Mario Gabelli
Barron's: How do things look to you, Mario?
Gabelli: In January I said the economy would grow more in 2002, in GDP terms, than I foresee for the balance of the decade. For the decade, I'm expecting growth of 3%-3½%. GDP is still on track, even with the lull that appears to have taken place in May. What gives us legs in 2003 -- capital spending, Japan, Europe? The answer is "yes" to all three. Inflation overall is still not a challenge. Profits will be up sharply this year, reflecting a combination of gains in GDP, corporate productivity, cost-cutting, financial re-engineering and the absence of the kitchen-sink writeoffs taken in 2001. FASB 142 [an accounting rule that eliminates the amortization of goodwill] helps reported earnings, as well. The dollar gets a little weaker, which is good. Slow, steady erosion would allow corporate profits for S&P 500 companies to be worth more. Oil prices are down a tad from the $25.50 a barrel at which they are trading today. And the bond market is going up from current levels.
Q: What about the stock market? What's left of it, anyway.
A: Overall, the market is where I thought it would be, but it has been awfully painful getting here. The Dow could go up 10%, or down no more than 2% or 3%. I think we are getting close to the bottom. The psychology is awful, but the Mideast and Kashmir and the Yankees are all resolved without some major hostility. There will be a lot more upward revisions of profits, except in the technology and telecom sectors. The press doesn't want to talk about Maytag, only mayhem in technology. Tech will turn around a year and a half from now, or maybe a year from now.
Q: Will a recovery in profits allay concerns about corporate accounting?
A: No. That's a different issue. All of our institutions are under siege, most recently Martha Stewart. [Stewart is under investigation by Congress in relation to her sale of shares in ImClone Systems prior to the announcement of an unfavorable FDA ruling on the company's pivotal drug.] The accounting profession, analysts, investment bankers, actuaries, priests-we're questioning everything. We are at the end of a cycle. An array of new analysts as well as investors have never been through cycles. They are graying a bit.
Mario Gabelli
Company Symbol Recent Price
Cablevision CVC $13.90
Del Monte Foods DLM 11.25
CH Energy CHG 47.75
Western Resources WR 14.69
DQE DQE 13.58
As for stocks, gold was bright. Areas like cable and wireless telephony were awful. But the liquid side of our portfolios -- wine, water, beer and soda -- did well. Globally, consumer nondurables were never bought by momentum investors, so they never had to be sold. I don't own it, but stocks like Procter & Gamble have done extremely well in the past six months.
Q: What will click in the next six months?
A: I've got something old and something new. The something old is Cablevision Systems. It has about 175 million shares and $8.8 billion of debt and redeemable preferred shares. Cable is a good business. The political environment, particularly since there is a satellite competitor, will remain neutral to positive. And regulation is favorable, because a TV operator now can own a cable station in the same market, and vice versa. Cablevision has some internal issues. A lot of capital is being spent to go digital and develop satellite and wireless businesses. There are some questions about the validity of their digital strategy, which employs a Sony digital box. There is concern about not carrying the Yankees on the Yes channel as part of a basic package. This has resulted in more customer churn than the company has acknowledged. As the baseball season moves into June-July, they will have to acknowledge much more erosion. But this is just a sidebar. Then there's the collapse of Adelphia, which has tainted the entire industry. I look at this and say it is one of the great buying opportunities in a wonderful business.
Q: What turns the company around?
A: The AT&T-Comcast merger will go through. [Comcast has agreed to buy AT&T's cable properties.] Cablevision will sell some assets and get some cash. Hopefully they will announce something in the next 60 to 90 days. With the stock at $14.50 a share, I can buy the company at a reasonable 8, 9 or 10 times EBITDA [earnings before interest, taxes, depreciation and amortization].
As for Adelphia, this was the first time in a long time that I have seen a good business run into the ground by people who were more than gray at the edges. It was a shocker for me, because cable is inherently a solid business, as opposed to the Houston entity that created paper businesses. Someone once said that power corrupts and absolute power corrupts absolutely. That's why the institutional investor has to come to the table with regard to changes in corporate governance. Things like poison pills, stock options and mindless investing have to be re-examined.
Q: Now, for something new.
A: Heinz has announced it's selling the Star Kist, College Inn and pet food businesses to Del Monte Foods. The deal reminds me of another in which we made a ton of money: J.M. Smucker, the jelly maker, bought Jif peanut butter from P&G. Smucker's stock went from 22 to 35 while people were still sorting through the details. Pro forma, Del Monte will earn 90 cents to a dollar a share, and the stock is $11. Revenues will go from $1.3 billion to $3.1 billion and EBITDA from just under $170 million to $500 million. We're also adding to Heinz, but my third pick today is CH Energy Group, which I recommended in January.
Q: The stock rallied from 44.72 into the low 50s. Now it's around 48. What's in store now?
A: A takeout about 25% higher, with Con Edison the likely buyer. The California energy crisis and Enron and the problems of independent power producers have converged to create some wonderful opportunities in utilities. There will be lots of deals. We've been buying Western Resources, which owns 45% of ONEOK, a natural-gas distributor. Western is around 15 a share. DQE, which operates the electric company in Pittsburgh, has done some pretty dumb things, including one just announced: They are selling 15 million shares to the public. The stock is around 13.50, and we think we can make 25% to 50% over the next year or two. We are buying a bunch of utilities aggressively, because of transactions we think will happen.
Q: Deals, deals, deals. Thank you, Mario.
GABELLI
Price Price Percent
Company Symbol 1/7/02 6/14/02 Change
CH Energy Group CHG 44.72 46.99 5.08%
Southwest Gas SWX 22.60 23.75 5.09
Rainbow Media RMG 26.00 15.27 -41.27
E.W. Scripps SSP 68.55 75.84 10.63
Liberty Media L 14.86 10.19 -31.43
Cablevision CVC 46.93 14.28 -69.57
Media General MEG 49.82 60.29 21.02
Paxson Commun PAX 10.40 7.00 -32.69
Liberty LC 41.51 39.60 -4.60
Broadwing BRW 10.55 3.09 -70.71
Chemed CHE 34.06 33.75 -0.91
Gaylord Entmt GET 24.49 23.75 -3.02
Grupo Televisa TV 42.51 40.74 -4.16 |
