for 2019 from $5.0 billion to $4.7 billion in Q2 2019.

Another focal point in Energy Transfer’s Q3 earnings would be its debt. Its large pile of debt is a concern for investors. How the management’s efforts on deleveraging fared during the quarter will also be key to watch.

In September, Energy Transfer agreed to buy oil and gas transport company SemGroup for $5 billion. How the company positions the SemGroup (SEMG) acquisition while trying to strengthen its balance sheet will also be crucial.

Will Energy Transfer increase distribution?

Investors must be waiting for a distribution increase, which hasn’t occurred for a while. So, any update on that front might drive Energy Transfer stock.

In its second-quarter earnings, its distributable cash flow increased sharply by 23% YoY to $1.6 billion. Its coverage ratio was 2.0x. The company offers a distribution yield of 9%, substantially higher than that of the broader markets and the benchmark Treasury yields.

Natural gas infrastructure company Williams Companies (WMB) reported its third-quarter earnings last week. It beat analysts’ earnings estimates but missed on revenue expectations. Its distributable cash flow increased by 8% compared to Q3 2018. WMB stock has also been subdued this year and has gained just 4% YTD.

Several brokerages cut Williams Companies stock’s price target after its Q3 earnings. Wells Fargo trimmed WMB’s price target to $26 from $29, while UBS also cut its target to $33 from $35. Raymond James cut its price target to $30 to $32, but rated the company as a “strong buy.”

How ET stock is placed

Energy Transfer stock is currently trading at $12.65, almost 4% and 11% below its 50-day and 200-day simple moving average levels, respectively. The large premium to both key levels indicates weakness in the stock. Energy Transfer stock has fallen below its 50-day levels in August and has been trading weakly since then. It is currently trading at an RSI (relative strength index) of 53, which indicates that the stock is neither overbought nor oversold.

Energy Transfer stock had fallen more than 25% from its 52-week high of $17.04 in November 2018. Its stock has gained almost 8% from its 52-week low of $11.68 in December 2018.

Analysts expect a massive upside of more than 65% from Energy Transfer stock. Analysts gave ET stock a mean target price of $20.84 against its current market price of $12.65. Along with its robust potential capital appreciation, Energy Transfer’s dividend yield makes it an attractive proposition from a total return perspective.

Energy Transfer stock is not an exception. There are many MLP (master limited partnership) stocks that have been weak despite strong earnings and distribution growth. To learn more, please read Top Midstream Energy Stocks: What Analysts Got Wrong.

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>>> Energy Transfer (ET)


11-7-19

Investor Place

https://finance.yahoo.com/news/7-buy-rated-stocks-dividend-195242975.html


Dividend Yield: 10%

Energy Transfer, L.P. (NYSE:ET) is one of the largest and most diversified midstream energy companies in the U.S. After the company’s Nov. 6 third-quarter earnings release, all eyes are on ET.

Top analyst, RBC Capital’s Elvira Scotto, believes that the company is on track to achieve an approximately 4.5x debt-to-EBITDA by the end of this calendar year. This is expected to be achieved through ramping up cash flows from Rover, Revolution, ME2/2X and several other growth projects as well as distribution payments slated for the end of 2021.

“With its slate of large-scale, primarily fee-based growth projects coming online and ramping, we expect cash flow growth to drive leverage meaningfully lower in the coming years, which should allow ET to return more cash to shareholders,” she commented.

This lends itself to her conclusion that ET will continue to reward investors with a stable dividend. We mean an annualized payout of $1.22 per share, which amounts to a yield of 9.7%. Based on all of the above, the five-star analyst predicts shares could soar 88% in the next twelve months.

As seven Buy ratings have been assigned vs no Holds or Sells in the last three months, the message is clear: ET is a Strong Buy. Not to mention its $21 average price target brings the upside potential to 70%.

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>>> Sallie Mae execs tan at Maui retreat while student debt crisis tops $1.6 trillion

As borrowers struggle to keep up with their payments, Sallie Mae flew more than 100 employees on its sales team to Hawaii to celebrate $5 billion in sales.

Sallie Mae celebrates at luxury resort while Americans struggle with student loans


NBC News

OCT. 17, 2019

By Catie Beck, Jackeline Pou and Ben Kesslen


https://www.nbcnews.com/news/us-news/sallie-mae-execs-tan-maui-retreat-while-student-debt-crisis-n1063826


WAILEA, Hawaii — As 1 in 5 American adults wonder how to pay off their combined $1.6 trillion in student debt, Sallie Mae executives and sales team members wrestled with a different question: Between meetings, how should they spend their time on their five-day paid trip to the luxury Fairmont resort on Wailea beach in Maui?

Sallie Mae brought more than 100 of its employees to Hawaii in August to celebrate a record year — $5 billion in student loans to 374,000 borrowers. The company said it didn’t pay for employees’ families to attend, but some did tag along.

“We said, ‘Hey, look, Maui is a pretty nice spot.’ And so if you wanted to stay a few days or want to bring family, that's up to you,” Ray Quinlan, CEO of Sallie Mae, told NBC News on the grounds of the Fairmont Hotel.

Ray Quinlan, CEO of Sallie Mae, told NBC News the trip was in part to celebrate a record year of $5 billion in sales.

Quinlan, in a walk-and-talk with NBC News, said the trip to Maui was not an “incentive trip.”

“This is a sales get-together for all of our salespeople,” he said, adding the publicly traded company has been taking retreats like the Maui one since it was founded in the 1970s to service federal education loans.

Since then, the lender's trajectory has changed, now offering private loans. But in 2014, the company split into two: Sallie Mae Bank, which offers private loans, and Navient, a newly formed offshoot which services and collects loans, including those that Sallie Mae sold. Sallie Mae’s borrowers, however, have said the company doesn’t treat them nearly as well as it does its sales team.

Paige McDaniel, 39, took out a federal Sallie Mae student loan to pay for her undergraduate degree 20 years ago. Six years later, before the Sallie Mae split with Navient, she took out a private loan with the company to pay for her grad school.

'Brazen act of lawlessness': Inside Education Department's effort to 'obstruct' student loan probes

“I thought they were the same kind of loans,” McDaniel, of the Denver suburb Elizabeth, said. A mother of two, she borrowed $120,000 for her tuition at Lakeland College for a master's in business administration, to help with the cost of living as she worked through school.

The agreement, which included a warning to read it before signing, said the interest rate was variable, but she says she doesn't remember being told the rate was much higher on the private loan.

After graduation, Sallie Mae expected McDaniel to pay “well over $1,500 a month,” she said.

“When I told them that, you know, I couldn't afford that, could we make some payment arrangements, they essentially said, 'So sorry, we'll put a lien on your house and garnish your wages if you don't make those payments,'” McDaniel said.

Paige McDaniel, 39, owes $304,000 in student loans, after taking out a $120,000 loan with Sallie Mae 14 year ago.

Now, McDaniel owes $304,000, even though she declared bankruptcy to protect her house after being unable to make her payments. She’s hired an attorney to sue Navient, arguing that bankruptcy should have cleared her debt because it was a private loan.

“There’s no way anybody can ever dig themselves out from underneath that,” McDaniel said. "They just don't see that there are families on the other side of this. It's not just my generation cause I have the loans, it affects my children. How am I going to send them to college?"

McDaniel's experience isn’t an outlier.

The attorney general of Illinois sued Navient and Sallie Mae in 2017, accusing the company of deceptive subprime lending, a failure to offer proper repayment options, and faulty collection practices.

“We worry about private student loans,” said Ashley Harrington, senior policy counsel on student debt at the nonpartisan Center for Responsible Lending (CRL). “They don’t have the same protections for borrowers” that federal loans have, she said.

Harrington said private student loans often employ subprime lending practices and give loans to people who will likely be unable to pay them back, adding the issue disproportionately affects black, Latino, Native American and female students.

Black undergraduate students with debt are unable to afford their loans at five times the rate of white bachelor’s degree graduates, a 2019 study in part done by the CRL found.

At HBCUs, crushing student loan debt is a symptom of even bigger problems
“Sallie Mae had a big part in creating a place where we are in the student debt crisis,” Harrington said, and student debt stalls people from buying homes and starting a small business, dragging the economy.

Sallie Mae says it’s not liable in McDaniel’s suit, saying the current bank wasn’t making loans when she took hers out.

“We believe Navient — a separate and independent company from Sallie Mae — is responsible for all liabilities that are at issue,” the company said in a statement to NBC News.

But putting the blame on Navient doesn’t square with the company’s own advertising. On its website, Sallie Mae advertises 43 years of “helping America pay for college,” ?— more years than McDaniel has even been alive.

Navient told NBC News the AG's suit is "baseless," and said it had no comment on McDaniel's case. Referencing allegations that it gave out private loans knowing students wouldn't be able to repay them, the company insisted all loans were issued in "good faith."

In Hawaii, Sallie Mae's lawsuits and controversies seemed lost in the sand.

“So we've had good years, we've had bad years,” Quinlan said. The conference, in Sallie Mae’s eyes, was a "recognition of the hard work” of the sales team.

Beachside, employees planned and strategized for the upcoming year, were awarded prizes, and soaked up the sun.

“We do it every year,” Quinlan said.

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>>> Emerson Electric CEO says all costs and businesses are under scrutiny


Reuters

November 5, 2019


https://finance.yahoo.com/news/1-emerson-electric-ceo-says-204124731.html


BOSTON, Nov 5 (Reuters) - Emerson Electric Co Chief Executive David Farr said on Tuesday that "everything is on the table" as the industrial products company takes a top-to-bottom look at its cost structure and business units.

Emerson has been under pressure from hedge fund D.E. Shaw & Co to cut costs and even split up the company. During a conference call with investors, Farr did not rule out anything, but added: "We are in control of our destiny."

Farr said, however, that D.E. Shaw's candidate for Emerson's board of directors, Mark Blinn, leap-frogged over two other candidates being considered. Emerson named Blinn, former CEO of Flowserve, to the company's board.

Farr said he is working with the board to re-assess the company. "We're taking a look at all of the portfolio of Emerson. What assets make sense, what assets don't make sense," Farr said.

"This is something we do all the time, but we've really put a little bit more effort into it," Farr added. "We'd like to look at this, especially when we go into a downturn.

"It allows us to remix, and it also allows us to have a chance to say, 'Where do we want to invest from an acquisition standpoint?'" he said. "So everything on the table."

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>>> GE Stock Soared After Crushing Earnings Estimates. This Is Why.


Barron's

By Al Root

Oct. 30, 2019


https://www.barrons.com/articles/ge-stock-gains-as-messy-earnings-top-wall-street-estimates-51572432805?siteid=yhoof2&yptr=yahoo


There is a lot going on at General Electric these days. Third quarter earnings—reported Wednesday morning—demonstrate that. The company earned 15 cents a share from ongoing operations, easily beating Wall Street estimates of 12 cents a share. That’s good. But the company said it lost 15 cents a share when adding in all the one time expenses. That’s not.

Investors knew some charges were coming, but the report illustrate how hard it has been to turn around the iconic American manufacture.

“Our results reflect another quarter of progress in the transformation of GE,” said CEO Larry Culp in the company’s news release. “We are encouraged by our strong backlog, organic growth, margin expansion, and positive cash trajectory amidst global macro uncertainty.”

Importantly for investors, General Electric (ticker: GE) raised its free cash flow outlook for the year. Management expected full-year free cash flow to be about zero. Now the company the company thinks it can generate about $1 billion of free cash flow from industrial operations. The increased guidance comes even as the Boeing (BA) 737 MAX—which GE makes engines for—remains grounded and a cash flow headwind for both companies.

GE generate $650 million in free cash flow during the third quarter, above the $500 million Wall street had been looking for, according to Gordon Haskett analyst John Inch.

The free cash flow boost is likely what sent GE stock up $1.04 cents, or 11.5%, to $10.11 in Wednesday. For the year, GE shares are up about 39%, better than the 17% comparable gain of the Dow Jones Industrial Average.

Long term care insurance, Baker Hughes (BKR) stock sales, and goodwill generated the special charges.

Lower rates caused GE’s insurance liability to rise—something Culp telegraphed to investors in September. GE no longer owns a majority of Baker Hughes. Now GE’s Baker stockholdings are marked to market on a quarterly basis—as accounting regulations dictate. Energy stocks are down with energy prices. Again, not a surprise to Wall Street. Finally, GE wrote off some of its renewable power assets.

The power business is still tough. Power sales fell 14% year over year in the third quarter and is still losing money. The power industry continues to be buffeted by trends moving power generation away from coal. GE makes equipment for coal based power generation. Aviation sales, on the other hand, grew 8% year over year and profit margins were 21%.

Overall, the quarter should be enough for GE bulls who can point to progress on the turnaround. GE will host a conference call at 8 a.m. eastern to discuss results with analysts and investors.

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>>> Johnson & Johnson stock falls after asbestos found in baby powder


By Paul R. La Monica

CNN Business

October 18, 2019


https://www.cnn.com/2019/10/18/investing/jnj-stock-baby-powder-asbestos/index.html


New York (CNN Business)The bad news keeps coming for Johnson & Johnson: The company on Friday announced a voluntary recall of its popular baby powder after some bottles were found to contain small amounts of asbestos.

Shares of J&J (JNJ) fell 5%, making it the second worst-performing stock in the Dow Jones Industrial Average. The drop in J&J, along with a slide in Boeing (BA), dragged down the broader market Friday.

J&J's stock is now up less than 1% in 2019. The company, along with other health care stocks, has lagged the broader market due to a series of legal concerns.

But J&J has arguably the greatest risk of all the top Big Pharma firms.
Johnson & Johnson recalls baby powder due to asbestos concerns
Johnson & Johnson recalls baby powder due to asbestos concerns

The company already has been dealing with lawsuits about whether it knew of asbestos in talcum powder. Shares plummeted more than 10% in mid-December — their worst one-day drop since 2002 — after Reuters reported that J&J knew about an asbestos problem for decades.

Some women have alleged that their ovarian cancer was caused by exposure to J&J products with asbestos. Prolonged exposure to asbestos has also been linked to cases of mesothelioma and lung cancer, according to some medical studies.

J&J said in a statement Friday that it "has a rigorous testing standard in place to ensure its cosmetic talc is safe and years of testing, including the FDA's own testing on prior occasions — and as recently as last month — found no asbestos."

"Thousands of tests over the past 40 years repeatedly confirm that our consumer talc products do not contain asbestos," the company added.
Still, asbestos allegations aren't the only legal headache for J&J.
Earlier this month, a Pennsylvania jury also ruled that J&J must pay $8 billion in punitive damages following a man's claim that the company didn't warn young men that they could grow breasts after using the antipsychotic drug Risperdal.

J&J is dealing with a series of other legal problems, most notably about the company's role in the opioid addiction crisis. That could cost the company billions of dollars in settlement costs.

J&J says in its earnings releases — including its third-quarter results reported earlier this month — that it will not provide earnings guidance "because the company is unable to predict with reasonable certainty the ultimate outcome of legal proceedings."

Ohio Attorney General Dave Yostalso announced Thursday that J&J agreed to pay nearly $117 million in a multistate settlement to resolve allegations about deceptive marketing of transvaginal surgical mesh devices that are used to treat bladder problems. The company was sued by women who allege they were injured by the devices.

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>>> Duke Energy's Arm Inks Deal to Build Battery Storage Project


Zacks Equity Research

October 15, 2019


https://finance.yahoo.com/news/duke-energys-arm-inks-deal-130601866.html


Duke Energy Corp.’s DUK subsidiary, Duke Energy Carolinas, recently announced its agreement with Anderson County, S.C., to build energy storage project at the Anderson Civic Center.

Notably, the project will be used as back-up power with a capacity to serve the Civic Center for at least 30 hours based on normal usage during outages. The company has submitted a request to the Public Service Commission of South Carolina for approval of the lease agreement for the land from Anderson County.

After the expected completion of final engineering study later in 2019, the project will go through a competitive bidding process for construction and is expected to be in service in early 2021.

Benefits of the Investment

One of the largest drawbacks of electricity generation from renewable energy sources is that it fails to provide electricity 24x7. Electricity generated from wind and solar energy sources requires storage, which can be used during periods of shortage. Increasing usage of battery storage promotes renewable energy as well as reduces the dependency on grid. Investments in such projects ensure significant energy grid support in any region.

The latest project is part of the company's Integrated Resource Plan (IRP), which was announced in October 2019. Per the plan, the company will invest $500 million in battery storage projects in Carolinas over the next 15 years for electricity generation capacity of 300 MW.

The company is also undertaking initiatives to build battery storage projects in other states. In June 2018, its subsidiary — Duke Energy Florida (DEF) — announced plans to construct three battery storage projects with 22 MW capacities. During the second quarter of 2019, the company announced 22 MW of battery storage projects in the Sunshine state, kicking off the first wave of its planned 50-MW pilot program. These initiatives are likely to expand Duke Energy’s growth prospects in the booming battery storage market.

Battery Storage Prospects

With increasing environmental awareness, the U.S. electric utility industry is shifting focus to renewable sources for electricity generation. To this end, the companies are trying to lower emission by implementing innovative technologies like battery storage. Per the U.S. Energy Information Administration (EIA), 899 MW of battery storage projects were being operated in the United States as of March 2019. Moreover, EIA expects battery storage power capacity to exceed 2,500 MW by 2023.

Xcel Energy Inc XEL, NextEra Energy NEE and PG&E Corp PCG are also investing in battery storage projects and benefit from the prospects in the battery storage market.

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>>> Johnson & Johnson Agrees to Settle Ohio Opioid Lawsuits for $20.4 Million


Settlement comes ahead of trial scheduled for this month; J&J is fourth drugmaker to settle with two Ohio counties suing over opioid epidemic

Johnson & Johnson said the settlement allows it ‘to avoid the resource demands and uncertainty of a trial as it continues to seek meaningful progress in addressing the nation’s opioid crisis.’


Wall Street Journal

By Sara Randazzo

Updated Oct. 1, 2019


https://www.wsj.com/articles/johnson-johnson-agrees-to-settle-ohio-opioid-lawsuits-for-20-4-million-11569977306


Johnson & Johnson on Tuesday said it has agreed to a $20.4 million deal to avoid a coming trial accusing the company of helping spark an opioid-addiction crisis in two Ohio counties.

The settlement makes J&J the fourth drugmaker to reach such a deal ahead of the trial, slated to begin later this month in federal court in Cleveland. The trial is considered a bellwether for thousands of opioid-related lawsuits that municipalities and states have filed against drugmakers.

The company said Tuesday the settlement allows it “to avoid the resource demands and uncertainty of a trial as it continues to seek meaningful progress in addressing the nation’s opioid crisis.”

Yet the deal, which includes no admission of liability, still leaves J&J facing hundreds of other opioid lawsuits.

The two Ohio counties behind the lawsuit, Cuyahoga and Summit, are home to cities including Cleveland and Akron that have been hit hard by the opioid crisis.

As in thousands of other opioid-related lawsuits filed by local and state municipalities, the counties accused J&J and other companies of contributing to widespread addiction through aggressive marketing practices and lax distribution policies.

J&J said Tuesday the company is “open to identifying an appropriate, comprehensive resolution of the overall opioid litigation” but is also prepared to defend its marketing and other actions.

Lawyers for the two counties said the settlement provides urgently needed funds for programs like those to treat babies born to opioid-addicted mothers. The lawyers said they are continuing to prepare for trial “to hold the remaining opioid makers and distributors accountable for fueling the crisis that has led to thousands of deaths in Ohio and across the country.”

Earlier this week, drugmaker Mallinckrodt PLC completed a $30 million deal with Cuyahoga and Summit counties. Endo International PLC had previously agreed to pay the counties $10 million, while Allergan PLC had agreed to pay $5 million to avoid the trial.

J&J’s settlement includes a $10 million cash payment, a $5 million reimbursement of legal expenses the counties incurred in relation to the trial, and $5.4 million in charitable contributions to opioid-related nonprofits in the counties.

The company is among drugmakers exploring a way to use the bankruptcy of another defendant in the opioid cases, OxyContin maker Purdue Pharma, to try to reach a global resolution of the cases, The Wall Street Journal reported this week.

Addiction experts are in wide agreement on the most effective way to help opioid addicts: Medication-assisted treatment. But most inpatient rehab facilities in the U.S. don’t offer this option. WSJ’s Jason Bellini reports on why the medication option is controversial, and in many places, hard to come by.

The litigation has weighed on J&J, of New Brunswick, N.J. The company lost the first opioid case to go to trial, in Oklahoma. A state-court judge there ordered the pharmaceutical and consumer products company to pay $572 million for contributing to the state’s opioid crisis. The company is appealing the verdict.

As settlements by drugmakers pile up, the Ohio trial is now shaping up to focus mostly on the companies that distribute drugs. Companies still included in the case as of Tuesday include AmerisourceBergen Corp., McKesson Corp., Cardinal Health Inc. and Walgreens Boots Alliance Inc.

Those companies have denied the allegations against them and argued they ran legal businesses that were heavily regulated.

J&J’s involvement in the lawsuits stems primarily from two opioid painkillers: the fentanyl patch Duragesic and Nucynta, a tapentadol pill. J&J also owned two companies that supplied the active pharmaceutical ingredients and narcotic raw materials to other drugmakers for their own opioid painkillers.

J&J still makes Duragesic but sold Nucynta in 2015 and exited the opioid-ingredients businesses by 2016.

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PRECISION PUSHBACK: HOW CSX IS CHANGING THE RULES OF RAILROADING

As the rail industry moves to mimic CSX’s operating model, shippers are calling foul — arguing with the company’s numbers and asking for more regulation


By Will Robinson

Reporter, Jacksonville Business Journal

Sep 17, 2019


https://www.bizjournals.com/jacksonville/news/2019/09/17/special-report-how-csx-is-changing-the-rules-of.html?ana=yahoo&yptr=yahoo


As the hours wore on, the mood in the Surface Transportation Board hearing room grew more tense.

Outside, a major storm was sweeping through the region, bringing tornado warnings that at one point shut the hearing down.

Inside, representatives from some of the largest companies in the country were bringing their own storm: So many shippers had signed up to complain about the railroad industry at the May hearing that federal regulators had to add a second day to the proceedings.

The shippers were angry — angry about?higher fines being imposed on them?by?railroads, angry about changes in the service railroads provide, angry about railroads’ refusal to share information, angry about what they see as monopolies run?amok.?

“Fundamentally, this is a situation of one dominant party that enjoys a clear monopoly over its customers, using that power position to take advantage of the customer,” said Ben Abrams, CEO of Scrap Resources Inc., a scrap recycler in Central Pennsylvania.?

Mostly, they were angry about precision scheduled railroading, the operating model brought to the United States by Jacksonville-based CSX Corp., the country’s third-largest railroad by market capitalization and by miles of track.

“There is no valuing of the customers,” said Steve DeHaan,?CEO of the International Warehouse Logistics?Association,?which?represents?360 third-party logistics providers. “It’s all about their business.”

The anger that erupted at the hearing has been simmering among shippers over the two years since CSX introduced the new model, with DeHaan?and?others throughout the industry?saying they believe rail shipping?had reached a breaking point.?

Over the course of?the?two-day hearing,?customers big and small voiced the same message: Railroads are abusing monopolistic power to drive record profits under the guise of creating operational efficiencies.?

Corporate giants like?mega-brewer?Miller-Coors and Olin Corp.,?the world’s largest chemical manufacturer, sat?alongside small businesses?like?Shea Brothers Lumber.?Trade associations representing?U.S. grain processors, paper?manufacturers, warehouse?operators, energy companies, food and beverage corporations, chemical suppliers?and more decried the behavior of America’s largest railroads.??

But the railroads, by contrast,?assured the board their service was better than ever.?Following?the?changes initiated by CSX Corp.?(Nasdaq: CSX),?the railroads had become leaner, faster and more reliable, they told the board.?

“Customers are benefiting from the best performance in CSX history,” said Arthur Adams, CSX vice president of sales.?

The hearing, convened by the regulator to examine surging?fees imposed by railroads, became a trial of precision scheduled railroading, the operating model E. Hunter Harrison brought to CSX two years ago, a model that?is sweeping the country.?

While the hearing was a public airing of shipper anger, the customers’ complaints – and their push for regulatory action – is now a constant drumbeat, expressed in private conversations and interviews with the Business Journal.

Wall Street loves the model.?Investors?have sent?CSX’s?stock price up about?160 percent over the past three years. By comparison, the Dow Jones Transportation Average, an index of 20 large transportation companies, has grown only 37 percent. The S&P 500 grew about 32 percent over that period.

But while investors cheer, customers?say railroads?are crippling their businesses.?Shippers say they?have borne the weight of reduced service days, more frequent and higher fees, increased rates, higher storage costs and higher legal fees to dispute railroad fines, all prompted by operating changes made by the railroads.?

The?railroads point to their service metrics as proof that performance has improved – but a Business Journal analysis of those metrics shows the picture they paint might not be as rosy as it appears.

At CSX,?performance?is?now measured by metrics?the company?implemented as federal regulators began monitoring?its performance. These new?metrics?differ significantly from industry standards, and customers?claim they are?disconnected from the reality they experience.?

CSX has also reformulated?how it calculates?its?operating ratio – the metric that's improvement is held up as proof the new model works. That improvement?has been helped in part by statistical changes that have gone largely unnoticed.?

As the rest of the American railroad industry — responsible for carrying millions of tons of goods, including 22 commodities, many vital to manufacturing and agriculture – races to follow CSX’s lead, shippers are pressing regulators to hit the brakes, saying the new approach is making the cost of?manufacturing and?shipping everyday goods more?expensive.?

Ray Neff, logistics manager for Lhoist America, warned regulators in a written filing that the industry’s changes, if left uncorrected, would accelerate an exodus from rail.

“My fear is that our 16-mile Industrial Spur in Tennessee will suffer the same fate (closure and abandonment) that our facilities in Florida and Texas have seen, and that Lhoist North America will eventually be forced to abandon rail,” Neff wrote.

Maverick CEO?

Former CEO E. Hunter?Harrison?was not recruited to CSX. He was installed. Already a?three-time railroad CEO and two-time Railroader of the Year, Harrison had a Steve Jobs-like following in the industry.

As creator and evangelist of precision scheduled railroading, Harrison touted the model’s ability to make railroads more efficient. It was supposed to be a win-win: Doing more with less would make the railroad more profitable, which would please investors, and better service such as more on-time trains would benefit customers.?

The model had worked?at Canadian National Railway, where?Harrison?spent seven years as CEO turning a bloated, inefficient company into one of the most efficient rail companies in North America — albeit with some customer complaints.?

He did it again at Canadian Pacific: Between 2012 and 2015,?that railroad’s revenue grew 18 percent?while earnings per share increased 133 percent and free cash flow surged to $1.155 billion – up from just $93 million in 2012. ?


Harrison had been brought to Canadian Pacific by an activist investor,?Pershing Capital,?which famously backed?Valeant Pharmaceuticals through a boom-to-bust run characterized by drug price surges.?

The private equity fund?positioned Harrison at Canadian Pacific in much the same way it positioned Valeant’s former CEO, Michael Pearson: Pushing the narrative that maverick CEOs had cracked the code to outperform?the rest of their industries. Both CEOs raised prices in areas where their companies had no competition, among other changes.

Jacksonville-based CSX would offer Harrison his biggest stage yet, and it afforded him the chance to prove skeptics wrong, something he relished. Many questioned whether precision scheduled railroading could handle the East Coast’s spaghetti-like rail network, since it had only been attempted on the straight, grid-like Canadian network.

After helping Pershing make?$2.6 billion in profit at Canadian Pacific,?Harrison left the company in January 2017. The plan: to partner with Pershing second-in-command Paul Hilal, who had left Pershing to start his own fund —?a fund formed specifically to bring Harrison to CSX.

In March 2017,?after Hilal’s fund triumphed over a reluctant CSX board, Harrison?took?the helm.?

Newly installed and dealing with health issues that would lead to his death later that year, Harrison moved quickly to make sweeping changes.?He laid off thousands of employees and contractors, shuttered railyards and sold hundreds of locomotives and railcars.?

The results five months later were dismal.?

By August 2017, the average train?spent?three more hours sitting in rail yards and?traveled?two miles per hour slower, according to data reported to the Surface Transportation Board. Only 55 percent of shipments arrived within two hours of their expected delivery. Customers called CSX’s helpline?with complaints?563 times a day, more than twice their normal rate.

The rate of train accidents rose 68 percent in the third quarter to the?railroad’s highest level in 12 years, according to data reported to the Federal Railroad Administration. On 20 occasions that quarter, CSX train accidents caused more than $100,000 in damages, the most since 2004.?

Customers were devastated by CSX’s service implosion, they told?regulators in?a 2017 hearing focused solely on CSX, sharing a range of mishaps with the board.

A Tennessee Pringles factory with 1,300 employees narrowly avoided several closures when CSX was late to deliver raw materials. Other factories, including a North Carolina Kellogg Co. factory, suspended production because of late deliveries.?Florida dairy cows?would have run out of feed if six federal and state agencies hadn’t intervened.

In one instance, CSX lost a railcar carrying chlorine, a regulated toxic substance, for three days. Shortline railroads — smaller companies that deliver shipments to the major railroads —?that relied on CSX interchanges lost as much as a quarter of their annual revenue due to CSX delays. An Amtrak passenger line running on CSX track in Indiana saw a 2,200 percent increase in CSX-caused delays.?

In testimony at the 2017 hearing, Harrison blamed his railroad’s poor performance on employees who resisted change, saying he “overlooked the people side of the ledger.” Precision scheduled railroading was not to blame, he told the regulator.

In response to customers’ complaints, the regulators began weekly monitoring calls with CSX executives.?

The same week monitoring began, CSX announced it had reinvented how it measured performance.

Redefining?performance?

In August 2017, CSX rolled out new ways of calculating standard performance indicators. The changes?— which the company touts on its website and to investors —?made the railroad’s 2017 meltdown appear less severe and its improvements more dramatic than the measures used by the rest of the industry.?

In August 2017, industry standard measurements ranked?CSX No. 6 out of?seven railroads?in how long its in-service trains?sat in railyards, a measure known as dwell time. Its trains?dwelled?for 29.3 hours?on average, by the standard calculation.?

CSX’s new formula calculates how long in-service trains sit at any point of their journey, not just in railyards. Because this methodology averages the time trains sit still over more stops, CSX’s average dwell time dropped dramatically. In the month the new methodology was introduced, trains dwelled?13.1 hours, ranking CSX No. 1.

Velocity undertook a similar transformation. In August 2017, the standard measure showed CSX’s trains going 1.9 miles per hour slower than?they did before Harrison?arrived.?CSX’s formula indicates velocity?dropped only 0.8 mph. This, too, was accomplished by including data formerly excluded, creating a larger denominator for the average.

The spread between the velocity metrics defined by CSX and the STB has narrowed, going from a 30 percent difference when introduced to about a 16 percent difference today. By coming more in line with the STB’s math, CSX has been able to show investors a 56 percent improvement in velocity since August 2017, while regulators have seen only a 36 percent improvement.


Adam Smith, CSX’s?head of operations planning, told the Business Journal?in May?that including end-to-end data in these measures?better?reflects total performance. This enables?CSX to more accurately find what needs improvement, Smith said.?For example, the new dwell metric would detect a frequent cause of delays 20 miles away from a yard, whereas the old metric would not.

The metric for cars online was also redefined in August 2017, with the company using a running average instead of a daily total. Using CSX’s formula, the number of cars online came in 33 percent less than the industry-standard equivalent, helping the railroad make the claim that it was doing more with fewer assets.

In three letters to the STB, CEO Jim Foote touted the progress CSX’s customized metrics showed. In January 2018, Foote — who took over after Harrison's death in December 2017 — noted a “remarkable rate of positive change” in dwell and velocity, then in a letter sent weeks later, he argued that because CSX’s statistical improvement was so great, “We believe we have earned the right to end STB monitoring.”

The STB disagreed, continuing to monitor CSX through March 2018.

The railroad presented its custom metrics in 30 presentations to the Surface Transportation Board from August 2017 through March 2018, and these are the only metrics it provides in quarterly earnings materials and investor conference calls. It also separately submits regulator-defined?metrics in mandatory filings to federal regulators.

The difference remains between the metrics defined by the Surface Transportation Board and those defined by CSX. CSX’s dwell, velocity and cars online are about 52 percent, 16 percent and?37?percent?apart from their?industry-standard?equivalents.

The railroad has also stopped reporting some of its long-standing measures – metrics it is not required to disclose – such as train lengths, local service measurement (the percentage of cars placed at a customer location based upon daily customer request) and right-car, right-train (percentage of cars that leave railyards according to plan).

In addition to offering investors a different sense of CSX performance, the metrics?make it harder for shippers to contest CSX fines for delays, plan capital investments, seek regulatory intervention and more, according to the American Chemistry Council,?a trade association representing most of the $526 billion?U.S.?chemical industry.??

"Railroads’ ability to change the methodology they use to calculate their performance data threatens the usefulness of that data,”?Chemistry Council attorney Jason?Tutrone?wrote in a filing submitted to regulators.?

Jim Blaze, an independent economist with decades of experience in railroading, sees the changes?as a way to?make the railroad look good, regardless of what customers are experiencing.?

“There is some gamesmanship going on,” Blaze told the Business Journal. “It’s not illegal or immoral, but?it’s harder to see if things are better or worse … .?They’re in a rush to report statistics that have a wow impact on Wall Street but no wow impact for shippers.”

Other CSX statistics have improved, shippers say, because of policy changes and data omissions.?

In Harrison’s first five months, for example, the number of customers who received the full number of cars they ordered plummeted, which led?the Surface Transportation Board?to monitor the percentage of orders CSX fulfilled.

During that monitoring period, CSX’s metrics show the fulfillment percentage improving, a sign that its network became more efficient — but customers say that was a mirage.

In 2017, a Packaging Corp. of America executive told?regulators CSX had capped how many cars his company could order at a fraction of the number it usually requested. That means order fulfillment improved?because customers could only order fewer cars, not because CSX was fulfilling more?orders, the executive explained.?

Two years later, the monitoring is no longer being done and the situation is reversed; customers told regulators in May they often are sent more cars then they need. Providing a surfeit of cars enables the railroad to charge the customers fines for keeping cars too long —?fines that now generate hundreds of millions of dollars for CSX.

CSX and other railroads have also changed the?number?of days their customers receive cars,?the number of cars in each delivery?and the time of day cars are delivered.?

“They are delivering 33 [percent] to 50 percent more cars to a yard,” Steve?DeHaan,?president of the International Warehouse Logistics Association,?said of all large railroads.?“How do you handle 50 percent more cars to your yard?”?

Customers are frequently rebuffed when they ask railroads for supplemental data, especially data customers could use to dispute fines, they told the Surface Transportation Board.

“Right?now,?it seems like all the data we have, we beg for from the railroad,”?DeHaan said.?

Redefining success?

The operational metrics aren’t the only ones that have changed. Some of the financial ones have, too.

The true sign that precision scheduled railroading works, Harrison told investors at every railroad he ran, is a drop in operating ratio.?

Operating ratio, an industry-accepted barometer of efficiency, measures how much it costs to generate?a dollar of?revenue. The lower the number,?the higher the profit.?

Jim Foote continues to hold up?operating?ratio as the single most important metric CSX reports.?

“It tells you by looking at one number whether or not you are running the company effectively and efficiently,” Foote said at an investor conference in May.?

CSX posted North America’s lowest annual operating ratio last year at 60.3 percent, a U.S. record. It also boasted?a?record?57.4?percent operating ratio ?last?quarter. Its quarterly operating ratio stood at 75.2 percent in the first quarter of 2017, the quarter before Harrison arrived.

These figures suggest that CSX has an operating profit margin of about 40 percent, and that it has improved its profit margin by 9 percentage points in just two years.?

But for CSX, this figure includes different datapoints than it did before CSX adopted the new model.

In 2017, CSX?reclassified?all real estate sales as operating income. In doing so, it eliminated a distinction between real estate with an operating impact and real estate with no operating impact – a distinction its competitors still make.?

All profits from real estate sales now?impact?operating ratio, with the profits – $236 million in the last 2.5 years – subtracted from the railroad’s expenses.?For example, CSX’s sale of the Westin Savannah Harbor Golf & Spa helped lower its operating ratio.

Without the $154 million in real estate gains last year, CSX’s operating ratio would have been 61.5, not 60.3. It would no longer have been a U.S. record.?


CSX considers the difference inconsequential. “Most Class I rails account for property sales in their operating income, including our direct peer, Norfolk Southern,” spokesperson Cindy Schild said by email. “Our reporting is very transparent, and it is easy for anyone to back out the real estate gains and get an adjusted [operating ratio].”

While Norfolk Southern does include real estate gains against expenses, it only includes income from operating properties –?the delineation CSX removed in 2017.

Blaze, the economic consultant, sees the accounting as unique.?

“It may make them look good to Wall Street, but it’s not what other railroads do,” he said.?

The methodology is also disconcerting to Chris Rooney, a former deputy administrator of the Federal Railroad Administration, since it includes unrepeatable sales of assets with no operating impact.

“While CSX is not unique in including operating real estate gains in operating earnings, it seems aggressive to remove the distinction between operating and non-operating assets,” said Rooney.

That means?CSX’s operating ratio is?improving?while CSX has assets to sell, but?it?is likely to rise once CSX becomes asset light. The railroad has sold or solicited for sale more than 1,500 miles of track.??

CSX set a target in 2018 of selling $300 million in real estate and $500 million in rail lines by the end of 2020. It has sold $562 million-worth of property over the past 2.5 years, according to its filings with the SEC.?

“There is no question these sales have?generated, and will continue to generate, sustainable income for the company,” Schild said.

CSX has also?been aggressive in selling locomotives and railcars, lowering its fleets by 12 percent and 18 percent respectively since 2017. CSX does not report how much money it has made from such sales, but Schild said the revenue from these sales is not included in operating ratio.

Railroad ripples?

The impact of the changes at CSX goes far beyond investors and customers.?

CSX moved 6.5 million units of goods last year across a 20,500-mile network that links every major metro area east of the Mississippi. Changing how it operates has ripple?effects?across that entire region.?

For example, CSX has been steadily increasing train lengths, with the length of trains growing more than 10 percent to 7,241 feet in the first five quarters in which precision scheduled railroading was implemented, between March 2017 and June 2018. Trains on some segments, such as the?Elsdon?Line between Chicago and Munster, Indiana, have grown to span more than three miles, according to CSX filings with the STB.?

CSX stopped reporting train length after the?second quarter of 2018,?but?the effect of longer trains, a practice many railroads are adopting, can be seen on the ground.?

In the Village of Evergreen Park, a Chicago suburb, trains spanning multiple miles have blocked intersections throughout the town, making school children late to class and hospital staff late to a major trauma center, residents there?have told the Surface Transportation Board. Some of the children have taken to crawling under the trains to get to school, according to Mayor James Sexton.??

“I quiver every time I see kids crawling under the train,” Sexton told the Business Journal. “It’s only a matter of time until someone is seriously hurt.”

CSX views Evergreen Park as an aberration. Shild said last month that “former issues” were due to “the complexity of Chicago” and equipment that has since been modernized.

“CSX’s goal is to serve customers reliably and minimize the impact of our operations on the surrounding community,” she said. “If we fall short of that goal, we work to understand how those situations can be improved and we coordinate closely with the city and local first responders to ensure the safety of the public while we work through such challenges.”

Evergreen Park said it has not found CSX so responsive, prompting the town to seek federal intervention, according to the town’s filings with the STB.?

“They really don’t seem to give a hoot,” Sexton said.??

Evergreen Park is not alone. In Jacksonville, for example, CSX trains were ticketed for blocking intersections 161 times in 2018 and 130 times in 2017 – up from just one ticket in 2016.?CSX has collected 30 tickets in Jacksonville so far in 2019.

No alternatives

Many of the changes?CSX made?over the past two years would have been impossible, customers told the STB in 2017 and again in 2019, if they could take their business elsewhere.?

The majority of?rail customers in the U.S. – two-thirds of rail-served chemical facilities, for example – have no alternative rail carrier, meaning their options are to ship by one railroad or to ship by truck. Trucks are expensive, given a nationwide driver shortage, and carry about a third as much as a railcar. For some materials, like hazardous chemicals, trucks are not an option.?

This gives railroads significant market power, even over corporate giants like Miller-Coors, Cargill Inc.,?Kinder Morgan?and others that testified before the?STB?in May.?

“We wouldn’t be having this conversation if shippers had other options,” testified Justin?Louchheim, director of government affairs for The Fertilizer Institute.?

That market power has allowed CSX and other railroads to increase the fees it assesses. These fees are major money makers?for CSX and railroads across the country, all of which changed their rules last year in ways that charge customers more when cars are held too long and give customers less time to return cars.??

Across the industry, fines per car per day have risen as high as $200, four times the size of the typical fine six years ago, while customers now often get half the time — just 24 hours — to unload cars, testified the International Warehouse Logistics Association's DeHaan.

“I view this as flogging the back of every American who has to pay the increased price for goods where the railroads are involved,” he said.

Railroads collected $1.2 billion from these fees last year?–?led by CSX with $371 million billed,?a 94 percent increase from 2017.?CSX led again in the first quarter of 2019 with more than $100 million billed.?It collected another $78 million in the second quarter, the second highest behind Norfolk Southern. At about 3 percent of its revenue, CSX has called such revenue insignificant.

Fees have become unavoidable because of?rule changes and?unpredictable railcar?deliveries,?customers told?the STB.?

“They created their own issues of yard congestion, and now they’ve developed a fee for it,” DeHaan said. “It’s amazing.”?

Customers told the regulators in May that they were charged fees even when railcars weren’t ready, were sent in higher numbers than requested, were improperly switched, were the wrong railcars, were late, were not delivered, were not picked up on time and were delayed because of service failures.??

Some?shippers have accused the railroads of using the fees simply as a revenue?generator.?

“Do they want the money, or do they want the improved efficiency and performance?” asked?Scrap Resources CEO?Ben Abrams. “Because it seems like they want the money.”?

The nation’s seven largest railroads, including CSX, defended the changes as an insignificant percentage of their revenues and as a means to incentivize?slow customers to move faster,?which benefits?all customers on the network.?

Surface Transportation board member Martin?Oberman?questioned the logic of this argument, noting that to avoid fees, customers would need to make major capital investments — investments that might not even be feasible.

“What we’re being told is it’s an incentive to make you move faster,” said?Oberman. “What it sounds like is it’s an incentive for you to stop using the railroad.”?

Another money maker: raising rates.? Foote has described higher prices as a virtue of the new model, since it allows railroads to compete as a premium service instead of a commodity, making them more like FedEx than the postal service. The railroad increased revenue per unit by 6 percent last year, resulting in $693 million in new revenue. CSX collected 11 percent more per unit in 2019 than it did in 2016.

Customers contend they have gotten no new value for the higher prices they’re paying.?

“The railroads are effectively doing much less and charging far more for reduced service,” Etzel testified on behalf of Kinder Morgan.??

Regulatory action?

The trail blazed by?CSX?is one?that most U.S. railroads have began to follow?– the nightmare scenario for many shippers.?

“That was the concern when CSX did it,” said the American Chemistry Council’s Scott Jensen. “Everybody worried it would be picked up by the?others.”??

Harrison brought precision scheduled railroading to Canadian National, Canadian Pacific and CSX. Norfolk Southern, Union Pacific and Kansas City Southern have all since adopted the model, leaving?Burlington Northern Santa Fe?as the only abstainer –?although perhaps not for long.?

Berkshire?Hathway?(NYSE: BRK) chairman and CEO Warren Buffett, whose firm owns BNSF, said in May he would be willing to consider some form of the operating model.?

“We?are not above copying anything that is successful, and I think there’s been a good deal that’s been learned by watching these four railroads,” Buffett said.?

Ackman’s Pershing Capital, meanwhile, bought a $688 million stake in BNSF last month.

But in May, STB board members seemed to share?customers’?view of precision scheduled railroading.?

“It has not been lost on me that the two railroads that seem to have the fewest concerns directed at them in the these two days of?hearings are BNSF, which has not adopted precision railroading, and KCS, which has just started adopting some parts of it,” said Chairwoman Ann?Begeman.?

Oberman, too, acknowledged customers’ disappointments with the operating model.? “The room is full of shippers who say PSR [precision-scheduled railroading] has made their lives worse,” he said.

The question remains: Will the regulator step in to curtail the railroads’ changes???

The board has yet to enact any concrete actions, investigations or rule changes, although?members?said in May the board?would hold meetings to determine next steps. It has not held a public meeting on the subject since May.

“Things can be better than they are,” Begeman said.?“The shippers and carriers need each other, and if we need to be the marriage counselor, we will be.”?

Customers, meanwhile, continue to leave rail.??Railroads’ monthly carloads?through May are down 4.7 percent from last year and down?12.2?percent from a decade ago, according to data from the Bureau of Transportation Statistics?—?despite the fact that?trucking is more expensive.?

CSX, however, says it is gaining in market share. Wolfe Research asked shippers this summer which rail carriers would it increase volumes with and which would it decrease volumes with, and CSX netted a 60 percent gain among respondents, while its East Coast rival Norfolk Southern netted a 33 percent loss.

Customers also gave CSX performance a higher rating in the second quarter, 64 percent, than the same quarter a year ago, 49 percent, according to a Cowen Equity Research report.

While CSX has?blamed the overall economy for a recent?drop in?carloads and revenue — with Foote calling?the “present economic backdrop one of the most puzzling I have experienced in my career” —?analysts had expected the railroad’s efficiency gains to bolster the bottom line for at least a few more quarters.

Customers, by contrast, say the changes are driving shippers away.?For Ray Neff, logistics manager for?Lhoist?North America,?the exodus was enough to prompt him?to?contemplate?the end of U.S. freight rail.??

"These charges are accelerating the demise of rail shipments at an alarming rate,” Neff wrote in an STB filing.?“Once it is gone, it is gone."

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[BottomBounce]

$NIO Electric vehicles will grow from 3 million to 125 million by 2030, International Energy Agency forecasts https://www.cnbc.com/2018/05/30/electric-vehicles-will-grow-from-3-million-to-125-million-by-2030-iea.html

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>>> AT&T Hits Highest Level Since 2018 After Elliott Urges Shake-Up


By Scott Deveau

September 9, 2019


https://www.bloomberg.com/news/articles/2019-09-09/elliott-takes-3-2-billion-stake-in-at-t-seeks-asset-sales?srnd=premium


Hedge fund criticizes DirecTV, Time Warner, T-Mobile deals

Stock could gain more than 50% with changes, Elliott says

AT&T Is on the Forefront of 5G Technology, Tech Mahindra CEO Says
Unmute

Elliott Management takes a $3.2 billion stake in AT&T.


AT&T Inc.’s sweeping transformation from Ma Bell to a multimedia titan has gone both too far and not far enough for Elliott Management Corp.

Billionaire Paul Singer’s New York hedge fund disclosed a new $3.2 billion position in AT&T, taking on one of the nation’s biggest and most widely held companies with a plan to boost its share price by more than 50% through asset sales and cost cutting.

Elliott outlined a four-part plan for the company in a letter to its board Monday. The proposal calls for the company to explore divesting assets, including satellite-TV provider DirecTV, the Mexican wireless operations, pieces of the landline business, and others. It urges AT&T, led by Chief Executive Officer Randall Stephenson, to exit businesses that don’t fit its strategy, run a more efficient operation and stop making major acquisitions. Elliott said it would also recommend candidates to add to AT&T’s board.

In response, AT&T said it would review Elliott’s recommendations and said many of them are “ones we are already executing today.”

The telecom giant said its strategy is “driven by the unique portfolio of valuable businesses we’ve assembled across communications networks and media and entertainment, and as Elliott points out, is the foundation for significant value creation. We believe growing and investing in these businesses is the best path forward for our company and our shareholders.”

AT&T shares surged as much as 5.2% to $38.14 in New York trading Monday, reaching their highest level since February 2018.

Elliott said the investment -- among its largest to date -- was made because the company is deeply undervalued after a period of “prolonged and substantial underperformance.” It argued this has been marked by its shares lagging the broader S&P 500 over the past decade. It pointed to a series of strategic setbacks, including $200 billion in acquisitions, the “most damaging” of which was its $39 billion attempted purchase of T-Mobile US Inc. That deal resulted in the largest breakup fee of all time when the government blocked it in 2011 -- about $6 billion in cash and assets.

“In addition to the internal and external distractions it caused itself, AT&T’s failed takeover capitalized a viable competitor for years to come,” Elliott said.

Elliott's pressure for changes boosts AT&T shares
The hedge fund also criticized the subsequent acquisitions of DirecTV and media giant Time Warner Inc.

While the position in AT&T is large, Elliott may have a difficult time pushing for change unless it gets other investors to back its stance. Its newly disclosed stake in AT&T represents just about 1.2% of the company’s total market value.

Elliott’s plan also calls for aggressive cost-cutting measures that aim to improve AT&T’s margins by 3 percentage points by 2022. Those margins have come under pressure amid cord-cutting in video and widespread discounting in wireless, and Elliott said competitors like Verizon Communications Inc. have done a better job addressing those headwinds.

Elliott said in the letter it has identified opportunities for savings in excess of $10 billion, but the plan would only require cost cuts of $5 billion.

Elliott is also calling for a series of governance changes, including separating the roles of CEO and chairman -- currently held by Stephenson -- and the formation of a strategic review committee to identify the opportunities at hand.

Transformative Deals

With a series of deals over the past several years, AT&T has transformed itself from a traditional telecom company into a multimedia behemoth. The company bought satellite-TV provider DirecTV for $67 billion in 2015, leaping into first place among U.S. pay-TV companies. Elliott criticized that deal in its letter as having come “at the absolute peak of the linear TV market.”

AT&T then moved firmly into entertainment and media with the $85 billion acquisition of Time Warner in 2018. That deal brought marquee assets such as HBO, CNN and Warner Bros.

“Despite nearly 600 days passing between signing and closing (and more than a year passing since), AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner,” said Jesse Cohn, a partner at Elliott, and Marc Steinberg, an associate portfolio manager, in the letter. “While it is too soon to tell whether AT&T can create value with Time Warner, we remain cautious on the benefits of this combination.”

High Debt

AT&T is the most indebted company in the world -- not counting financial firms and government-backed entities -- with $194 billion in total debt as of June, a legacy of Stephenson’s steady clip of large acquisitions. The CEO used to keep a spreadsheet of a few dozen companies that he studies on his tablet to plan his next big deal, people familiar with the matter told Bloomberg in 2016.

The stock is among the top 20 most widely held U.S.-traded companies among institutional investors, according to data compiled by Bloomberg. That’s partially because of its steady dividend, which totaled $2.04 a share last year, giving investors a reliable payout in good times and bad.

What Bloomberg Intelligence Says

“AT&T will likely be under greater pressure to streamline operations and wring better performance out of Time Warner following the involvement of activist investor Elliott Management, yet this probably won’t prompt a change in company strategy. ... Elliott’s recommendation to spin off the DirecTV satellite business isn’t practical, in our view, as AT&T likely needs its free cash to help fund its dividend.”

-- John Butler, senior telecom analyst, and Boyoung Kim, associate analyst.

Phone companies have also traditionally been considered a safety net for investors in bad economic times because people still need to communicate, though AT&T’s exposure to the landline business has more recently been a drag on profits because more people are shutting off their home phones and going wireless-only.

President Donald Trump, whose Justice Department unsuccessfully opposed AT&T’s Time Warner acquisition and who has criticized CNN’s coverage of him, tweeted Monday, “Great news that an activist investor is now involved with AT&T.”

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J+J - >>> Why The Opioid Verdict Is Actually A 'Devastating Body Blow' For J&J


Investor's Business Daily

by ALLISON GATLIN

8/27/2019


https://www.investors.com/news/technology/opioid-crisis-jnj-stock-pops-oklahoma-verdict-ohio-case-looms/?src=A00220&yptr=yahoo


Pharmaceutical company Johnson & Johnson's (JNJ) reputation sustained a "devastating body blow" following a $572 million verdict in Oklahoma's opioid crisis, an industry observer said Tuesday.

Unlike most pharmaceutical companies, Johnson & Johnson is also a consumer-facing brand with products like shampoo and Band-Aids, said finance and brand management expert Eric Schiffer. Schiffer is the chief executive of Patriarch Organization and Reputation Management Consultants.

The Oklahoma verdict was $572 million out of a potential $17 billion. But the real cost could be in the billions of dollars in terms of brand equity, Schiffer said. The judgment decimates public trust in Johnson & Johnson via what he called a "devastating body blow that could haunt them for years."

"The judgment is like the black death for the reputation of Johnson & Johnson," he told Investor's Business Daily. "You're witnessing the single greatest self-inflicted reputational wound to a health care brand in modern American history."

Meanwhile, privately held Purdue Pharma appeared on the verge of offering $10 billion to $12 billion to settle more than 2,000 outstanding lawsuits against the company, according to people familiar with the matter cited by CNBC.

Purdue is the maker of OxyContin, a notorious painkiller often noted at the center of the opioid crisis. Lawsuits claim it and other pharmaceutical companies used deceptive marketing practices to stoke sales of opioids, leading to thousands of overdose deaths.

JNJ Stock Rises After Oklahoma Verdict
However, on the stock market today, JNJ stock rose 1.4%, to 129.64. Judge Thad Balkman said Monday that Johnson & Johnson and its Janssen subsidiary created a public nuisance through "misleading marketing and promotion of opioids."

The judgment is just a small portion of the $17 billion Oklahoma attorneys sought. It's also below most investor expectations, which ranged from $500 million to $1.5 billion, according to various analyst reports.

But Schiffer says investors aren't baking in the potential longer-term impact to sales. The verdict adds a "blistering level of disgrace among the public," he said. He predicted a slowdown in sales of products carrying J&J's brand — a massive list of goods like Neutrogena face wash and Pepcid.

"No one believes that this will be the death knell, but it will bring them to their knees in terms of reputation, and that has an impact on sales with consumers," he said. "When you decimate trust, you blow up the opportunity to capture future revenues from consumers."


J&J To Pay For One Year Of Abatement

The $572 million payment equals one year of costs to abate the opioid crisis in Oklahoma, RBC Capital Markets analyst Brandon Henry said in a report to clients. Oklahoma attorneys estimated it would cost $13 billion to $17 billion over 20 years to resolve the opioid crisis.

"Although several of Oklahoma state's witnesses testified that the abatement plan will take at least 20 years of work, the court found that the state did not present sufficient evidence of the amount of time and costs necessary, beyond year one, to abate the opioid crisis," he said.

Before trial, privately held Purdue Pharma and Teva Pharmaceutical (TEVA) settled with Oklahoma for a respective $270 million and $85 million. The $572 million verdict against Johnson & Johnson is out of bounds with the scope of its sales, SVB Leerink analyst Ami Fadia said in his note to clients.

"It shouldn't be a surprise that this value is proportionally greater given that J&J elected to go to trial and ended up getting an unfavorable ruling, but the penalty amount was relatively moderate compared with the $17.2 billion the state attorney general was looking for," she said.

Comparing Opioid Sales In Oklahoma

However, J&J's sales were historically lower than those of Teva and Purdue. Fadia attributes that to the pharmaceutical company's fentanyl patch, dubbed Duragesic, which wouldn't be included in databases tracking pills. In addition, J&J has sold off several subsidiaries that make ingredients for opioids.

The pharmaceutical company is planning to appeal, claiming it abided by laws and used responsible marketing practices. Further, J&J says its drugs have accounted for less than 1% of total opioid sales in Oklahoma and the U.S.

"Janssen did not cause the opioid crisis in Oklahoma, and neither the facts nor the law support this outcome," J&J General Counsel Michael Ullmann said in a written statement. "We recognize the opioid crisis is a tremendously complex public health issue and we have deep sympathy for everyone affected."

Pharmaceutical Companies Brace For Ohio Trial

Relatively speaking, the case in Oklahoma was small.

Investors are now turning to a consolidated case in Ohio featuring some 1,600 claims. The cases are vastly different, analysts say. Both the public nuisance claim and the limited number of defendants make the Oklahoma case an outlier.

The Ohio case features roughly a dozen pharmaceutical companies, their subsidiary and drug distributors. The opioid crisis claims have been consolidated in one court. A jury trial will begin in late October, RBC's Henry said.

"Recall that in Cleveland, Ohio, more than 1,600 cases brought by states, counties, cities and other groups (representing 85% of outstanding cases) have been consolidated in a federal court," he said. "This is the more important trial for the drug manufacturers."

Last week, Endo (ENDP) reached a not-yet-finalized $10 million settlement with two counties in Ohio. Reports also suggested Allergan (AGN) could be nearing a settlement.

Pharmaceutical companies Teva and Mallinckrodt (MNK) are also defendants. UBS analyst Navin Jacob suggested the Oklahoma verdict against J&J could extrapolate out to $3.9 billion to $16.8 billion in damages across all 50 states for Teva.

Teva stock toppled 9.6%, to 6.71, on Tuesday. Mallinckrodt stock crashed 15.6%, to 3.56.

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>>> Johnson & Johnson to pay $572M in Oklahoma's historic opioid trial


MSN

8-26-19


https://www.msn.com/en-us/news/us/johnson-and-johnson-to-pay-dollar572m-in-oklahomas-historic-opioid-trial/ar-AAGlVoo?li=BBnb7Kz&ocid=mailsignout#page=2


An Oklahoma judge on Monday found Johnson & Johnson and its subsidiaries helped fuel the state's opioid drug crisis and ordered the consumer products giant to pay $572 million to help abate the problem in the coming years.

Cleveland County District Judge Thad Balkman's ruling followed the first state opioid case to make it to trial and could help shape negotiations over roughly 1,500 similar lawsuits filed by state, local and tribal governments consolidated before a federal judge in Ohio.

"The opioid crisis has ravaged the state of Oklahoma," Balkman said before announcing the verdict. "It must be abated immediately."

The companies are expected to appeal the ruling to the Oklahoma Supreme Court.

Before Oklahoma's trial began May 28, Oklahoma reached settlements with two other defendant groups - a $270 million deal with OxyContin-maker Purdue Pharma and an $85 million settlement with Israeli-owned Teva Pharmaceutical Industries Ltd.

Oklahoma argued the companies and their subsidiaries created a public nuisance by launching an aggressive and misleading marketing campaign that overstated how effective the drugs were for treating chronic pain and understated the risk of addiction. Oklahoma Attorney General Mike Hunter says opioid overdoses killed 4,653 people in the state from 2007 to 2017.

Mike Hunter has called Johnson & Johnson a "kingpin" company that was motivated by greed. He specifically pointed to two former Johnson & Johnson subsidiaries, Noramco and Tasmanian Alkaloids, which produced much of the raw opium used by other manufacturers to produce the drugs.

"They've been the principal origin for the active pharmaceutical ingredient in prescription opioids in the country for the last two decades," Hunter said after the trial ended July 15. "It is one of the most important elements of causation with regard to why the defendants ... are responsible for the epidemic in the country and in Oklahoma."

Attorneys for the company have maintained they were part of a lawful and heavily regulated industry subject to strict federal oversight, including the U.S. Drug Enforcement Agency and the Food and Drug Administration, during every step of the supply chain. Lead attorney Larry Ottaway said during closing arguments that opioid drugs serve a critical health need - to address chronic pain that affects thousands of Oklahomans every day.

"This problem of untreated chronic pain afflicts people here in Oklahoma," Ottaway said.

Oklahoma pursued the case under the state's public nuisance statute and presented the judge with a plan to abate the crisis that would cost between $12.6 billion for 20 years and $17.5 billion over 30 years. Attorneys for Johnson & Johnson have said that estimate is wildly inflated.

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>>> Johnson & Johnson faces multibillion opioids lawsuit that could upend big pharma


Oklahoma is holding the drug giant with the family-friendly image responsible for its addiction epidemic


The Guardian

by Chris McGreal


https://www.theguardian.com/us-news/2019/jun/22/johnson-and-johnson-opioids-crisis-lawsuit-latest-trial


The state of Oklahoma is suing Johnson & Johnson in a multibillion-dollar lawsuit.

Day after day, the memos flashing across screens in an Oklahoma courtroom have jarred with the family-friendly public image of Johnson & Johnson, the pharmaceutical giant best known for baby powder and Band-Aid.

In one missive, a sales representative dismissed a doctor’s fears that patients might become addicted to the company’s opioid painkillers by telling him those who didn’t die probably wouldn’t get hooked. Another proposes targeting sales of the powerfully addictive drugs at those most at risk: men under 40.

As the state of Oklahoma’s multibillion-dollar lawsuit against Johnson & Johnson has unfolded over the past month, the company has struggled to explain marketing strategies its accusers say dangerously misrepresented the risk of opioid addiction to doctors, manipulated medical research, and helped drive an epidemic that has claimed 400,000 lives over the past two decades.

Johnson & Johnson profited further as demand for opioids surged by buying poppy growing companies in Australia to supply the raw narcotic for its own medicines and other American drug makers.

One expert witness at the forefront of combatting the epidemic, Dr Andrew Kolodny, told the court he had little idea about Johnson & Johnson’s role until he saw the evidence in the case.

“I think it’s fair to characterize Johnson & Johnson as a kingpin in our opioid crisis,” he said.

Oklahoma’s attorney general, Mike Hunter, is suing Johnson & Johnson for billions of dollars for its alleged part in driving addiction and overdoses in his state in the first full trial of a drug maker over the opioid epidemic.

But Hunter’s lawsuit has put the wider industry in the dock, too, by laying out how opioid manufacturers worked together to drive up sales by using their huge resources to influence medical policy and doctor prescribing. Hunter said the strategy was motivated by the industry’s “greed” as profits surged.

The case is being closely watched by a host of opioid makers, drug distributors and pharmacy chains facing more than 2,000 other lawsuits by communities across the country to see if a court is prepared to hold a pharmaceutical firm responsible for the worst drug epidemic in American history.

Hunter accuses Johnson & Johnson of joining with other companies to create a false narrative of an epidemic of untreated pain in the US to which opioids were the solution, in part by funding front organizations such as the American Pain Society. The strategy helped drive a surge in opioid prescribing as narcotic painkillers ballooned into a multibillion-dollar-a-year market.

Purdue Pharma kickstarted the epidemic with its high-strength, long-lasting opioid, OxyContin, in the mid-1990s. The court heard how Johnson & Johnson quickly realized the potential and set about competing.

Its drug division, Janssen, was founded by Paul Janssen, a Belgian who invented an artificial opioid, fentanyl, in 1960. In the early 1990s, Janssen Pharmaceuticals was selling a fentanyl patch, Duragesic, to treat severe pain in people with cancer. But with the arrival of OxyContin, the company aggressively widened the market for Duragesic by falsely claiming there was a very low risk of addiction to the drug, according to Hunter.

Hunter brought to court 35 boxes containing thousands of subpoenaed “call notes” – sales reps reports on their meetings with doctors – that he claimed showed Johnson & Johnson was more interested in increasing demand for its drug than seeing it properly prescribed.

Johnson & Johnson hired the consultants McKinsey & Company to identify opportunities to sell more. McKinsey recommended sales reps focus on doctors already prescribing large amounts of OxyContin. McKinsey also proposed a strategy to keep patients on Duragesic even if they had an “adverse event”. The broader push was to get as many patients as possible off of lower strength opioids and on to Johnson & Johnson’s more powerful drugs.

As the company ramped up its drive, sales of Duragesic surged past $1bn a year. A senior Johnson & Johnson marketing executive, Kimberly Deem-Eshleman, defended the sales strategy as reps “educating” doctors.

Johnson & Johnson, which is already facing compensation payments of several billion dollars after asbestos in its baby powder caused cancer, strongly denies that it bears responsibility for the opioid epidemic.

At the core of its defense is the claim that the company was distributing drugs approved by federal agencies such as the Food and Drug Administration, and that it sold a relatively small amount of opioids in Oklahoma that cannot be tied to any specific overdoses.

Hunter is painting his case on a much broader canvas by characterizing the company as working in coordination with its rivals to change the narrative around opioids to drive up prescribing across the country so that they all benefitted from a bigger market.

Some of the most damning testimony has come from Dr Russell Portenoy, a pain specialist and influential early cheerleader for the wide prescribing of opioids who was a paid adviser to Johnson & Johnson, Purdue and other drug makers.

Portenoy told the court that painkiller manufacturers “understated the risks of opioids, particularly the risk of abuse, addiction and overdose” to boost sales. He accused the drug makers of distorting his research and that of other specialists by selectively quoting the results, including omitting information about the dangers of narcotics.

“Those messages about risk were neglected and de-emphasised,” he said in recorded video testimony shown in court. “I think the purpose of doing that was to improve the sales of their products. ”

?Portenoy was among a group of doctors hired by Johnson & Johnson and Purdue as speakers to promote opioids to other physicians. He said the talks “generally favored the drugs created by the drug companies” even though they were ostensibly offering independent advice.

The court was shown Janssen’s 2012 business plan which said that “speaker programs often trigger first use” of Duragesic.

The Oklahoma case is closely watched by other drug firms being sued by towns, cities and counties in nearly 2,000 lawsuits combined in a single action in federal court in Ohio, known as the Multi District Litigation (MDL).

Last week, lawyers for the plaintiffs in the MDL proposed that any compensation settlement cover every municipality and county in the US in order to deal with all potential lawsuits at once. The lawyers believe this will be an incentive for the drug firms to settle because an agreement will shield them from further claims, although it would not deal with actions by state attorney generals such as the one underway in Oklahoma.

Paul Farrell, one of the lead lawyers on the MDL, said he was hesitant to put too much weight on any one trial. But he said that if Johnson & Johnson lose the Oklahoma case it would be a blow to the other drug companies pursuing similar lines of defence.

“If the judge decides to rule that Johnson & Johnson is not liable in Oklahoma because of the facts in Oklahoma, then I think they’re going to have to replicate that result in 49 other states and in at least 1,900 other governmental entity cases. If, on the other hand, the judge does find liability against Johnson & Johnson, despite the fact that they claim their market share was so small, you would think that that would have reverberations across the industry,” he said.

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>>> GE Rout Ambushes Hedge Funds After Second-Quarter Buying Spree


Bloomberg

By Brendan Case

August 16, 2019


https://www.bloomberg.com/news/articles/2019-08-16/ge-rout-ambushes-hedge-funds-after-second-quarter-buying-spree?srnd=premium


Shares dropped most in 11 years after report by Madoff accuser

CEO’s turnaround drive had won over investors during spring

GE plummeted 11% to $8.01 on Thursday, the biggest drop since April 2008.



General Electric Co.’s biggest plunge in 11 years came at an awkward time for some of Wall Street’s savviest investors.

Hedge funds added more shares of GE than any other company to their industrial investments in the second quarter, according to an initial analysis of U.S. regulatory filings compiled by Bloomberg Global Data. Their holdings of the Boston-based company increased by 25% to a total of 199.3 million shares, valued at $2.09 billion at the quarter’s end.

While some recent buyers may have sold since then, many of them were almost certainly left holding the bag when Harry Markopolos, who rose to prominence by blowing the whistle on Bernie Madoff, accused GE of “accounting fraud” Thursday. Markopolos’s report wiped out much of the company’s share gains this year, even as Chief Executive Officer Larry Culp labeled the analysis “market manipulation -- pure and simple.”

The rout highlights the perils in trying to call a bottom to a troubled stock as the company attempts a turnaround from an epic collapse. GE’s market value fell by more than $200 billion in the two years ended Dec. 31 amid weak cash flow, a slump in the power-equipment market and two CEO changes. While Culp vowed to improve financial transparency after taking over in October, Markopolos accused the company of masking tens of billions in liabilities.

GE plummeted 11% to $8.01 on Thursday, the biggest drop since April 2008. That cut this year’s advance to 10%, compared with a 13% gain in an S&P index of industrial stocks. The company is the worst performer on that gauge since the end of the second quarter, with a steady decline since it reported earnings July 31.

GE trails industrial peers after Thursday's plunge

Following the close of Thursday’s trading, GE climbed about 2% after a regulatory disclosure that Culp purchased about $2 million in shares amid the rout. He bought $3 million of stock earlier this week, a move the company said reflects “confidence in GE’s long-term strengths and its progress.”

‘Impending Losses’

Markopolos, who is working with a short seller, took the opposite stance. He said GE will need to increase its insurance reserves for a long-term care portfolio immediately by $18.5 billion in cash -- plus an additional noncash charge of $10.5 billion when new accounting rules take effect. GE also is hiding a loss of more than $9 billion on its holdings in oilfield-services company Baker Hughes, he said.

“These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants,” Markopolos said in his report.

GE defended its accounting in a statement by Culp and board member Leslie Seidman, who chairs the audit committee.

“The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis, but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit,” Culp said of Markopolos.

Seidman said the analysis included “novel interpretations and downright mistakes” about accounting requirements.

Hedge-Fund Holdings

For the analysis of hedge-fund investments, Bloomberg looked at 824 filings for the second quarter, which showed $1.66 trillion in total stock holdings. Industrial-sector investments accounted for $120.5 billion, or 7.2% of the value of the securities listed in the filings. The firms cut their holdings the most in railroad CSX Corp., which has fallen 17% since the end of the period.

It’s impossible to know which hedge funds may have sold some or all of their GE holdings before Thursday’s rout. The company’s shares were little changed in July before their August decline.

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>>> Warren Buffett sends a silent warning to investors


Motley Fool

8-7-19

by Sean Williams


https://www.msn.com/en-us/money/markets/warren-buffett-sends-a-silent-warning-to-investors/ar-AAFt2gc?li=BBnb7Kz&ocid=mailsignout#page=2


Warren Buffett is arguably the greatest investor of our time. With around $10,000 to his name in the mid-1950s, the Oracle of Omaha, as he's now known, has grown his net worth to more than $84 billion. And, mind you, this is a modest figure, given the tens of billions of dollars Buffett has generously given to charity over the years. If not for his ongoing philanthropic contributions, he might very well dethrone Amazon CEO Jeff Bezos as the richest man on Earth.

Buffett, who has helmed conglomerate Berkshire Hathaway as its CEO for almost 50 years, is an interesting case. Whereas every method under the sun has been seemingly tested to beat the stock market and get rich, Buffett has done so by simply focusing on value, buying solid companies, and hanging onto them for very long periods. Coca-Cola and Wells Fargo, for example, have been staples of the Berkshire Hathaway investment portfolio for more than 30 years. And with the book value of Berkshire Hathaway gaining 1,091,899% since 1965 (through Dec. 31, 2018), who's to argue with his performance?

When Buffett speaks, Wall Street listens

Not surprisingly, this has created quite the following for the Oracle of Omaha. Every year, when Berkshire Hathaway hosts its annual stockholder meeting, tens of thousands of shareholders, enthusiasts, and press alike, descend on Omaha, Nebraska, to hear Buffett's latest musings on stocks, the economy, and Berkshire's performance. Aside from Berkshire's more than $212 billion investment portfolio, the conglomerate also owns more than five dozen businesses in an array of sectors and industries, with a core focus on finance.

Suffice it to say Buffett is an investing icon -- and he's often known for his bullish stance on the economy and long-term outlook for businesses. Here's just a small snippet of some commonly quoted Buffett blurbs:

"If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."

"Someone's sitting in the shade today because someone planted a tree a long time ago."

"When we own portion of outstanding businesses with outstanding managements, our favorite holding period is forever."
This confidence in the U.S. economy, and in the stock market gaining value over the long run, has defined Buffett's approach to value investing for decades.

However, Buffett's words and his actions have been at odds for a while, and it just might be a silent warning that investors should take note of.

Buffett's inaction is a warning to investors

Last weekend, Berkshire Hathaway released its second-quarter operating results, which featured, among other highlights, a record $122.4 billion in accumulated cash and cash equivalents. While cash is king, this isn't the case for an investment company like Berkshire Hathaway that aims to put its capital to work in companies that it views as lucratively valued. Whether it's making direct investments in businesses, or acquiring them outright, as Berkshire has done dozens of times before, this cash pile, in Buffett's own previous words, would be better off closer to $30 billion.

So why has Berkshire's cash level risen to an all-time record? The simple answer is that Buffett and his team haven't made a needle-moving purchase since acquiring Precision Castparts about 3.5 years ago. Buffett has made clear that the only acquisitions he's interested in are those that'll move the needle for megacap company Berkshire Hathaway.

While this is perfectly sound reasoning for not having pulled the trigger on any major deals, it's also a silent warning to investors that Buffett and his team don't see any intriguing values at the moment. Another way of rephrasing this statement: Stock market valuations aren't attractive.

And it's not just Buffett's growing cash hoard that's been doing the talking. Berkshire Hathaway was a net-seller of equities during the first quarter, and according to Investor's Business Daily was an even steeper net-seller of stocks during the second quarter. That's exceptionally uncharacteristic of Buffett, who is known for his long-term approach to investing.

Furthermore, Berkshire Hathaway also decreased its share buybacks during the second quarter, despite previous rumblings that it could get more aggressive on the buyback front. The company repurchased $400 million shares of its own stock in Q2, down from $1.7 billion worth of shares in the sequential first quarter.

In other words, all of Buffett's actions would appear to suggest that the Oracle of Omaha doesn't view the stock market as all that attractive right now. Of course, that's nothing Buffett would ever come out and say. But his actions are speaking much louder than his words at the moment, and investors would be wise to take note.

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>>> GE Climbs as Improved 2019 Forecast Buoys Culp’s Turnaround


By Rick Clough

July 31, 2019


https://www.bloomberg.com/news/articles/2019-07-31/ge-raises-outlook-amid-power-improvement-as-turnaround-advances?srnd=premium


CEO calls outlook ‘a sign of progress, a sign of stability’

CFO Miller to step down soon as company seeks a replacement


General Electric Co. gained after raising its outlook for the year as the long-suffering power division showed signs of improvement, boosting Chief Executive Officer Larry Culp’s efforts to rejuvenate the ailing manufacturer.

The industrial businesses will generate as much as $1 billion in cash this year, up from the previous range of no more than zero, GE said in a statement Wednesday as it reported second-quarter earnings. The company also boosted its 2019 forecast for adjusted profit by 5 cents a share. In a further break with the past, GE said Chief Financial Officer Jamie Miller will step down soon.

The brighter outlook “is a sign of progress, a sign of stability here, but you’re not going to hear us trying to extrapolate too much too soon,” Culp said in an interview. “To the extent that you saw a lot of negative surprises at the back half of last year and fewer this year, while it’s early and we’re far from perfect, I do think that is a sign.”

GE's has gained twice as much as other industrials this year

The results -- boosted by quarterly earnings above Wall Street’s expectations -- mark the second straight quarter of improved performance under Culp, who set a low bar for himself by slashing the dividend and warning of a weak outlook in power equipment after taking the reins in October. The new CEO has sought to stabilize cash flow and reduce debt to stem one of the worst slumps in the company’s 127-year history.

“Things are turning,” said Nicholas Heymann, an analyst with William Blair & Co. While GE still has more work to do, especially in nursing the power business back to health, the latest moves suggest Culp is “comfortable in his own skin right now. He knows the key levers to pull.”

The shares advanced 3.3% to $10.87 before regular trading in New York. GE climbed 45% this year through Tuesday, doubling the increase in an Standard & Poor’s index of industrial stocks. With this year’s gain, GE has recovered much of the decline during the early part of Culp’s tenure.

Beating Expectations
GE said Miller would “transition from her role.” The company has started a search for a new CFO and Miller will stay on for now to smooth the changeover.

Adjusted profit fell to 17 cents a share in the second quarter, topping the 12-cent average of analyst estimates compiled by Bloomberg. Free cash flow from the manufacturing units was minus $1 billion, at the high end of GE’s previous expectations.

The results failed to impress Steve Tusa, an analyst at JPMorgan Chase & Co. who earned a reputation for prescience in recent years after emerging as the biggest GE bear on Wall Street. He questioned whether GE’s performance merited the improved outlook for this year, and recommended selling the shares into any gains.

“The stock is up on the headlines, as it has been many times before, but, like in the past, the underlying core fundamentals are actually a bit worse,” he said in a note to clients.

737 Max

Cash flow, a closely watched metric that is considered an indicator of company performance and earnings potential, has been a central weakness during GE’s recent slump. The company had previously said it expected to run through as much as $2 billion this year before a rebound in 2020.

In the second quarter, sales rose 4.8% at GE Aviation while orders fell 10%. The division, a longtime bright spot that has run into hurdles recently, makes engines for Boeing Co.’s 737 Max and 777X, the debut of which is facing delays because of an engine problem.

Culp said GE faces a cash headwind of $400 million a quarter as long as the Max isn’t flying. The Boston-based company makes the engine for the plane -- which has been grounded after a pair of crashes killed 346 people -- through a joint venture with France’s Safran SA.

Revenue at GE Power, which has struggled through a downturn in the gas-turbine market, fell 25%. But the business showed signs of improvement, Culp said, and orders in the gas-power operation climbed 27%.

Adjusted profit this year will be 55 cents to 65 cents a share, up a nickel from the prior range, the company said.

The outlook adjustment was due in part to “improvements at power, lower restructuring and interest, higher earnings and better visibility at the half,” Culp said in the statement.

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>>> J&J Denials of Asbestos in Baby Powder Spur Criminal Probe


Bloomberg

By Jef Feeley

July 12, 2019


https://www.bloomberg.com/news/articles/2019-07-12/j-j-denials-of-asbestos-in-baby-powder-spur-u-s-criminal-probe


Grand jury is examining what officials knew about cancer risks

J&J scientists wrote memos warning of asbestos-laced talc

The U.S. Justice Department is pursuing a criminal investigation into whether Johnson & Johnson lied to the public about the possible cancer risks of its talcum powder, people with knowledge of the matter said.

The criminal probe, which hasn’t been reported previously, coincides with a regulatory investigation and civil claims by thousands of cancer patients that J&J’s Baby Powder talc was responsible for their illness. Now, a grand jury in Washington is examining documents related to what company officials knew about any carcinogens in their products, the people said.

Baby Powder accounts for only a tiny fraction of J&J’s annual revenue, but it’s been a core brand for the company for more than a century. Questions about the product’s safety have led to more than 14,000 lawsuits from consumers asserting that the company’s talc products caused their ovarian cancer or mesothelioma, a rare form of the disease linked to asbestos exposure.

J&J disclosed in February that it had received subpoenas, but little was known then about the investigation behind them, including whether the matter was civil or criminal. The filing didn’t mention a grand jury.

The company said in a statement Friday that there had been no new developments. “We have been fully cooperating with the previously disclosed DOJ investigation and will continue to do so,” said J&J spokeswoman Kim Montagnino. “Johnson’s Baby Powder does not contain asbestos or cause cancer, as supported by decades of independent clinical evidence.”

Shares of J&J declined by 4.2% to close at $134.30.

Internal Memos

J&J, the world’s largest maker of health care products, has said safety tests of its Baby Powder over many decades have shown no presence of asbestos. But some of the lawsuits have turned up internal memos as far back as the 1960s and ’70s that contain warnings from company scientists that asbestos detected in J&J’s talc was a “severe health hazard” that could pose a legal risk for the company.

Justice Department prosecutors, FBI agents and Securities and Exchange Commission regulators are almost surely looking at whether J&J officials’ public denials that their talc-based products ever contained asbestos were truthful, legal experts said. SEC spokeswoman Judy Burns declined to comment.

Nearly a dozen juries have concluded J&J knew that some of their Baby Powder and former Shower-to-Shower products had at least trace amounts of asbestos and failed to disclose that to consumers. Over the past three years, jurors have awarded a total of more than $5 billion to people who blame the powders for their cancers.

The company has said it has set aside money for legal costs related to talc claims but hasn’t said how much. Bloomberg Intelligence estimates that civil settlements could cost J&J as much as $15 billion overall. J&J says it has no liability because the products are safe.

Shares of J&J plunged as much as 17% in December -- erasing billions in value -- after news reports about memos appearing to show that J&J executives knew the products were contaminated with asbestos as early as the 1970s.

Document Requests

The February document requests from the Justice Department, the SEC and the top Democrat on the Senate Committee on Health, Education, Labor and Pensions sought information about the company’s knowledge of asbestos in its talc-based products. J&J said it would be “cooperating with these government inquiries and will be producing documents in response.”

The grand jury was impaneled after the Justice Department’s fraud unit started an investigation. Investigators are probably looking for more internal communications that might conflict with the company’s public statements, said Henry Klingeman, a former federal prosecutor now in private practice in New Jersey.

“Since J&J is a public company, they are probably looking at whether their statements amounted to fraudulent statements to consumers and regulators,” Klingeman said in an interview. “I’d also think they’d be looking at whether they violated securities-fraud laws.”

The grand jury inquiry is likely to influence any talks between J&J and plaintiffs over resolving their claims out of court, said Peter Henning, a law professor at Wayne State University in Detroit.

“This will make it more difficult for Johnson & Johnson to settle the civil cases as long as there is a continuing criminal investigation, which may require employees to testify before a federal grand jury,” Henning said. “Civil plaintiffs may not want to settle until they know better whether criminal charges will be filed, which they can use to aid their cases.”

Investor Suits

In addition to the consumers’ suits, some J&J investors have accused the company of defrauding them, arguing in lawsuits that J&J failed to disclose that its powder was tainted and that the company’s shares were artificially inflated as a result.

Jacob Frenkel, a former SEC trial lawyer now in private practice in Washington, said there’s no timeline for grand-jury investigations and no certainty it will result in charges. “This could be a high-profile government investigation that goes nowhere,” he said. “Regardless of the outcome, the timetable for such investigations can measure in years, not months,” he added.

Baby powder is mostly talc, a mineral used to keep skin dry and as an astringent to prevent diaper rash. It’s also used in consumer products such as makeup, paint and dietary supplements. But geological formations that contain talc also yield asbestos, a mineral once used in products such as building insulation.

Scientists have found strong links between asbestos and mesothelioma, while plaintiffs’ lawyers claim that studies have also shown a link between talc and ovarian cancer. In court filings, J&J has disputed both contentions.

Indemnity Agreement

J&J sold the rights to its Shower-to-Shower talcum powder to Valeant Pharmaceuticals International Inc. in 2012. Valeant, which changed its name to Bausch Health Cos last year, has an indemnity agreement with J&J covering asbestos suits tied to the powder.

Juries in states such as Missouri, California and New Jersey have ruled for some of the plaintiffs since suits started going to trial in 2016. However, some of those verdicts have been thrown out by judges and others are on appeal. Some other cases have resulted in hung juries or outright wins for J&J.

Most of the ovarian cancer cases, along with investors’ suits, have been consolidated before a federal judge in New Jersey for pretrial information exchanges and test trials. The first trials of those cases haven’t yet been set.

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SpotOn, NIO would have been a great short, and there's still no sign of a bottom yet. You've actually been long?

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GE - >>> CFM wins blockbuster jet engine order from IndiGo -sources


Reuters

June 12, 2019


https://finance.yahoo.com/news/cfm-wins-blockbuster-jet-engine-215748512.html


PARIS, June 12 (Reuters) - Engine maker CFM International is poised to announce one of the world's largest jet engine orders with a deal for more than 600 engines from India's IndiGo, industry sources said.

The French-U.S. engine maker, owned by General Electric and France's Safran, has been competing with the airline's existing engine supplier, Pratt & Whitney, to provide the power for 280 twin-engine A320-family jetliners already on order from Airbus by the Delhi-based budget carrier.

The airline has selected CFM for the order, which is expected to rise above 600 engines including spares, the sources said. It was unclear if this includes previous options.

The two sides are putting finishing touches to the deal in time for an announcement at next week's Paris Airshow, they added. CFM International and IndiGo declined to comment.

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GE - >>> Was Jack Welch Really That Good?

General Electric’s legendary CEO was good—but he was also lucky.


Bloomberg

By Joe Nocera

June 12, 2019


https://www.bloomberg.com/news/articles/2019-06-12/reassessing-jack-welch-s-legacy-after-ge-s-decline-joe-nocera?srnd=premium


Of all the key moments in Jack Welch’s storied tenure as General Electric Co.’s chief executive officer, there’s one that’s always overlooked. It took place on Friday, Aug. 13, 1982.

Although he’d been CEO for only 16 months, the 46-year-old Welch had already put his stamp on the place. He was blowing up the bureaucracy, eliminating the formalized meetings that had long marked GE’s culture, and installing a blunter, more freewheeling style that prioritized “facing realities” over “superficial congeniality,” as Welch later put it in Jack: Straight From the Gut. He was beginning to execute on his famous dictum that if a GE business wasn’t first or second in its market, it should be sold, fixed, or closed. (In his first two years, Welch sold 71 businesses.) And though he wasn’t yet known as Neutron Jack, the large-scale layoffs that would earn him that nickname were well under way.

Yet the stock market had barely noticed. GE’s shares were actually down 5% during that period, and investors still viewed the company as a dividend play. Then came Aug. 13. That, we know now, was the first day of a powerful bull market, one that would see the S&P 500 index return more than 2,400% by the time it ended 18 years later. Once the bull began running, GE’s stock went in only one direction: up. By the end of 1983, it had returned more than 90%; within five years, 237%. A sprawling, century-old conglomerate had become, improbably, a growth stock.

“Jack was one of the finest managers I’ve ever met.”

There’s no question that Welch was a brilliant and forward-thinking chief executive. With one big exception (GE’s acquisition of Kidder, Peabody & Co.), everything he touched seemed to turn to gold. Even as General Motors, U.S. Steel, Eastman Kodak, and other companies lost market share to foreign competitors, Welch’s GE was making inroads internationally. He turned GE Capital from a ho-hum ­consumer-finance arm—underwriting loans for, say, GE refrigerators—into an immense generator of profits. He was one of the first CEOs to reward his top executives with stock options—lots and lots of stock options, making many of them millionaires. He also believed that the mediocre should go elsewhere if they didn’t improve quickly, and he acted on that belief. When Welch adopted Six Sigma, a set of processes designed to create continuous improvement, half the CEOs in the Fortune 500 raced to adopt it as well. Under Welch, GE became famous for developing outstanding managers, men (always men) such as W. James McNerney Jr., Lawrence Bossidy, and David Cote, all of whom became CEOs of important industrial companies.

So, yes, Jack Welch was really good. But he was also lucky. According to Fortune magazine’s Geoffrey Colvin, in a story he wrote near the end of Welch’s tenure, Welch tossed aside GE’s historic ambition—“simply to grow faster than the economy”—and replaced it with a new mission: “to be the world’s most valuable company.” In other words, Welch redirected GE’s focus on share-price appreciation at the exact moment the greatest bull market of our lifetime was starting.

Prior to August 1982, the men who ran America’s big companies didn’t spend a whole lot of time worrying about their stock price. For one thing, CEOs weren’t measured by how well the stock did. For another, the business world had largely given up on equities. Nothing typified that more than that infamous 1979 BusinessWeek cover, “The Death of Equities.”

Consider Reg Jones, Welch’s predecessor. In his day, Jones was widely considered the country’s best CEO, even though GE’s stock dropped 21% during his nine years at the helm. When he died in 2004, the New York Times attributed the stock’s poor performance to “investor disenchantment with stocks generally, rather than the company’s operations.”

The bull market changed all that. The creation of 401(k)s and IRAs meant the stock market was suddenly important to Americans saving for retirement. Corporate raiders such as T. Boone Pickens and Carl Icahn began demanding that companies start paying attention to shareholders. And executives themselves realized that a rising stock price could make them wealthy thanks to the stock options that became part of every CEO’s compensation package. Suddenly, nothing mattered more than stock performance.

Welch partisans will tell you that GE’s shares didn’t just rise in lockstep with the S&P 500; they absolutely obliterated the index. That’s true: GE’s total return during Welch’s 20 years was about 5,200%, more than double that of the S&P 500. GE’s revenue grew from $25 billion to $130 billion while its profits grew tenfold, to $15 billion.

“He was the first CEO to lay off workers while the company was still profitable. There were people who hated him for it. But if he hadn’t done it, GE wouldn’t have thrived.”

“Jack was one of the finest managers I’ve ever met,” billionaire investor and former GE director Ken Langone told CNBC last year. “Every 90 days he would meet with all his different business segments and drill down. He knew everything about his businesses.”

“Jack changed the rules of the game,” says John A. Byrne, who for years wrote about Welch when he was on the BusinessWeek staff. “He was the first CEO to lay off workers while the company was still profitable. There were people who hated him for it. But if he hadn’t done it, GE wouldn’t have thrived.”

“He motivated. He inspired,” says Paul Argenti, a longtime business professor and Welch observer at Dartmouth College’s Tuck School of Business. “He was great at defining and executing a strategy. And changing it when it needed to change. He was the consummate leader of his time.”

I don’t disagree with any of that. But I also recall another reason Wall Street was so enamored of Welch: Quarter after quarter, this huge, unwieldy conglomerate beat the Street’s earnings estimates by a penny or two. Given the ups and downs of business, it was an almost miraculous feat. The profit GE Capital generated was only one of the reasons Welch valued it so much. The other reason was that it was GE’s black box. It gave him the means to dispense those quarterly miracles.

Argenti says he doesn’t think Welch’s methods would work today. “Beating by a penny has gone away,” he told me. Today’s employees tend to respond best to a different kind of leadership—quieter and less self-promotional, as exemplified by Tim Cook at Apple Inc., say, or Reed Hastings at Netflix Inc.

Still, by the time Welch retired in September 2001, he was widely hailed as the greatest CEO of his time, maybe of all time. Fortune named him manager of the century; BusinessWeek gave him and his wife, Suzy, a column. But it seems to me that GE’s deterioration during Jeff Immelt’s time as chief executive officer should cause us to question whether such accolades were truly deserved.

One issue is whether the conglomerate structure Welch turned over to Immelt was sustainable. Take GE Capital again. Immelt critics point out that he depended on it for profits even more than Welch did. But a good part of the reason for this is that the business climate Immelt operated in was far more difficult than anything Welch ever faced. The 2008 financial crisis exposed how woefully undercapitalized GE Capital was. It had far too many substandard loans on its books, as it stretched for profits that were harder to come by. Would Welch have prevented the fall of GE Capital? Maybe. But it was he who created the dependence on that division in the first place.

The second issue has to do with the larger business culture. Yes, hundreds of other CEOs adopted Six Sigma after Welch did. But they also bought into his obsession with the stock price. At its worst, that obsession gave us Enron Corp. and WorldCom. But even putting crookedness aside, it led most of corporate America to care primarily about dancing to Wall Street’s tune. Employees, communities, and even customers became less important than “maximizing shareholder value.”

Then there’s the question of Welch’s successor, Immelt. Welch now claims that Immelt fooled him—that he gave the impression of being a better leader than he turned out to be. But c’mon. Immelt joined GE in 1982; Welch had almost two decades to size him up. If one of the most important jobs of a CEO is to pick his successor—and it is—then Welch failed.

A year after Welch retired, BusinessWeek asked the great management thinker Jim Collins whether Welch was a “Level 5” leader, Collins’s highest accolade for a CEO. He responded: “His report card does not come in until Immelt exceeds him. If Immelt does not exceed him, then he has failed. Jack Welch did not make GE great. GE was already great. Every GE CEO has been to his era what Welch was to his, without exception. It takes 50 years to create a GE. Generations of leaders built it. Whether Welch was a Level 5 comes down to a question we don’t know the answer to. Was Welch first and foremost ambitious for himself or for GE? Only he knows that.”

Here’s one other thing. As I noted earlier, the great bull market ended on March 24, 2000. Tech companies such as Pets.com imploded. Solid companies such as Cisco Systems Inc. saw their stock price fall by three-quarters, and they still ­haven’t fully recovered.

Jack Welch’s GE wasn’t immune. From March 24, 2000, to Sept. 6, 2001, when Welch retired, GE’s shares fell 24%. Was he managing any differently? No. Had he lost his touch when it came to earnings? No, again. The only thing that had changed is that the market was going down instead of up. Even Welch couldn’t defy a bear market.

Was Jack Welch a great manager? Of course he was. But the bull market—and the culture’s new emphasis on share price—made him look better than he really was. And by the way, the greatest manager of the 20th century was Alfred P. Sloan, who ran General Motors Co. from 1923 to 1956. But that’s a story for another day.

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>>> GE’s Larry Culp Faces Ultimate CEO Test in Trying to Save a Once-Great Company

The new chief executive is trying to summon his inner Jack Welch.


Bloomberg

June 12, 2019


https://www.bloomberg.com/news/features/2019-06-12/ge-s-larry-culp-faces-ultimate-ceo-test-in-trying-to-save-a-once-great-company


One Sunday in March, Gary Wiesner, who runs General Electric Co.’s wind-turbine-blade factory in Pensacola, Fla., received something he’d never gotten before: a personal email from the CEO. H. Lawrence Culp Jr. wanted to know if it would be OK if he came for a visit.

When Culp arrived two days later, alone, in jeans, it marked the first time a GE chief executive officer had visited the plant since the company bought it 18 years ago. He spent about two hours walking the floor and chatting with technicians, stopping only briefly for a call with the board of directors.

A longtime devotee of Toyota-style lean manufacturing, Culp was in his element. While overhead screens flashed measurements of the production pace in eight-hour increments, Culp wondered aloud if the metrics were visual enough and whether they could be broken down into 20-minute or even 10-minute slices, so workers would know sooner when they might be falling behind on their goals. At the tour’s end, he urged them to face up to production issues as early in the process as possible—or, as he put it, “Let’s make it red, make it ugly, let’s go fix them,” Wiesner recalls. A half-hour after leaving, Culp sent another email promising to return.

The wind turbine business is among the least of Culp’s worries. GE’s balance sheet is lopsided with debt, its GE Power division is shedding millions of dollars in cash daily, the stock price is barely in double digits, and the Securities and Exchange Commission is investigating the company’s accounting practices. Nonetheless, Culp’s Pensacola visit is a telling example of how the first outsider to run GE is trying to fix it, metric by metric.

Since taking over as CEO on Oct. 1, he’s eschewed the company’s Boston headquarters for frequent travel, spending day-and-a-half sessions with GE units around the world and meeting with CEOs at Boeing, Duke Energy, and Safran, among other customers. In May, the night before his appointment to see FedEx Corp. CEO Fred Smith, he flew to Memphis to watch a million-odd packages handled in the “night sort” at the company’s main shipping hub. Culp ordered almost 50 GE business heads to take off June 10-14 for an on-the-factory-floor, “true-lean” manufacturing boot camp that he’s helping to teach.

None of this would surprise people who worked with Culp in his 14 years as CEO at Danaher Corp., the low-profile industrial conglomerate. On his watch, Danaher grew fivefold in revenue while Culp, in the mold of GE legend Jack Welch, oversaw scores of acquisitions. And like Welch, Culp isn’t the sort to buy a company and forget it. It wasn’t unusual to see Culp moving equipment around in factories or strolling trade shows seeking time with customers. While studying an orthodontics company Danaher had bought, Culp decided he could best understand its customers by testing the product himself. “Probably he didn’t need braces, but he got braces,” says Vicente Reynal, who ran that business for Culp.

Culp retired from Danaher four years ago at the age of 51. The behemoth he’s charged with rescuing is, with $120 billion in annual revenue, six times the size of that company, with quadruple the number of employees. GE Power, which produces electricity-generating equipment, is by itself larger than Danaher. Whereas Culp expanded his former company with acquisitions, his first job at GE will be to shrink it. At Danaher he could mostly ignore an outside world that mostly ignored him—a luxury he no longer enjoys.

Culp is an “inspired choice,” but the skills he honed at Danaher—buying companies and making them more efficient—don’t prepare him for the mess at GE, concluded research firm Paragon Intel in a recent report. JPMorgan Chase & Co. analyst Stephen Tusa, who predicted GE’s collapse before his peers, has argued that there still hasn’t been a true accounting of the extent of the company’s problems.

Culp’s many acolytes aren’t fazed. Jim Lico, who worked for him at Danaher and now runs Fortive Corp., a Danaher spinoff, says that when he heard of his old boss’s new job, he bought a “meaningful” chunk of GE stock. “And I think most of the people that have worked for him did, too,” Lico says. “When you look at how Danaher changed over the course of his CEO tenure, there might not have been as many zeros behind the numbers, but the work he did to build Danaher was every bit as risky” as what he confronts at GE.

Culp himself doesn’t seem terribly worried, either. “Is it more challenging? I can’t say that it is,” he said in a brief phone interview in January, sounding supremely confident, or deeply delusional, or possibly both. “I wish I had more hours in the day, I wish we had started sooner, but I can’t deal with any of that. We’re just trying to make progress a little bit every day.”

The magnitude of GE’s fall probably helps Culp by giving him a longer leash with investors than his predecessors. Wall Street was always skeptical of Welch’s successor, Jeffrey Immelt, who overpaid for some early acquisitions and later committed the cardinal sin of cutting the dividend. Then John Flannery was too busy dousing fires during his short reign to build rapport with shareholders. Culp brought his gleaming Danaher résumé and zero GE baggage. Although it’s not at all clear that he can return GE to its past glory, he probably can’t make things much worse.

GE shares got a nice little bump when the company announced on April 30 that it had burned only $1.2 billion in cash in the first quarter, a third of what most analysts expected. “No news is good news, I guess, in the eyes of some investors,” Culp said in another brief phone chat. In fact, no news has been almost the only good news the past two years, as the rat-a-tat of negative revelations prompted investors to knock $150 billion off GE’s value, or more than the entire market cap of Nike Inc. or General Motors Co.

The descent began decades ago. GE preserved its public bearing as one of the world’s greatest companies partly because of its name: Everyone wanted to believe in General Electric, maker of lightbulbs and jet engines, corporate child of Thomas Edison, keystone of 20th century industrial America. Welch could do no wrong in the eyes of most investors and business media.

The reckoning also was deferred because GE’s questionable accounting and selective disclosures made it almost impossible for shareholders to see which businesses were truly thriving and which weren’t. The company pioneered the euphemistically named practice of earnings management; it could sell a handful of assets at the end of the quarter to give earnings a boost. GE routinely met or beat Wall Street expectations, which of course juiced shares. Further obscuring the picture, its in-house bank, GE Capital, was so vast that troubled businesses such as long-term-care insurance or subprime mortgages could fester without drawing much attention.

Cracks finally became visible under Immelt, who ran GE much like Welch, constantly buying and selling companies. When the 2008 financial crisis hit, GE almost collapsed. Immelt cut the dividend for the first time since the Great Depression. The SEC charged the company with misleading investors, saying it “bent the accounting rules beyond the breaking point.” GE paid $50 million to settle the case without admitting fault, but it would no longer get a free pass when fiddling with earnings.

By the time Nelson Peltz’s activist Trian Fund Management disclosed it had bought a $2.5 billion stake in 2015—usually not a good sign for top managers—Immelt had made two fateful decisions that would help pave the way for Culp’s ascension. The first was GE’s $10.6 billion acquisition of the energy business of France’s Alstom SA. A maker of natural gas power turbines, Alstom had poor profitability as fossil fuels faced growing competition from renewables, but the purchase bolstered GE’s position as the world’s largest maker of gas turbines. The global market for those products was crashing when GE closed the Alstom deal in late 2015.

Then, in selling the bulk of GE Capital, Immelt cashed in on strong assets while hanging on to weak ones, such as the long-term-care insurance business that last year forced GE to set aside $15 billion to cover potential future losses. On the day in June 2017 that GE announced Immelt would retire, the stock rose 3.6%, its biggest one-day jump in almost two years.

GE veteran Flannery, one of four finalists inside the company to succeed Immelt, took over in August 2017. Two of the other candidates resigned before the year was over. “Things will not stay the same,” Flannery vowed. He was right; things worsened as the power business continued to deteriorate and investors inured themselves to hearing one bad-news bombshell after another. Investor Trian, with its sizable GE stake and a board seat, grew concerned about both Flannery and the shallow bench behind him, says a source who isn’t authorized to speak publicly.

Early last year, GE took the extraordinary step of overhauling its board, shrinking it to a dozen directors from 18. Flannery sought advice on new members from, among others, Kevin Sharer, a GE alumnus and former Amgen Inc. CEO, who was teaching at Harvard Business School. Sharer raved about his fellow HBS lecturer and golf-fishing-and­-skiing buddy Culp. After Culp joined the board, he threw himself into learning everything about the giant company, even visiting factories. Analysts began to speculate that he’d soon become CEO. Sharer says there was no such plan, though Flannery “knew very well Larry’s background and his capability.” In one of Culp’s first conversations with the then-CEO, Flannery said he admired what Culp had done at Danaher. Culp replied, “We were simply doing what we thought you were doing.”

Unless you’re a Danaher shareholder or a fan of Harvard case studies, you probably don’t know much about the company. It’s an oddly frequent focus of academic inquiry, perhaps because its executives seem more willing to speak with professors than the media, which Danaher tends to ignore. The company didn’t respond to requests for interviews for this story.

Its headquarters are on the eighth floor of a glass building wedged between a federal credit union and an upscale restaurant in the Washington, D.C., neighborhood of Foggy Bottom. The name “Danaher” doesn’t appear on the building’s exterior. The company evolved from a real estate firm that brothers Mitchell and Steven Rales founded in 1969. (It’s named for a tributary of a Montana river they liked.) By the mid-1980s, it had acquired hundreds of small and midsize industrial companies.

Danaher was one of the first U.S. companies to adopt Toyota Motor Corp.’s kaizen process of increasing productivity with tiny, continuous improvements. Its own version is called the Danaher Business System, or DBS, which in some ways resembles the Six Sigma quality-assurance regimen Welch embraced in the 1990s. DBS relies heavily on measurable facts, including not only profits and sales but also nonfinancial metrics such as on-time delivery. These are measured on monthly, weekly, daily, and even hourly bases, depending on a project’s urgency. From the moment Culp joined Danaher in 1990, he embraced it like a religion.

Danaher was Culp’s first job out of HBS. Classmates sought out big-name companies, but Culp thought Danaher’s relative obscurity would give him the chance to have a bigger impact quickly, he told students in a talk last year at Montgomery College in Maryland. One of his first assignments was helping assemble air conditioners at a plant in Japan—his introduction to lean thinking. In 2001, at age 38, he became CEO. Immelt succeeded Welch at GE the same year.

Over the next 14 years, Culp oversaw $25 billion in acquisitions. They included makers of digital microscopes, dental implants, water purifiers, and advanced packaging tools. Each year, Danaher performed due diligence on 150 com­panies or more while cultivating other targets that weren’t for sale, at least not yet. It deliberately avoided cyclical businesses and those in the financial sector, Culp said in an HBS study.

Soon after a purchase, the acquired company would often be plunged into a DBS kaizen “event” that could last a few days. “Even the smallest operation was scrutinized, be it the act of picking up a tool, the organization of parts, or the distance a worker moved to get the product to the next stage of production,” according to a study by the University of Virginia’s Darden business school.

A month after Danaher bought Radiometer, a maker of blood analysis technology, in 2004, the top 40 managers of the acquired company split into six study groups to seek efficiencies. Radiometer’s CEO told Harvard that he and his team were “skeptical that anybody?…?could make us any better.” One Radiometer study group quickly learned that a part that took less than a half-hour to produce took as long as 18 days to ship. The group slashed that to less than two days by cutting two departments out of the production flow.

Radiometer executives then presented the new owners with their updated strategy, boasting of their 40% market share in key product segments. Danaher asked why 60% of the market preferred rival offerings. Radiometer’s CEO told the Harvard researchers, “We probably knew our own existing customers very well, but we did not know our competitors’ customers.”

What other companies might see as success could be viewed with suspicion at Danaher. In 2007, Culp, a rabid Boston Red Sox fan, told this magazine, “There are a lot of companies where if you win 10-9, nobody wants to talk about the nine runs [they] just gave up.” At Danaher, he said, “We’ll talk about ‘How did we give up nine runs? Why didn’t we score 12?’?”

Culp retired from Danaher in March 2015. “I was very happy with my post-CEO life,” he recently told the Harbus, an HBS publication. In addition to teaching and advising Bain & Co., he did a lot of fishing and skiing. Money wasn’t a problem; he’d made about $300 million at Danaher, according to a Bloomberg News analysis. “Some friends said, ‘Why put your legacy at risk?’ And I thought that is exactly why I should do it,” Culp said. “I strongly believe GE as a company matters to the world.”

In Culp’s first day on the job, GE’s stock shot up 7%. It soon reversed direction as the extent of the company’s problems became clearer. By yearend, GE had cut its quarterly dividend to a penny—30¢ lower than its all-time high in early 2009—and the stock had fallen almost 40%. In February, Culp’s first letter to shareholders was a crisp five pages (vs. the 26 pages of Immelt’s last such missive) that committed GE to a simple two-step strategy: reduce debt and fix the power business.

Culp moved as he might have at Danaher. He finalized an agreement to pay $1.5 billion to settle a Department of Justice investigation into GE’s defunct subprime mortgage business. He scaled back Immelt’s grandiose plan for the new headquarters in Boston. The smaller board now meets in a smaller room around a smaller table. He ditched a plan to spin off the thriving health-care unit in favor of selling its biopharmaceutical business for $21.4 billion to Danaher. He restructured a Flannery deal to sell GE’s loco­motive business in a way that will raise additional cash of as much as $3.4 billion.

GE also is getting a taste of Culp’s zeal for that Danaher regimen. Inside the company, he has preached the importance of hewing to measurable results. On a conference call with analysts in January, he said, “When we talk about execution, we talk about daily management.” He used the phrase “daily management” six times and the word “lean” 11 times in a recent presentation at an industry conference.

David Joyce, who heads GE’s healthy aviation division, says this way of running things requires understanding not only what a business has accomplished but how. “I can sit down with Larry and show him 30 metrics and tell him relative to plan, the variance was positive in every one.” But that’s not enough. “Did you do it because there was a one-time event that allowed you to get across the finish line? Did you have a lot of variation and just happened to be on an upswing at the end of the quarter? How do you control it to make sure this performance repeats itself?”

A mountain of work remains. GE Power, in particular, shows how hard it will be for Culp to untangle the knots his predecessors tied. Angry shareholders have dragged it into court. Unfavorable contracts that past managers negotiated have helped Power become GE’s biggest cash drain. The unit’s marquee gas turbine suffered an embarrassing malfunction last year that necessitated widespread repairs. These would all be problems even if the gas-power market wasn’t suffering as it is. GE Power lost more than $800 million last year. At $27 billion in revenue, it’s one of GE’s biggest businesses, yet investors value it at zero—or worse. Culp has acknowledged that a turnaround will take years.

If he can restore GE to its old self, he could go down as one of the greatest CEOs ever, surpassing even Welch at his cult-status peak. Culp also could collect a windfall of more than $200 million if GE’s stock goes way up and stays there. He says he’s eager to get back to what he did so well at his old job: buying good companies and making them great. For now, though, he’s stuck trying to make GE merely good again.

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>>> Teva and J&J Stocks Were Hit by Opioid Worries. What Could Come Next.


Barrons

By Josh Nathan-Kazis

June 7, 2019


https://www.barrons.com/articles/how-the-opioid-litigation-against-drug-companies-could-play-out-51559914560?siteid=yhoof2&yptr=yahoo


Shareholders of Teva Pharmaceutical Industries (ticker: TEVA) and Johnson & Johnson (JNJ) recently received a jolt on news from an opioid case in Oklahoma.

Teva agreed to pay $85 million to a settle a lawsuit brought by the state that accused the company of helping fuel the opioid crisis. In the same case, Johnson & Johnson is now on trial. Shares of the two companies tumbled.

With the Oklahoma case, investors are beginning to weigh the likelihood of large-scale payouts from health care companies over the opioid epidemic. Teva has denied any wrongdoing; J&J says that its marketing and promotion of opioid medications were “appropriate and responsible” and that the allegations against it are baseless.

The one to watch is U.S. District Judge Dan Polster in Ohio. He is pushing for a settlement, possibly in the next few months, that could sweep in more than a thousand separate opioid lawsuits. Experts say that Polster hopes to reach a settlement before the fall, and some think he just might succeed.

The judge “made very clear from the beginning this is a national public health emergency, trials are not the answer, the legislatures have punted to him, and they’ve got to settle,” says Abbe Gluck, a professor of law at Yale Law School and the faculty director of the Solomon Center for Health Law and Policy.

State, local, and tribal governments, along with some individual plaintiffs, have brought roughly 2,000 cases against companies that have produced, sold, and distributed opioids in recent years. “These defendants cannot litigate 2,000 cases,” Gluck notes. “It can’t happen in anybody’s lifetime.”

Instead, federal courts have embarked on a complex process known as a multidistrict litigation, which combined more than a thousand cases in an effort to reach an overarching settlement. The settlement could even sweep in the hundreds of cases still in the state courts that have not been consolidated in the multidistrict litigation.

With the parties so far unable to reach an agreement, Polster also set in motion a handful of trials, the first of which is set to begin in October. These are known as “bellwether” trials; designed to gauge the strengths of the parties’ arguments as they continue to work toward settlements.

Exactly how a global opioid settlement will shake out is a harder, if not impossible, question. “You’re dealing here with multiple layers of causation and liability,” says Andrew Pollis, a professor of law at Case Western University.

Still, some analysts have made their own guesses about liabilities. UBS analyst Navin Jacob wrote on May 28 that Teva could be on the hook for anywhere from $154 million to $4.25 billion, and downgraded the company to Neutral from Buy.

Oppenheimer analyst Esther Rajavelu has estimated that Teva would end up paying $500 million to $700 million nationally. But she argues that the recent selloff “creates an opportunity for a long-term holder to get into the stock.”

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[BottomBounce]

$NIO on Squawk Box https://www.cnbc.com/video/2019/03/05/this-chinese-car-company-could-rival-tesla.html

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Slap, Now it's looking interesting for a possible dead cat bounce, short term trade, though still risky. Anything Chinese right now is in the doghouse.

I was thinking NIO might have some longer term potential (electric cars, huge China market), but haven't done much research on the stock yet.

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Slap, >> NIO <<

One up day doesn't make a bottom. I'd wait for it to clearly bottom out.

That's being made harder by the trade war, which has everyone afraid of Chinese stocks, and argues against a rapid turnaround for NIO.

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J+J - >>> First Opioid Trial Takes Aim at Johnson & Johnson


NY Times

by Jan Hoffman

5-26-19


https://www.nytimes.com/2019/05/26/health/opioid-trial-oklahoma-johnsonandjohnson.html


Having settled with Purdue Pharma and Teva, Oklahoma will now try to blame Johnson & Johnson for its opioid disaster. Nearly 1,900 lawsuits remain nationwide.

Did the people who brought you baby powder and baby shampoo also bring you the opioid crisis?

That will be the question before an Oklahoma judge starting Tuesday, as the first civil trial takes off on the long, nationwide runway of trials against prescription opioid manufacturers, distributors and sellers. Oklahoma is squaring off against Johnson & Johnson, the New Jersey-based, family-friendly giant, which produces a fentanyl patch.

On Sunday, another defendant in the case, Teva Pharmaceuticals Ltd., the Israel-based producer of generic medicines, including opioids, settled with Oklahoma for $85 million. Details of how the state will allocate the money have not yet been finalized.

In a statement, the company said, “The settlement does not establish any wrongdoing on the part of the company; Teva has not contributed to the abuse of opioids in Oklahoma in any way.”

There is great interest in the case, which originally included Purdue Pharma, and not only from lawyers in nearly 1,900 federal and state lawsuits who want to see how the evidence and legal strategies resonate.

“So much of the litigation has remained under seal or redacted that this will be the public’s first glimpse into Pandora’s box,” said Elizabeth C. Burch, a law professor at the University of Georgia who writes about mass torts. “Not only will a trial occur, but it will be televised.”

While the state has not said how much it is seeking, the Oklahoma attorney general, Mike Hunter, has said that companies have caused opioid-related damages worth billions of dollars. But Purdue Pharma already settled with the state in March for $270 million. With the company that has become embedded in the public’s mind as an arch villain gone from the proceedings and Teva also out of the case, will Mr. Hunter be able to stick J & J with the rest of the bill?

Oklahoma, a largely rural state whose medical, social welfare and criminal justice systems have been ravaged by opioid addictions and deaths, has “home court advantage,” Ms. Burch said.

But the case is hardly a slam-dunk.

The challenge in all opioid cases is how to closely tie each defendant to the carnage.

In its attempt to frame that narrative, Oklahoma is relying on just one legal theory, which itself has an uneven record.

The theory — that J & J violated public nuisance law — is also being raised in the first federal cases to go to trial in Cleveland, Ohio, currently set for Oct. 21. All eyes will look to the Oklahoma trial as an out-of-town rehearsal for that big show. How will witnesses perform? Which arguments will resonate?

“If J & J prevails in Oklahoma, they may feel they are gaining leverage” in the federal negotiations, said Alexandra D. Lahav, a professor at the University of Connecticut School of Law who is an expert on bellwether trials.

Through its pharmaceutical division, Janssen, J & J manufactured Nucynta, an opioid tablet, which it divested in 2015. It still makes Duragesic, a fentanyl patch. Teva produces Actiq and Fentora, for breakthrough cancer pain.

Through a company spokesman, J & J said that since 2008, its opioid medications have amounted annually to less than 1 percent of the opioid prescriptions written nationally. A Teva spokeswoman said its medications were administered infrequently in Oklahoma: Between 2007 and 2017, she said, the state reimbursed just 245 Actiq and Fentora prescriptions.

The case is a bench trial, heard before Judge Thad Balkman without a jury, but media attention and courtroom cameras will essentially render the public into a collective jury.

Publicity heightens pressure. The case already has a political shadow: Not only is Mr. Hunter an elected official, but Judge Balkman, a former state legislator, is also elected.

J & J also has reason to be wary of the spotlight: It wants to protect its family-friendly branding. In redacted court documents, Oklahoma has accused J & J of targeting patient groups for opioid sales, including veterans, older adults and children.

In a statement, John Sparks, a lawyer for J & J and Janssen, said, “Janssen did not market opioids to children, and the State’s suggestion to the contrary is false and reckless.” Instead, he continued, Janssen had designed a drug-abuse prevention program with a school nurse association.

J & J, with 2018 sales of $81.6 billion, is already waging a public-relations campaign as it continues to fight lawsuits alleging that its talc-based baby powder caused cancer in some consumers.

If Oklahoma is not ground zero for the emergency, it’s “certainly close,” Mr. Hunter said recently during a panel on opioids at the Bipartisan Policy Center in Washington. Between 2015 and 2018, he said, there were 18 million opioid prescriptions written in a state with a population of 3.9 million. In a 15-year period, overdose deaths increased 91 percent.

In briefs, lawyers for Mr. Hunter who, like many government officials bringing such cases, is using outside counsel, have called J & J the “kingpin behind the public-health emergency.”

One of Mr. Hunter’s lead lawyers lost a niece to opioids; another, a son.

Oklahoma’s case against J & J largely falls into three areas. The first is the company’s marketing and sales practices, including targeting populations like veterans and children, and using patient front groups and high-profile doctors who oversold the benefits and downplayed the risks of the drugs. By doing so, the state says, the company helped normalize opioids from what had originally been a very conservative approach to them.

The second is J & J’s former ownership of two companies that produced and refined Tasmanian poppies into narcotics material for other drug manufacturers, including Purdue. Finally, the state points to the company’s development and sales of its own opioids.

J & J says the company manufactured drugs that played only a minor role in the market, even as it was conducting business that was heavily regulated and approved by government agencies.

The company stopped marketing Duragesic by 2008, court papers said, and divested Nucynta in 2015, the year the company ceased marketing opioid medication altogether.

J & J’s Mr. Sparks said that Oklahoma “attempts to group all manufacturers together with general and broad allegations.”

In 2017, Oklahoma became one of the first states to file a prescription opioid lawsuit. In the ensuing months, the case has morphed considerably.

Oklahoma recently jettisoned most of its claims to concentrate on just one — that the companies violated the state’s public nuisance law, creating a substantial health harm.

Unlike a conventional lawsuit that seeks compensation for damages already incurred, the state is asking J & J to pay to “abate” the nuisance it is accused of creating, going forward.

Public nuisance laws, which are centuries old, were invoked when something interfered with a right common to the general public, traditionally roads, waterways or public spaces. Recently, their use has been expanding, with mixed results: success for the Big Tobacco settlement and some pollution cases; failure in gun litigation and most lead paint cases.

Ms. Burch said some courts have found that those manufacturers didn’t have a specific duty to the public. The companies had prevailed by arguing that once the product left their facilities, they were not the direct cause of the ensuing harm or in a position to remedy it.

Similarly, she said, opioid defendants contend that the connection between manufacturers and overdose deaths is too attenuated.

Earlier this month, a North Dakota judge dismissed that state’s case against Purdue, including its public nuisance claim. While the ruling affects only that state, lawyers have said the decision creates an appellate template for defendants. Public nuisance laws, the judge wrote, were not intended where “one party has sold to another a product that later is alleged to constitute a nuisance.”

Mr. Hunter says that Oklahoma’s own law is “powerful and expansive.”

The state had been eager for a jury trial. But recently, lawyers reversed course and requested a bench trial, despite the perception that a jury could be readily convinced to seek revenge for the opioid devastation.

That perception is not necessarily true. “Juries are increasingly pro-defendant,” said Ms. Lahav. “And the state may feel that Oklahomans are business-friendly and individualistic.”

Jurors might have responded well to the company’s argument that manufacturers were producing medicines that were government-approved, she added, and that people had a choice about whether or not to take them.

It was J & J who wound up requesting a jury trial. That was likely because, said Adam Zimmerman, who teaches complex litigation at Loyola Law School Los Angeles, Judge Balkman has made rulings against the defense and has steadily marched the parties toward a trial date.

“J & J would probably rather try their luck with 12 people as opposed to this one person,” he said.

In a statement about the Teva settlement, Mr. Hunter said: “Nearly all Oklahomans have been negatively impacted by this deadly crisis and we look forward to Tuesday, where we will prove our case against Johnson & Johnson and its subsidiaries.”

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[BottomBounce]

Wrong! Thats why its $NIO is flying today.

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Slap, NIO is still a falling knife, and because the chart is so new there are no previous support levels to go by. With the trade war uncertainty I'd probably avoid Chinese stocks right now. Longer term it might be an interesting stock though.

[BottomBounce]

$NIO Chinese electric cars prepare US blitz in 2020 GAC, Byton and NIO push ahead with launch plans, eager for new markets https://asia.nikkei.com/Spotlight/Electric-cars-in-China/Chinese-electric-cars-prepare-US-blitz-in-2020-despite-trade-war

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>>> SunCoke Energy, Inc. (SXC) operates as an independent producer of coke in the Americas. The company operates through three segments: Domestic Coke, Brazil Coke, and Logistics. It offers metallurgical and thermal coal. The company also provides handling and/or mixing services to steel, coke, electric utility, coal producing, and other manufacturing based customers. SunCoke Energy, Inc. was founded in 1960 and is headquartered in Lisle, Illinois.

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>>> Energy Transfer LP (ET) provides energy-related services in the United States and China. The company owns and operates approximately 9,400 miles of natural gas transportation pipelines and three natural gas storage facilities in Texas; and approximately 12,200 miles of interstate natural gas pipelines. It sells natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users, and other marketing companies. The company owns and operates natural gas gathering and natural gas liquid (NGL) pipelines, processing plants, treating facilities, and conditioning facilities in Texas, New Mexico, West Virginia, Pennsylvania, Ohio, and Louisiana; natural gas gathering, oil pipeline, and oil stabilization facilities in South Texas; a natural gas gathering system in Ohio; and transportation and supply of water to natural gas producers in Pennsylvania. It also owns approximately 4,769 miles of NGL pipelines; NGL and propane fractionation facilities; NGL storage facilities with working storage capacity of approximately 45 million barrels (Bbls); and other NGL storage assets and terminals with an aggregate storage capacity of approximately 11 million Bbls. The company also sells gasoline, middle distillates, and motor fuel at retail, as well as crude oil, NGLs, and refined products; operates convenience stores; and distributes motor fuels and other petroleum products. It provides natural gas compression services; carbon dioxide and hydrogen sulfide removal, natural gas cooling, dehydration, and British thermal unit management services; and manages coal and natural resources properties, as well as sells standing timber, leases coal-related infrastructure facilities, collects oil and gas royalties, and generates a total of 75 megawatts electrical power. The company was formerly known as Energy Transfer Equity, L.P. and changed its name to Energy Transfer LP in October 2018. Energy Transfer LP was founded in 2002 and is based in Dallas, Texas.

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>>> Emerson Electric Co. (EMR), a technology and engineering company, provides various solutions to industrial, commercial, and consumer markets worldwide. The company's Automation Solutions segment offers products and integrated solutions, including measurement and analytical instrumentation; valves, actuators, and regulators; industrial solutions; and process control systems and solutions. It serves the oil and gas, refining, chemicals and power generation, pharmaceuticals, food and beverage, automotive, pulp and paper, metals and mining, and municipal water supplies markets. The company's Climate Technologies segment offers residential and commercial heating and air conditioning products, such as residential and variable speed scroll compressors; system protector and flow control devices; standard, programmable, and Wi-Fi thermostats; monitoring equipment and electronic controls for gas and electric heating systems; gas valves for furnaces and water heaters; ignition systems for furnaces; sensors and thermistors for home appliances; and temperature sensors and controls. It also provides commercial and industrial refrigeration products that include reciprocating, scroll, and screw compressors; precision flow controls; system diagnostics and controls; and environmental control systems for use in medical, food processing, and cold storage applications. In addition, this segment offers air conditioning, refrigeration, and lighting control technologies, as well as facility design and product management, site commissioning, facility monitoring, and energy modeling services; and temperature management and monitoring products for the foodservice markets. Its Tools & Home Products segment offers professional and homeowner tools, and appliance solutions. The company was formerly known as The Emerson Electric Manufacturing Company and changed its name to Emerson Electric Co. in 2000. Emerson Electric Co. was founded in 1890 and is headquartered in St. Louis, Missouri

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>>> Lowe's stock plunges after mixed first quarter earnings -


Lowe's reported mixed fiscal-first-quarter earnings before the bell Wednesday.


CNBC

5-22-19


https://www.msn.com/en-us/money/companies/lowes-stock-plunges-after-mixed-first-quarter-earnings/ar-AABJBC7


Here’s how the company did, compared with what Wall Street was expecting, according to Refinitiv consensus estimates:

Earnings per share: $1.22 adjusted, vs. $1.33 estimated

Revenue: $17.74 billion, vs. $17.66 billion estimated

Same store sales: up 3.5%, vs. up 3.2% estimated

The retailer's stock was down nearly 10% in early trading.

"Our first quarter comparable sales performance is a clear indication that the consumer is healthy and our focus on retail fundamentals is gaining traction," Lowe's CEO and president Mark Ellison said in a company release.

Last quarter, Lowe's said it expected to earn between $6 and $6.10 per share on revenue growth of about 2%. It predicted, at the time, that same-store sales would rise about 3% in fiscal 2019. ""However, the unanticipated impact of the convergence of cost pressure, significant transition in our merchandising organization, and ineffective legacy pricing tools and processes led to gross margin contraction in the quarter which impacted earnings."

Lowe's has been in a period of transition since CEO Mark Ellison joined the retailer less than a year ago.

The home improvement retailer announced Monday they were acquiring the retail analytics platform from Boomerang Commerce with hopes that infusing technology into its core retail business will help bolster data-driven pricing and merchandising.

Lowe's results come just a day after the leader in the space Home Depot reported better-than-expected first-quarter earnings Tuesday. Lowe's rival's strong results came despite the second wettest February weather in U.S. history and a deflation in lumber costs. Home Depot reaffirmed its fiscal 2019 guidance.

As of Tuesday's market close, Lowe's market value was $88.4 billion, with shares are up more than 20% since the start of the year. Home Depot, with a market cap of about $211.1 billion's shares are up more than 11% year to date.

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>>> GE profit rises, cash outflow slows, shares jump 10 percent


By Alwyn Scott and Rachit Vats

4-30-19


https://www.msn.com/en-us/money/topstocks/ge-profit-rises-cash-outflow-slows-shares-jump-10-percent/ar-AAAJpS5?OCID=ansmsnnews11#page=2


General Electric Co said on Tuesday it generated more profit and lost less cash than expected in the first quarter, suggesting an improving outlook under its new leader and sending its shares up more than 10 percent in premarket trading.

Profit from continuing operations more than tripled as sales rose in GE's aviation, oil and gas, and healthcare units. Negative cash flow from GE's industrial business was $1.2 billion, much better than the $2.16-billion outflow that analysts, on average, were expecting.

GE's industrial free cash flow showed a "much smaller outflow than we expected," said Julian Mitchell, an analyst at Barclays, and "should drive a positive reaction in the stock."

GE took a string of multibillion-dollar writedowns last year, so the slowing in cash outflows in the latest quarter could be a sign that its fortunes have started to improve.

Investors have been keen for a turnaround since GE named new Chief Executive Officer Larry Culp last October to restore earnings and improve a stock price that has fallen by more than two-thirds since 2016.

But while the Boston-based conglomerate stuck to its full-year financial forecast, it said Boeing Co's 737 MAX jet presented a "new risk" for GE, which makes engines for the plane with partner Safran SA of France. Boeing's newest jetliner was grounded worldwide last month after a second fatal accident in less than five months.

Profit margins also contracted at GE's aviation, power and renewable energy businesses, the three core units that GE plans to retain as it undergoes a break-up announced last year.

And GE's cash balance was boosted mainly the $2.9-billion sale of locomotive business to Wabtec Corp. Its adjusted free cash flow from industrial businesses was "better than planned," GE said, helped mainly by the timing of payments. GE did not provide further detail.

Culp had set low earnings targets in March and warned that GE's industrial cash flow could be negative by as much as $2 billion.

Culp had said this "reset" would result in negative cash flow at its ailing power business through 2020 before turning positive in 2021. GE wrote down $22 billion in goodwill at the unit last year.

In the latest quarter, power orders fell 14 percent and profit fell 71 percent to $80 million on revenue of $5.7 billion, down about 22 percent from a year earlier, GE said.

Earnings from continuing operations attributable to GE shareholders rose to $954 million in the first quarter ended March 31 from $261 million a year earlier.

Earnings per share from continuing operations rose to 11 cents from 3 cents, the company said.

On an adjusted basis, GE earned 14 cents per share. Analysts had expected 9 cents per share, on average.

Total revenue fell 2 percent to $27.29 billion, above analysts' average estimate of $27.05 billion.

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>>> Risky Company Debt Is Getting Riskier


Protections built into loans and bonds are being steadily eroded, but investors keep buying.


Bloomberg

By Sally Bakewell and Lisa Lee

April 4, 2019


https://www.bloomberg.com/news/articles/2019-04-04/risky-company-debt-is-getting-riskier?srnd=premium


One night in 1982, a group of bankers from Drexel Burnham Lambert gathered at the Quilted Giraffe, a nouvelle cuisine restaurant in New York frequented by Warren Beatty and Jackie Onassis.

The financiers were there to celebrate a junk-bond deal that got away. They’d worked with Sparkman Energy Corp. for months, but the natural gas pipeline company had stopped returning their calls. Contractual terms that Drexel was proposing for the bond, particularly investor protections known as covenants, had been deemed too strict, says Vince Pisano, an attorney who worked on the deal.

At the dinner, Pisano recalls, some bankers wore custom-made belt buckles that featured Sparkman’s logo—crossed out with a slash. They were luckier than they realized at the time. Five years later, Chairman Wallace Sparkman would reach a settlement with the U.S. Securities and Exchange Commission, neither confirming nor denying participating in an alleged kickback scheme.

Few at the dinner recognized that Sparkman’s decision to insist on looser bond terms was a sign of what would come decades later. The legal framework that Pisano and his colleagues were creating in the 1980s helped fortify what would become a more than $2 trillion market in junk bonds and loans. But in the last few years, that framework of covenants, once routine for the riskiest borrowers, has come under severe attack.

Lenders Lose Some Security





Private equity firms such as Apollo Global Management and KKR & Co. have fought to make it easier for the companies they own to take on more debt soon after borrowing, and for debtors to sell off assets and pay the proceeds to shareholders. For a decade they had already chipped away at other provisions in loans known as “maintenance covenants”—requirements that a corporate borrower meet specific performance hurdles or else be forced to renegotiate terms or even repay debt.

Private equity firms “began to select their investment banks based in part on who could get the loosest high-yield covenants,” says Kirk Davenport, a former partner at law firm Latham & Watkins who also worked for Drexel on early junk-bond deals. “And once they figured that out, the race to the bottom was on.”

Moody’s Investors Service says covenants for bonds and loans generally are at or near their weakest levels since the ratings firm started tracking them nearly a decade ago. When the economy slows, lenders could suffer much bigger losses than in previous downturns, say strategists at UBS Group AG, who estimate that lenders might recover less than half their money instead of 75 percent to 80 percent because of eroded protections.

Lenders to Caesars Entertainment Operating Co., the casino company that filed for bankruptcy in 2015, are familiar with this problem. The company changed its covenants in 2014 when it took out a $1.75 billion loan, raising the limit on how much debt it could take on that would give lenders a first claim on assets if the company went under. The new covenants helped allow Apollo and TPG Capital LP, the private equity firms that bought Caesars in 2008, to strip assets from creditors’ reach before the casino company went under, a court-appointed bankruptcy firm found in 2016. A spokesman for Apollo declined to comment.

Investors complained about the terms on a series of bond and loan sales last year, but they still bought the debt. In one September sale, KKR & Co. helped finance its buyout of Envision Healthcare Corp. with debt that contained provisions making it easy for KKR to sell the most profitable portion of the company’s business, leaving lenders with the less attractive part. KKR declined to comment.

Private equity firms and their lawyers often note that not having maintenance covenants gives a company more leeway to survive a stumble. Otherwise lenders, entitled to demand higher interest at the first sign of weakness, might push the borrower into bankruptcy in the rush to recover their money.

“A number of companies have gone from being a high-yield issuer and back to investment grade because they have been allowed to operate their business in a way that an inflexible covenant package would have prohibited them from doing,” says William Hartnett, a partner at law firm Cahill Gordon & Reindel LLP who also represented Drexel on its early deals.

Covenants were once required mainly by banks’ loan departments, which were armed with workout teams that specialized in squeezing more money out of troubled companies to ensure the lenders got paid back as much as possible. Strong covenants can be a real advantage in those situations. Institutional investors, which today account for most of the loan market, are more likely to sell out fast instead of sticking with a distressed borrower. According to S&P Global Market Intelligence’s LCD unit, almost 80 percent of the outstanding loans in the market lack maintenance covenants, in deals dubbed “covenant lite.”

“No one wants a company to default,” says Thomas Majewski, managing partner and founder of Eagle Point Credit Management, which manages $2.6 billion. “With covenant lite, we believe there will be fewer defaults and we expect those to happen later, so we will still receive our interest.”

Still, weaker covenants have emboldened companies to take steps that aren’t purely about survival. Some strip away collateral before a default to benefit equity investors at the expense of lenders. In 2017, preppy clothing retailer J.Crew Group Inc. moved its valuable trademarks out of the reach of creditors when it restructured debt. As decades-long norms that were once spelled out in contracts are eroded, lenders and equity investors increasingly find themselves clashing in courts. “Lenders may need to resort to the courts more and more in the next downturn,” says Michael Nechamkin of Octagon Credit Investors. —With Davide Scigliuzzo

Bakewell and Lee cover corporate finance and leveraged lending for Bloomberg News in New York.

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>>> GE Deal With Danaher Shows Culp Is All About the Balance Sheet


The sale of its biopharmaceutical business indicates creditors are the CEO’s top priority.


Bloomberg

By Brooke Sutherland

February 25, 2019


https://www.bloomberg.com/news/articles/2019-02-25/ge-deal-with-danaher-shows-culp-is-all-about-the-balance-sheet?srnd=premium


All about the balance sheet.

General Electric Co.’s latest deal shows that CEO Larry Culp is putting creditors in the driver’s seat, and shareholders can come along for the ride for now.

GE announced on Monday that it’s selling its biopharmaceutical business to Danaher Corp. for $21 billion in cash plus the assumption of $400 million in pension obligations. The deal has a bit of intrigue — Culp spent 13 years as Danaher’s CEO — but it’s a huge step forward in his push to attack GE’s bloated balance sheet and reduce one of the largest unfunded pension balances in the S&P 500 Index. The biopharmaceutical business makes up the bulk of GE’s life-sciences operations, which were the most attractive part of the health-care division it had planned to take public. As such, Culp is putting those IPO plans on ice for now and will contemplate other options for its core imaging business. Taken together, it’s clear that GE’s creditors, rather than its stockholders, are Culp’s top priority.

Long Way to Go

GE shares spiked more than 15 percent in early trading on Monday as shareholders cheered the influx of cash to address the company's balance sheet woes. That only gets the stock back to where it was in October, though.

Recall that Danaher reportedly expressed interest in the life sciences operations in early 2018, but GE, led by John Flannery at the time, rebuffed its overtures. Flannery tried to juggle an obvious need to reduce GE’s leverage with an effort to conserve upside for aggrieved equity investors. Culp has torn up that blueprint to refocus the company’s divestiture drive on raising cash. Flannery was hesitant to pull the trigger on a wind-down of GE’s stake in the Baker Hughes energy business; Culp kick-started the sale just six weeks into his role as CEO. Flannery structured the merger of GE’s transportation unit with Wabtec Corp. to give GE shareholders a bigger stake in the combined entity than the company itself; Culp rejiggered that deal at the 11th hour to raise more cash to tend to the balance sheet. Flannery planned to spin off 80 percent of GE’s health-care business to shareholders; the life sciences deal with Danaher gives nothing to shareholders directly and it seems likely that any future divestiture of the remaining health-care operations will also be focused on raising cash, rather than providing shareholders with an ongoing interest.

It’s a bitter pill, and GE’s decision to sell some of its better assets for cash speaks to the depth of the challenges it faces in its power unit and GE Capital financial arm. I don’t think Culp would be doing this if he thought GE could just muddle through another few years of power losses. Time is not on his side; more than three-quarters of business economists expect the U.S. to enter a recession by the end of 2021, according to a semiannual National Association for Business Economics survey released Monday. A downturn is likely to undermine the aviation unit that has been GE’s primary savior throughout its recent struggles. The benefit of scrapping the health-care IPO for now is that GE gets to milk the cash flow from that business awhile longer. Notably, GE said it would at long last release its outlook for 2019 on March 14 and also booked a March 7 date for a presentation focused solely on its long-term care insurance liabilities. That suggests the additional detail on the insurance business that GE has promised to provide in its 10K annual filing is likely to be complicated and seemingly ugly.

While the balance between bond and equity holders is always tricky, I think Culp is doing the right thing by putting creditors first. These are hardly the actions of a company operating from a position of strength, but it’s the most logical path. And at this point, GE’s stock price is so contingent on what happens with the balance sheet that you could argue the interests of bond and equity holders are aligned for the time being. That’s why I have advocated in the past for an equity raise to put those leverage concerns to rest once and for all. The life-sciences deal and delayed divestiture of the remaining imaging business most likely mitigates any imminent need for a share sale. But you still have to wonder what GE is going to look like once Culp is finished and what its growth story will be. The health-care business was one of GE’s better cash-generating assets and, one way or another, it likely will be gone eventually. GE risks following the path of fallen industrial giants before it like Tyco International or Westinghouse and breaking itself up until it’s a shadow of its former self.

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>>> Buffett's Stock Losses and Key Takeaways From Berkshire Results


By Katherine Chiglinsky and Michelle Kim

February 24, 2019


https://www.bloomberg.com/news/articles/2019-02-24/buffett-s-stock-losses-and-key-takeaways-from-berkshire-results?srnd=premium


Judging how Warren Buffett’s Berkshire Hathaway Inc. ended 2018 very much depended on one’s preferred metric.

The company posted a staggering net loss of $25 billion in the fourth quarter, the biggest loss in its history. That was largely due to a new accounting rule that Buffett disagrees with, which requires companies to report changes in the value of investments as part of earnings. For most corporations, that’s a relatively minor figure, but Berkshire’s $170 billion stock portfolio means big gains and losses each quarter.

The firm’s operating earnings, meanwhile, soared 71 percent from a year earlier. That’s Buffett’s preferred metric because it excludes stock swings and measures how Berkshire’s underlying businesses are performing. Those units benefited from better insurance results, gains at the company’s railroad and a lower corporate tax rate.

Here are more takeaways from the results and the billionaire investor’s annual letter to shareholders:

Buffett Hopes for an “Elephant-Sized Acquisition”

Warren Buffett is on the lookout for his next purchase as his cash pile rose to $112 billion. He dismissed immediate prospects for a deal due to “sky-high” prices. Berkshire has not had a major acquisition in more than three years, and instead has used its cash to buy back about $1.3 billion of its own shares in 2018 and snap up stocks of other companies.

Dry Powder

Berkshire's cash has remained above $100 billion for six straight quarters

The cash has been a drag on Berkshire’s ability to return more than the broader market. While the company’s book value has increased at almost twice the rate of the S&P 500 during his career, it has actually trailed the index over the last decade. Buffett said he’d be retiring the metric from his annual letter because it has lost relevance.

Berkshire's total return underperformed S&P 500 over past decade





Buffett Argues Berkshire Is Better Together

Although Buffett didn’t disclose hints of his successor in the letter, he did answer some questions about the kind of company that he would ultimately pass on. Berkshire’s chairman wrote the conglomerate should be viewed as a “forest” with five different groves, as part of his case for keeping the businesses together. The combined entity can easily allocate huge amounts of capital, obtain low-cost funding, reap tax efficiencies and minimize some risks and costs, he wrote in the letter.

Berkshire Takes a Hit From Stock Portfolio

The period featured $27.6 billion in investment losses for Berkshire as U.S. stocks had their worst quarter in more than seven years. Apple Inc., the conglomerate’s biggest equity bet, dropped 30 percent in the three months.

Berkshire’s fourth-quarter net loss was also widened by a $2.7 billion hit to its stake in Kraft Heinz Co., which announced late Thursday a $15.4 billion writedown to its assets, including the value of some of its most prominent brand names.

More Stock Purchases Are Coming

The lack of big acquisitions led Berkshire to add $24 billion to its stock portfolio last year. And Buffett said that “the disappointing reality” that prices are expensive for deals means Berkshire will probably be buying more stocks in 2019.

“In recent years, the sensible course for us to follow has been clear: Many stocks have offered far more for our money than we could obtain by purchasing businesses in their entirety,” Buffett wrote.

Despite the big losses on its stock portfolio in the quarter, Berkshire is still ahead on most of its biggest bets, including Apple. Among the largest stakes, the only one where the company is below its purchase cost is JPMorgan Chase & Co., a position Berkshire entered last year.

Bang for the Buck

Even after the market's plunge, Berkshire remains ahead on its biggest.

Berkshire’s Businesses Rise Above

Berkshire’s operating companies showed strong performance, driven by higher earnings in its railroad and energy businesses and a lower corporate tax rate. Profit generated from all the units jumped by 71 percent in the year, and the insurance businesses rebounded from a $2.2 billion underwriting loss in 2017.

Buffett used his letter to single out Tony Nicely, Geico’s long-time chief executive officer who quietly stepped down last year. “By my estimate, Tony’s management of Geico has increased Berkshire’s intrinsic value by more than $50 billion,” Buffett wrote in Saturday’s letter.

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>>> AT&T wants to be big in entertainment, but first it has a $49 billion problem to fix


Wall St Journal

by Drew FitzGerald

1-29-19


https://www.msn.com/en-us/money/companies/atandt-wants-to-be-big-in-entertainment-but-first-it-has-a-dollar49-billion-problem-to-fix/ar-BBSTUYm?li=BBnb7Kz&ocid=mailsignout#page=2


When AT&T Inc. took over DirecTV in 2015, a group of executives from the two companies gathered at Fleming’s steakhouse in El Segundo, Calif., to celebrate the deal. Toward the end of the dinner, DirecTV chief Mike White stood up, drew a lightsaber and handed it to an executive of AT&T, saying it might help in future negotiations with channel owners.

Today the telecom company, nicknamed the Death Star by detractors, isn’t scaring so many. Acquiring satellite-TV provider DirecTV, which cost $49 billion, was supposed to catalyze AT&T’s transformation into a media and entertainment giant. Instead, it has become one of the biggest casualties of the rise of Netflix Inc. and other streaming-video services.

DirecTV has lost 1.4 million satellite customers since its peak of 21 million-plus about two years ago. Analysts expect news of roughly 300,000 more defections when AT&T reports quarterly results on Wednesday. AT&T is bracing for cancellations this year that would cut into its 2019 operating profits by $1 billion.

The company has told investors it plans to make up for much of the money lost to defections by charging more to customers with discounts who stay. Meanwhile, some former call-center workers say AT&T has incentivized such employees to make it as difficult as possible for customers to cancel, a claim the company disputes.

AT&T is facing the perils of trying to move beyond its telecom roots into a media industry where the balance of power is dramatically shifting. DirecTV in the span of a few years has evolved from a springboard for its parent company’s show-business ambitions into a drag on its business and public image. The shift has weakened AT&T’s hold on once-reliable channel-surfers as it seeks to capitalize on an even bigger purchase of an entertainment heavyweight, its $81 billion acquisition of Time Warner Inc.

The forces hampering DirecTV are pressuring many other television companies, too, as more people drop traditional subscriptions in favor of streaming internet services. Cable-TV providers, however, also sell broadband connections, which the cord-cutters need. Satellite services such as DirecTV have less room to maneuver.

AT&T solidified its push into media and entertainment last year with its purchase of Time Warner, the owner of HBO, Warner Bros., CNN and other cable channels. The deal swelled AT&T’s debt load, leaving it with about $170 billion of net debt late last year, the highest of any nonfinancial public U.S. company.

Investor concerns about the debt have helped drive down AT&T’s market capitalization to around $225 billion, which is roughly even with Verizon Communications Inc.’s even though AT&T has about $50 billion more annual revenue.

“Investors are pretty skeptical, especially that they can turn around the video business,” said Allyn Arden, a credit analyst at S&P Global Ratings.

AT&T Chief Executive Randall Stephenson said the company’s many parts are working in concert: The video business built atop DirecTV has helped support investments in the parent company’s residential fiber-optic broadband service, its new streaming video technology and a relatively young advertising business, among other growing units.

“It’s pretty much playing out as we expected,” Mr. Stephenson said in an interview. “The board doesn’t sit around saying, ‘Wow, this thing, the wheels came off versus what was expected.’ We’re not too far off. . . . This is a year when we get everything rationalized.”

The CEO said the combination of AT&T with DirecTV, which AT&T executives knew was a mature and declining business, has brought promised savings and is generating more than $4 billion in annual cash flow.

Satellite subscriber losses have accelerated in the past year, he acknowledged, and price pressure from streaming services has been greater than expected at the time of the deal. He said AT&T expects investments in growing businesses to yield results this year.

“So 2019 candidly is the money year,” he said.

AT&T’s U.S. cellphone business, which provides $70 billion of the company’s more than $170 billion in annual revenue, is relatively stable, fueling nearly half of earnings last year. The movie studios and TV channels AT&T acquired last year in the Time Warner deal also are helping the bottom line.

AT&T’s push into satellite broadcasting started several years ago in its deal-making unit, a sprawling group taking up half a floor of AT&T’s Dallas headquarters. John Stankey, who led the group, had become increasingly focused on how much time cellphone customers spent watching video on their phones, and began pushing for AT&T to acquire assets involved with entertainment.

A handful of TV-channel owners controlled the best original programming and they were charging cable and satellite companies more each year to carry it. The biggest pay-TV providers had the leverage to pay the lowest fees for those channels, something AT&T could see at its small U-verse unit, which provides TV and broadband over fiber-optic lines in 22 states. U-verse had to pay about $20 more per video subscriber than DirecTV did for programming, said a person familiar with the pricing.

Executives regarded DirecTV, which controlled a fifth of the U.S. pay-TV market, as a springboard for a potential AT&T plunge into the entertainment distribution business.

They also considered building a platform from scratch, but that would be a costly endeavor. “Our shareholders expect a dividend,” Mr. Stephenson noted. “They expect return of capital. Netflix is in a very different place, as is Amazon. . . .” Neither pays a dividend. AT&T stock has a 6.7% payout.

In a filing to the Federal Communications Commission in 2014, the year AT&T made the deal for DirecTV, AT&T said a large share of 18- to 29-year-olds had already dropped pay-TV service or avoided buying it altogether. “We expect consumers in other age groups to follow suit in the coming years,” the company wrote in the filing laying out the rationale for the deal.

AT&T executives believed they could mitigate the threats to the traditional TV business with cost-saving benefits.

First, AT&T had nearly six million U-verse customers in Texas, California and elsewhere who could instead watch DirecTV, which didn’t have to pay so much for programming.

Second, controlling DirecTV would allow the sales staff to offer cellphone customers a bundle of wireless and satellite-TV service at discounted rates. AT&T also had the resources to invest in the kinds of online-only video services that were siphoning off customers, and DirecTV would throw off more cash to do so.

Though AT&T was well aware of cord-cutting, “the decline of the traditional pay-TV bundle started faster than we assumed,” Mr. Stankey testified last year in an antitrust case in which the Department of Justice tried to block the Time Warner acquisition. AT&T won the suit and closed the deal, though the DOJ has appealed.

On top of the accelerated customer losses, AT&T discovered that packaging cellphone and satellite service didn’t make much sense. Strategy leader Mr. Stankey, who ended up running DirecTV for two years after its acquisition, later said the combination was an “unnatural bundle” that didn’t appeal to most people.

“The problem is, when a customer is thinking about buying pay TV, it doesn’t necessarily align for when they’re thinking about buying a cellphone or changing their cellphone carrier,” Mr. Stankey testified in the antitrust case. “They tend to buy pay-TV services when they move. You have your cellphone all the time.”

Mr. Stephenson, in the interview, said DirecTV’s defections have been on a par with those at cable-TV rivals. “Where we are losing subscribers is where we don’t have a broadband play with it,” he said. “Where we pair an over-the-top product with a wireless product, it does quite well.”

AT&T’s streaming option, called DirecTV Now, has acquired nearly two million subscribers since it launched in late 2016. The total includes customers who signed up for free trials and some cellphone subscribers who added low-cost channel packages.

AT&T hasn’t been able to steer enough of the customers who ditched DirecTV’s satellite service to DirecTV Now because the streaming service must compete with a growing field of online channel bundles from YouTube, Hulu and Sony Corp.’s PlayStation.

AT&T was particularly wounded by YouTube TV, an online package of live channels that cost $35 a month when it launched in 2017. The service, run by Google owner Alphabet Inc., has more than a million users, according to investment bank UBS. AT&T executives think Google is subsidizing the unprofitable service. A YouTube spokeswoman declined to comment about the company’s profitability.

Armed with entertainment assets from Time Warner, AT&T is rolling out more streaming-video products to answer Google, Netflix, Hulu and Amazon. Besides DirecTV Now, AT&T has launched a slimmer bundle of channels called WatchTV. In October it disclosed plans to offer an HBO-centered video service with a selection of movies and TV series acquired in the Time Warner deal.

Such online packages are often unprofitable, at least at first. They will need time to build big enough audiences to offset the loss of traditional customers who shell out more than $100 a month, on average, for channel packages via satellite. AT&T’s new offerings enter a market that will soon include streaming services planned by Walt Disney Co. and Comcast Corp.

In the meantime, the hard work falls on the customer-service agents with the job of plugging the leaks at DirecTV. They are under growing pressure to keep customers from canceling, said former employees. The the pay of call-center workers is so closely tied to their ability to hold onto subscribers that former employees said they sometimes crossed ethical lines to meet the goals.

"There’s no way that we could make the numbers we were told to make,” said Altrina Grant, former manager of a Chicago-area AT&T call center. She said some agents would promise to call back a customer about a request to drop service rather than immediately disconnecting, which would count against their compensation. Irate customers would later call another employee to ask why their request wasn’t honored, she said.

"These reps were getting thousands of dollars because they knew how to manipulate the system,” Ms. Grant said.

Cyrus Evans, a former call-center manager in Waco, Texas, said employees’ pay could swing between $50,000 and $80,000 a year depending on their performance, which was often influenced by how many disconnection requests they could deflect. Mr. Evans said employees often got angry calls from customers who had been promised their service would end, only to receive a bill the next month. He said the incentive structure rewarded bad behavior.

Former AT&T workers said the company launched a new audit team in 2017 to crack down on support staffers making promises they couldn’t keep. Ms. Grant said this initiative led the company to fire some workers but several customer-care executives are still in their jobs.

The company said its incentives reward employees based on customer satisfaction, not sales or disconnections. “We have a dedicated team that monitors customer interactions and I can tell you that reps failing to disconnect a customer for any reason is extremely rare,” AT&T said. “Our expectation is that customers receive a great experience. Our employees are held to the highest ethical standards and we consider anything short of that to be a serious violation of our company Code of Business Conduct.”

This year, about two million two-year DirecTV contracts are expiring, an opportunity AT&T plans to use to roll back discounts. “As those customers come due, we’ll get closer to market pricing,” said John Donovan, chief of the telecom business, at a November investor conference. “We’ll be respectful of our customers, but that will move up.”

DirecTV has had an edge over rival satellite and cable companies with NFL Sunday Ticket, an add-on subscription providing games that aren’t shown locally. The service features prominently in marketing.

The league has weakened DirecTV’s hold on fans, however, by offering other ways to access some of the content. And the agreement is on shaky footing because the NFL has the option to open up Sunday Ticket to bidding early this year. AT&T executives have discussed the matter with NFL Commissioner Roger Goodell. The league hasn’t signaled what it will do.

AT&T customer Ben Harding is sticking with the company despite disappointing call-center interactions. The Los Angeles screenwriter said a representative of AT&T’s loyalty department offered him monthly discounts adding up to $500 a year if he kept his TV service, a deal he accepted.

Weeks later, Mr. Harding said, some promised channels weren’t available, and it took several calls to AT&T’s corporate office and a Facebook message to a high-level executive to persuade the company to give him a credit.

"The whole thing left me suspicious,” he said, “and with a bad taste in my mouth.”

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>>> Just How Ugly Is GE's Balance Sheet?


Its rethink of a train-unit divestiture says a lot about CEO Larry Culp’s turnaround approach, as well as the company’s desperate need for cash.


By Brooke Sutherland

January 25, 2019


https://www.bloomberg.com/opinion/articles/2019-01-25/ge-train-deal-do-over-shows-desperate-need-for-cash?srnd=premium


A reworked General Electric Co. deal says a lot about new CEO Larry Culp’s approach to a turnaround.

The embattled industrial conglomerate announced on Friday that it was updating the terms of its transportation unit’s pending merger with Wabtec Corp. GE will still receive a $2.9 billion cash payment up front, but it’s reducing the allocation of shares in the combined company to be spun off to its shareholders and keeping a bigger stake for itself. GE’s ownership in the new Wabtec will rise to 24.9 percent, compared with 9.9 percent previously. The net of this is that the deal will yield more cash that GE can use to chip away at its estimated $100 billion in net liabilities. GE says its stake in Wabtec is worth $3.4 billion at current prices, and it can sell that down subject to staggered lockup provisions.

It’s highly unusual to see companies revise deal terms so significantly this late in the game. The Wabtec deal was announced last May and at the time, the companies expected it to close in early 2019. GE is still expecting a February completion for the merger, but the fact that it’s ripping away equity rights from its own investors just a month beforehand is the strongest sign to date of just how desperate the company is for cash. In light of that, the locomotive business likely won’t be the only GE asset Culp tries to milk further.

Too Much New Year's Cheer?

GE shares have climbed in recent weeks, but a painful reset of its earnings looms and yet more trouble spots may come to light at GE Capital

Former CEO John Flannery carefully crafted the Wabtec transaction to provide a balance between giving GE the cash it needs and saving some upside for its aggrieved shareholders. He repeated this blueprint with his plans for the health-care unit: Flannery’s June proposal calls for the sale of a 20 percent stake in the business via the public markets, with the rest spun or split off to shareholders. Culp has already said he’s considering selling as much as a 49.9 percent stake in the health-care business instead. That’s the maximum amount GE can sell and still have the spinoff be tax-free to shareholders.

In the new Wabtec deal, the spinoff portion will be considered a taxable dividend, suggesting the interests of GE shareholders are increasingly taking a back seat to those of its creditors in the mind of the CEO. This suggests we could see a similar revision to the health-care business divestiture, with GE possibly scrapping the spinoff altogether. GE could follow a model similar to what Siemens AG did with the separation of its Healthineers business and retain a stake that it could sell down over time for more resources, helping to offset some of the sting of losing one of its best cash-flow generating businesses.

Just to take a step back, though, the Wabtec deal revision follows Culp’s decision to shrink GE’s quarterly dividend down to a mere penny per share and to accelerate the divestiture of the company’s majority stake in the merger of its oil-and-gas assets with Baker Hughes. He also sold GE’s stakes in Pivotal Software Inc. and NeoGenomics Inc. While I appreciate Culp’s sense of urgency in trying to alleviate GE’s debt burden and put the company on a healthier path, this race to find cash in every possible nook and cranny suggests the balance sheet is in an even uglier state than investors may be aware. That’s especially true for those shareholders who pushed GE’s stock up a whopping 16 percent this year through Thursday with little substantive news.

It seems likely that GE will now need to pump meaningfully more money into its GE Capital finance arm than the $3 billion it had earmarked. The biggest unknown is GE’s legacy long-term care insurance operations. All signs are pointing to the company’s initial estimate of a $15 billion reserve shortfall as not being nearly conservative enough. We should get more details on this when GE releases its fourth-quarter earnings next week, but Culp is already laying down telling – if troubling – guideposts.

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>>> Leveraged Loan Investors Worry Good Times Will Soon Haunt Them


Boomberg

By Lisa Lee

January 4, 2019


https://www.bloomberg.com/news/articles/2019-01-04/leveraged-loan-investors-worry-good-times-will-soon-haunt-them?srnd=premium


Fresh worries about collateral protection on big LBO loans
Loans from Refinitiv, Envision have dropped amid fear

One of the safest ways to invest in junk-rated companies is starting to look pretty risky.

Money managers have grown increasingly concerned about loans to high-yield corporations over the last month as early signs of slowing global growth have emerged. Investors are starting to realize that a key safeguard that protects them, namely the collateral they can seize if a company goes under, gives them less cover than they thought.

In December these worries helped push down prices in the $1.3 trillion leveraged loan market, hitting the debt that financed some of the biggest buyouts of 2018. In the go-go credit markets of the last two years, companies won unprecedented power to sell businesses, move operations to different units, and use other tactics to move assets out of the reach of lenders before defaulting.

“Collateral is a big long-term risk,” said Chris Mawn, head of the corporate loan business at investment manager CarVal Investors. “You think you’re secured by a Cadillac, but three years from now, it turns out you’ve got a Chevy.”

The loose contract provisions that money managers have agreed to over the last two years mean that when borrowers actually do start going under en masse, creditors are likely to end up with fewer assets to liquidate, and ultimately bigger losses. Private equity-backed firms have generally been the most aggressive borrowers when it comes to pushing for the right to move around collateral.

Getting Worse

A measure of leveraged loan covenant deterioration spikes to near record

When Blackstone Group bought out a majority stake of Thomson Reuters Corp.’s financial terminal business last year, its $6.5 billion loan offered it wide latitude to sell assets and pull cash from the company. Soon after that Bloomberg reported that the business, dubbed Refinitiv, was looking at offloading its currency trading unit, among others. These concerns along with broader market volatility helped push the bid on these loans as low as 93.375 cents on the dollar in December, from their initial sale price of 99.75 cents.

Loans sold to help finance another leveraged buyout in September for Envision Healthcare have similarly fallen, to 93.75 cents from their original 99.5 cents. Investors have grown more worried that private equity owner KKR can easily sell off a more profitable portion of the company’s business and leave lenders with the less attractive part, according to people with knowledge of the matter.

Sometimes loan investors don’t realize the extent of the rights they’ve given to a corporation and its private equity owners until assets are taken away. The contractual provisions that allow greater flexibility, known as covenants, may be spread through a lengthy lending agreement. Only careful consideration of how different lending terms interact with each other reveals what a company can do.

“There are covenants that put together can make a loan like an equity,” said Jerry Cudzil, head of credit trading at money manager TCW Group Inc., which oversaw $198 billion of assets as of Sept. 30. Equity usually has the last claim on assets when a company is liquidated, making it the riskiest kind of investment in a company.

More Risk

Weaker collateral protection is just one factor that makes loans to junk-rated companies much riskier in this cycle than they’ve been in previous downturns, and one factor spurring investors to pull money from leveraged loan funds. Companies have more debt relative to their assets than they had in the past, which means that if a failed corporation liquidates, the proceeds have to cover more liabilities.

On top of that, a higher percentage of loan collateral is intangible assets -- about two thirds, up from about 60 percent in 2009, according to UBS Group AG. Those kinds of assets, like brand names, are harder to value and liquidate than tangible assets. And more borrowers have just loans and no other form of debt this time around, meaning if the company fails, there are fewer other creditors to absorb losses.

Add it all up, and Moody’s Investors Service reckons that investors will recover just 61 cents on the dollar when first-lien term loans go bad whenever the market turns, well below the historical average of 77 cents.

Credit Brief: Fear and Loathing in Leveraged Loans

A key to loosening investors’ hold over collateral has been tweaking the tests that determine if a company is earning enough relative to its debt obligations, known as leverage. As long as corporations are generating enough income, managers often have the freedom to move assets around and pull money from the company, among other things. Companies have been easing the requirements for these tests, making it easier for them to clear the hurdles and keep their flexibility.

“These leverage tests are like a master key that unlocks all these flexibilities,” said Derek Gluckman, analyst at Moody’s, “and the master key is working better and easier.”

J. Crew

One of the first signs of the potential trouble ahead for loan investors came from J. Crew Group. In 2016, the preppy clothing retailer told lenders it was moving intellectual property including its brand name into a new unit that was out of the reach of creditors as part of a restructuring, a process it completed in July 2018. Litigation ensued, as angry lenders said that collateral was being taken away from them. But the company has showed signs of recovering, and its term loan now trades at 92 cents on the dollar, up from around 55 cents in November 2017.

J. Crew’s efforts seem to have inspired other private-equity owned retailers as well. PetSmart Inc. and Neiman Marcus Group Inc., for example, have shuffled online businesses into different units where lenders can’t reach them.

“If new terms get through, all the private equity firms and their counsels start to claim that the new term is becoming standard in the market and they point to the precedent,” said Justin Smith, an analyst who looks at high-yield lending agreements at Xtract Research. “There are too many lenders who don’t care enough about covenant packages or don’t pay attention.”

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>>> Warren Buffett used to avoid tech stocks. Now he loves them. Here's why


Money

by Adam Seessel

12-29-18


https://www.msn.com/en-us/money/topstocks/warren-buffett-used-to-avoid-tech-stocks-now-he-loves-them-heres-why/ar-BBRrLQg


At this year’s annual Berkshire Hathaway meeting in Omaha, Warren Buffett, the high priest of value investing, uttered words that would have been grounds for excommunication if they had come from anyone but him.

Buffett began his career nearly 70 years ago by investing in drab, beaten-up companies trading for less than the liquidation value of their assets—that’s how he came to own Berkshire Hathaway, a rundown New England textile mill that became the platform for his investment empire. Buffett later shifted his focus to branded companies that could earn good returns and also to insurance companies, which were boring but generated lots of cash he could reinvest. Consumer products giants like Coca-Cola, insurers like Geico—reliable, knowable, and familiar—that’s what Buffett has favored for decades, and that’s what for decades his followers have too.

Now, in front of roughly 40,000 shareholders and fans, he was intimating that we should become familiar with a new reality: The world is changing, and the tech companies that value investors used to haughtily dismiss are here to stay—and are immensely valuable.

“The four largest companies today by market value do not need any net tangible assets,” he said. “They are not like AT&T, GM, or Exxon Mobil, requiring lots of capital to produce earnings. We have become an asset-light economy.” Buffett went on to say that Berkshire had erred by not buying Alphabet, parent of Google. He also discussed his position in Apple, which he began buying in early 2016. At roughly $50 billion, that Apple stake represents Buffett’s single largest holding—by a factor of two.

At the cocktail parties afterward, however, all the talk I heard was about insurance companies—traditional value plays, and the very kind of mature, capital-intensive businesses that Buffett had just said were receding in the rearview mirror. As a professional money manager and a Berkshire shareholder myself, it struck me: Had anyone heard their guru suggesting that they look forward rather than behind?

The Big Debate

There is a deep and important debate going on in the investment community, one with profound repercussions for both professional money managers and their clients. Some believe that Buffett is right—that we have become an asset-light economy and that value investors need to adapt to accommodate such changes. Noted value managers like Tom Gayner of Markel Corp. and Bill Nygren of Oakmark Funds, for instance, count companies like Amazon and Alphabet among their top holdings. The fact that these stocks often trade at above-market valuations—a factor that once scared away orthodox value investors—hasn’t deterred them, because the companies’ futures are so bright that they’re worth it.

Other value managers like David Einhorn at Greenlight Capital and Bruce Berkowitz at Fairholme are betting on the very same old-economy companies that Buffett long favored. Berkowitz, Morningstar’s domestic equities Manager of the Decade from 2000–10, has seen his performance suffer this decade, thanks to positions in AT&T and, most notably, Sears Holdings, which declared bankruptcy earlier this fall. Einhorn’s performance has also suffered; his largest position is GM, and he says he has been short what he calls a “bubble basket” that includes Tesla, Netflix, and Amazon.

All value investors continue to agree that price is an important component of value—that’s why we’re called value investors. What’s happening now is a debate about what the drivers of value are—of what constitutes value in the 21st-century economy—and what will drive both the economy and the market forward over the next generation.

Value investors are just that—we hunt for value, and our focus on price in relation to a business’s value makes us easily distinguishable from other investors. Momentum investors, for example, care about price only insofar as they can sell whatever they’ve bought to someone else at a higher one—the so-called greater-fool approach. Then there’s growth investing, in which price takes a distant second place to a business’s prospects for rapid expansion. Because weighing price vs. value is paramount in value investing, those in this school have a reputation of being long-term-oriented, self-denying cheapskates.

Value’s Beginnings

The father of value investing was Ben Graham, who gave birth to it roughly 100 years ago, when 100% of the components of the Dow Jones industrial average were just that—industrials. Hard assets were what drove companies like Anaconda Copper and National Lead. Consumer marketing was in its infancy; in 1915, the closest thing the Dow had to a consumer products company was General Motors (or maybe American Beet Sugar).

The year before, Graham had graduated second in his class from Columbia University with such a gifted intellect that he was offered teaching positions in three departments: philosophy, mathematics, and English. Acquainted with poverty at an early age, however, Graham chose a career in finance. The market of his day was dominated by tipsters, schemers, and speculators; stock operators trying to corner the market in United Copper had caused the Panic of 1907, which wiped out Graham’s widowed mother’s savings. Graham loathed such speculations, but he was attracted to the upside of equities. He saw them for what they were: a fractional ownership of a company’s business.

Driven by both his academic temperament and practical necessity, Graham set about trying to figure out a predictable, systematic way to make money in stocks. For an answer, he turned to corporate financial statements and the tangible assets represented therein. Graham saw that while equities went up and down in the short run according to the whims of the market, a company’s tangible assets—its forges and its foundries and the inventory they produced—had a solid, knowable value. Graham began to calculate that value in a precise, mathematical way. He asked himself: What would a company be worth if it were to liquidate its assets and pay off its liabilities? Sometimes the liquidation would actually occur; other times it would be a theoretical exercise that gave Graham what he termed a “margin of safety” when buying a security.

By quantifying value and then juxtaposing it with price, Graham found he could make sense of markets. Thus was born security analysis and, with it, value investing.

From the beginning, value investing focused on the quantitative and tangible aspects of a business. Graham was an intellectual who lived in abstractions; he didn’t want to know about the products the companies made. Irving Kahn, one of Graham’s assistants, told Buffett biographer Roger Lowenstein that if someone began to describe to Graham what a company actually did, he would get bored and look out the window. With his focus on liquidation value, Graham tended to buy boring, beaten-down businesses—cigar butts, they came to be known, good for only a few extra puffs. Walter Schloss, a Graham analyst who later became a legendary value investor in his own right, once pitched Graham on Haloid, which owned the rights to a promising technology that would one day become the Xerox machine. While there is no record as to whether Graham looked out the window, he nevertheless said no.

“Walter,” he said, “it’s just not cheap enough.”

The Oracle

One of Graham’s acolytes was a young man from Omaha who was born into the Depression but came of age during America’s large, optimistic postwar expansion. As a teenager, Warren Buffett tried to understand the stock market by studying charts and other technical indicators; when he came upon Graham’s writings, he said that he felt “like Paul on the road to Damascus.” Buffett came East for business school to study under Graham, who by then was teaching at Columbia, and he briefly worked for Graham after graduation. A classic Middle American boy, however, Buffett soon quit New York for his beloved hometown.

Surveying the economy of the mid-1950s with his own partnership, Buffett saw that it was vastly different from the one Graham had encountered as a young man. While the Dow Jones industrial average was still dominated by industrials, it also contained Procter & Gamble, Sears Roebuck, and General Foods. These companies were fundamentally different from an industrial company: The primary driver of their business value had little to do with hard assets. Rather, the value had to do with the company’s brands—with the loyalty and familiarity that customers felt for Ivory Soap and Jell-O gelatin. These emotional ties, encouraged and cemented by mass marketing, allowed businesses to charge high prices for relatively mundane goods.

The great enabler of such businesses was the rise of national television, which both emanated from and reinforced a culture of homogeneity. Market-leading brands used scale in a very different but no less effective way than manufacturing companies. A beer, shampoo, or cola brand with dominant share could flood the three major TV networks with more advertising than their competition, yet still spend less than the competition as a percentage of absolute sales dollars. This set up a virtuous circle for dominant brands and a vicious circle for those less fortunate. Brands like Budweiser went from strength to strength; strong regional brands like Narragansett beer, once the No. 1 seller in New England, slowly but surely withered away.

With the help of his partner Charlie Munger, Buffett studied and came to deeply understand this ecosystem—for that’s what it was, an ecosystem, even though there was no such term at the time. Over the next several decades, he and Munger engaged in a series of lucrative investments in branded companies and the television networks and advertising agencies that enabled them. While Graham’s cigar-butt investing remained a staple of his trade, Buffett understood that the big money lay elsewhere. As he wrote in 1967, “Although I consider myself to be primarily in the quantitative school, the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side, where I have had a “high-probability insight.” This is what causes the cash register to really sing.”

Value 2.0

Thus was born what Chris Begg, CEO of Essex, Mass., money manager East Coast Asset Management, calls Value 2.0: finding a superior business and paying a reasonable price for it. The margin of safety lies not in the tangible assets but rather in the sustainability of the business itself. Key to this was the “high-probability insight”—that the company was so dominant, its future so stable, that the multiple one paid in terms of current earnings would not only hold but perhaps also expand. Revolutionary though the insight was at the time, to Buffett this was just math: The more assured the profits in the future, the higher the price you could pay today.

This explains why for decades Buffett avoided technology stocks. There was growth in tech, for sure, but there was little certainty. Things changed too quickly; every boom was accompanied by a bust. In the midst of such flux, who could find a high-probability insight? “I know as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz,” Buffett wrote in 1967, referring to an obscure Polish beetle. Thirty years later, writing to a friend who recommended that he look at Microsoft, Buffett said that while it appeared the company had a long runway of protected growth, “to calibrate whether my certainty is 80% or 55% … for a 20-year run would be folly.”

Now, however, Apple is Buffett’s largest investment. Indeed, it’s more than double the value of his No. 2 holding, old-economy stalwart Bank of America.

Why? Not because Buffett has changed. The world has.

And quite suddenly: Ten years ago, the top four companies in the world by market capitalization were Exxon Mobil, PetroChina, General Electric, and Gazprom—three energy companies and an industrial conglomerate. Now they are all “tech”—Apple, Amazon, Microsoft, and Alphabet—but not in the same way that semiconductors and integrated circuits are tech. These businesses, in fact, have much more in common with the durable, dominant consumer franchises of the postwar period. Their products and services are woven into the everyday fabric of the lives of billions of people. Thanks to daily usage and good, old-fashioned human habit, this interweaving will only deepen with the passage of time.

Explaining his Apple investment to CNBC, Buffett recalled making such a connection while taking his great-grandchildren and their friends to Dairy Queen; they were so immersed in their iPhones that it was difficult to find out what kind of ice cream they wanted.

“I didn’t go into Apple because it was a tech stock in the least,” Buffett said at this year’s annual meeting. “I went into Apple because … of the value of their ecosystem and how permanent that ecosystem could be.”

The New Economy

If the postwar era was about consumer brands operating at scale, the early 21st century is about what we might call digital platforms. Like the branded enterprises before them, they have the permanence and probability that make for a good long-term value investment. Innovation scholar Carlota Perez has written about how at least five times in Western civilization, new technologies have erupted, gone through a speculative frenzy, and then busted, only to settle down after a shakeout into a long, protracted period of stability. We’ve had the high-tech eruption, we’ve had the frenzy of the dotcom boom, and we’ve had the bust. Now we are in what Jonathan Haskel and Stian Westlake, authors of Capitalism Without Capital, call the “bedding-in” phase.

Unlike branded companies, digital businesses often benefit from network effects: the tendency of consumers to standardize on a single platform, which reinforces both consumer preference and the platform’s value. Because of this, the market shares of these platform companies dwarf those of the consumer products giants; software businesses like these are often characterized by a “winner take all” or “winner take most” dynamic. Combine this with the fact that they require little to no capital to grow, and you have Value 3.0—business models that are both radically new and enormously valuable.

“In the past you would’ve needed a tremendous amount of capital to achieve global scale,” says Oakmark’s Nygren, whose top position in his Oakmark Fund is Alphabet, “but these companies have done it just by writing code and pressing “send.””

Like their branded predecessors, the platform companies are wisely reinvesting their vast profit streams into not only their core business but entirely new platforms as well.

Take Alphabet, which my fund also owns: It began with search, a classic two-sided market in which consumers looking for goods and services are paired with advertisers who want to reach them. Google gained an early edge thanks to a superior search algorithm; with the word “google” now routinely used as a verb, it commands 95% of all mobile search. Google tweaks its algorithm twice a day to maintain its search superiority; meanwhile, the cash flow from this asset-less platform is so abundant that the parent can afford to spend $20 billion a year on research and development. That’s more than the annual earnings of Coca-Cola and American Express combined. It’s going into not only the core franchise but also nascent platforms like YouTube (user-generated video content), Android (smartphone operating systems), and Waymo (driverless cars). None of these businesses earns much now, but they may soon do so, and they are funded entirely by Google’s search platform. Little wonder that Amazon founder Jeff Bezos once told a colleague: “Treat Google like a mountain. You can climb the mountain, but you can’t move it.”

Meanwhile, Bezos has built a mountain or two of his own. As the first big mover in e-commerce, he created a network of warehouses and logistics capabilities that now allows him to deliver packages to more than 100 million Prime customers in two days or less. He too has chosen to reinvest Amazon’s profits back into the business in various forms: lower prices for customers, ancillary services like Prime Video, and entirely new industries like Amazon Web Services, which provides outsourced, essential computational “plumbing” for the next generation of digital startups. In its core retail business, Amazon still has only a roughly 5% share of U.S. retail commerce despite being at it for more than 20 years. Amazon’s stock may be overvalued today—but with its dual moats of immense customer loyalty and low-cost provider status, there is no argument that it is very valuable.

Value 3.0

As these platform companies create billions in value, they are simultaneously undermining the postwar ecosystem that Buffett has understood and profited from. Entire swaths of the economy are now at risk, and investors would do well not only to consider Value 3.0 prospectively but also to give some thought to what might be vulnerable in their Value 2.0 portfolios.

Some of these risks, such as those facing retail, are obvious (RIP, Sears). More important, what might be called the Media-Consumer Products Industrial Complex is slowly but surely withering away. As recently as 20 years ago, big brands could use network television to reach millions of Americans who tuned in simultaneously to watch shows like Friends and Home Improvement. Then came specialized cable networks, which turned broadcasting into narrowcasting. Now Google and Facebook can target advertising to a single individual, which means that in a little more than a generation we have gone from broadcasting to narrowcasting to monocasting.

As a result, the network effects of the TV ecosystem are largely defunct. This has dangerous implications not only for legacy media companies but also for all the brands that thrived in it. Millennials, now the largest demographic in the U.S., are tuning out both ad-based television and megabrands. Meanwhile, Amazon and other Internet retailers have introduced price transparency and frictionless choice. Americans are also becoming more health conscious and more locally oriented, trends that favor niche brands. Even Narragansett beer is making a comeback. With volume growth, pricing power, and, above all, the hold these brands once had on us all in doubt, it’s appropriate to ask: What’s the fair price for a consumer “franchise”?

To be sure, some of the digital-disruption rhetoric is overdone. Cryptocurrency replacing the bank system? Not likely. David Einhorn’s bearish calls on Tesla and Netflix may well be right, not because the stocks are expensive but because they face rising competition. And for all the hype about autonomous vehicles, they’re not anywhere close to being here—yet.

But a lot can change in half a generation. If you google “Easter Day Parade, New York City 1900” and then “Easter Day Parade, New York City 1913” and look at the pictures that appear, you will see that the former has nearly 100% horse-drawn carriages while the latter has nearly 100% horseless carriages—i.e., automobiles. And when driverless cars do arrive, what happens to the auto industry? What happens to the auto-insurance industry—that cuddly, capital-intensive commodity business that value investors love to talk about at cocktail parties?

Long-term investors need to be thinking about such shifts, and they need to position their portfolios in accordance with them rather than against them. Darwin is often misunderstood, says Markel’s Gayner, who counts both Amazon and Alphabet among his holdings. “It’s not survival of the fittest, but those who are most adaptable to change, that make it through.”

Value 3.0 Rules of the Road

Even in an economy transformed by technology, many of Warren Buffett’s principles of value investing apply. Here are some dos and don’ts.

DO’S

Always look for a business with a clear-cut competitive advantage. If you can’t explain to your spouse what makes a company special as a long-term moneymaker, it probably isn’t. Amazon has a stranglehold on e-commerce; Google owns search; Sherwin-Williams, in which my fund owns a stake, dominates brick-and-mortar paint stores. What makes a company able to earn outsize profits over the next generation?

Try to find companies with a small market share, a huge addressable market, and a large competitive advantage. This was Warren Buffett’s recipe for success with Geico, a once-tiny auto insurer that sold directly to consumers rather than pay agents’ commissions. These traits may be present in GrubHub, the first mover in the food-delivery market, which my fund also owns. It has an industry-leading market share yet still has less than a 1% share of all American restaurant meals consumed each year. Still TBD: whether consumers will continue to migrate away from in-restaurant dining, and whether Uber and Amazon will try to eat GrubHub’s lunch.

DON’TS

As Buffett has said, never confuse a growing industry with a profitable one. One cautionary tale from the 2000s: Vonage, a pioneer in routing phone calls over the Internet. Business exploded over the past decade, but so did competition. Profits for everyone imploded, and the big winner (as is so often the case) has been the consumer. Vonage’s stock has never gotten back to its $17-per-share IPO price.

Avoid businesses whose best days are behind them. This is true even if you’re paying a cheap price relative to current earnings or book value because, in the long run, underlying business quality trumps price. Exhibit A: Sears Holdings looked cheap all the way down until it declared bankruptcy earlier this fall. You can still buy a fractional interest in Sears’s future today for a very cheap price, by the way—36¢ a share, as of this writing.

Industries to Look At… and to Avoid

Some industries are particularly well positioned to benefit both from the drivers of “Value 3.0” (network effects, grwoth that isn’t capital intensive) and more traditional advantages (wide competitive moats). Here are some industries to watch right now and a couple to be wary of.

Attractive

Platform tech It’s difficult to see how Alphabet’s Google subsidiary will lose its 95% market share in mobile search. Advertising on the Internet represents only 30% of total worldwide marketing spending, so Google has room to grow. Likewise, Amazon has only a 5% share of U.S. retail spending; thanks to its network of warehouses and its frictionless customer interface, it possesses powerful competitive advantages.

Aerospace While it’s tempting to be swept away by the might of digital platforms, it’s also true that most business continues to be done in the real world, not the ether. Consider the aerospace industry: It has grown 5% per annum over the past 50 years, well ahead of global GDP, yet 80% of the world’s population still has not yet set foot on an airplane. Add to this the fact that aerospace companies tend to be duopolies or oligopolies, and you have a recipe for powerful economic compounders. Not surprisingly, industrial conglomerates Honeywell and United Technologies are both taking steps to become more aerospace-focused.

Not So Much

Autos A cyclical, capital-intensive business that makes commoditized products is a troubled industry to begin with. If driverless cars become a reality, then car sharing is not far behind. Once that occurs, it’s virtually certain we’ll need fewer automobiles. Falling production on a fixed-cost base—look out below.

Insurance Another cyclical, commoditized business with no barriers to entry except capital—which is to say, no barriers at all. Returns on equity in insurance have been in structural decline for 30 years, with personal lines most at risk. Warren Buffett, whose Berkshire Hathaway conglomerate is invested in insurance, has acknowledged that self-driving cars could significantly decrease auto-insurance premiums. Such coverage may join the buggy whip in terms of utility within the next generation.

Adam Seessel, who won journalism’s George Polk Award in 1991, is founder and CEO of Gravity Capital Management. His fund owns positions in some of the companies mentioned here. This article also appeared in the December 2018 issue of Fortune.

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>>> General Electric Shares Surge After Rare JPMorgan Upgrade


General Electric GE shares surged the most in more than five years in pre-market trading Thursday after JPMorgan analyst Stepehen Tusa changed his rating on the beaten-down stock for the first time in two and a half years.


The Street

Martin Baccardax

Dec 13, 2018


https://www.thestreet.com/investing/stocks/general-electric-shares-surge-after-rare-jpmorgan-upgrade-14809623?puc=yahoo&cm_ven=YAHOO&yptr=yahoo


General Electric (GE - Get Report) shares surged the most in more than five years in pre-market trading Thursday after JPMorgan analyst Stepehen Tusa changed his rating on the beaten-down stock for the first time in two and a half years.

Tusa lifted his rating to "neutral" from "underweight", a view he had held since May of 2016, and although he maintained an $8 price target on the stock, he said the ""known unknowns" surrounding the company are now easier to quantify.

"Key to the story, in our view, is the outcome of 'known unknowns' in near term, which are better understood and around which debate is more balanced, as opposed to being overlooked by most bulls in the past," Tusa said. "We now believe a more negative outcome one these liabilities (equity dilution is one) is at least partially discounted, and it's possible the company can execute its way through an elongated workout that limits near-term downside."

GE shares were marked 10.28% higher in the opening minutes of trading in New York and changing hands at $7.42 each. The move would be the biggest single-day gain in more than five years and would trim the stock's year-to-date decline to around 56% if it holds until the end of the session.

TheStreet's technical expert, Bruce Kamich, noted earlier this week that his charts were showing a "bullish divergence", but was doubtful the stock could produce a "meaningful advance" on its own.

Separately, GE said Thursday that it was launching a $1.2 billion "internet of things" software company and selling a majority stake in its ServiceMax, a field service management software division, to private equity group Silver Lake.

"As an early leader in IIoT, GE has built a strong business with its industrial customers thanks to deep domain knowledge and software expertise," said CEO Larry Culp. "As an independently operated company, our digital business will be best positioned to advance our strategy to focus on our core verticals to deliver greater value for our customers, and generate new value for shareholders."

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