March 22, 1999
Cover Story, Part 2
Cover Story, Part 1
There was a time, not so long ago, that Best Buy was considered anything but a
market winner. Just two years ago, the giant Minnesota-based
consumer-electronics retail chain was pulling in more sales per store than any of
its competitors but still generating only the most modest of profits, in large part
because the growth had raced ahead of the company infrastructure and
distribution systems. But all that has changed rather dramatically for the better.
"Things were pretty grim," says Peter
Caruso, who tracks the company for
Merrill Lynch. "But then Best Buy
brought in consultants who showed
management the error of its ways, got
them up off their backs and introduced
them to the disciplines they needed to
make things work properly."
With margins up from virtually nil to 3
1/2 % and headed still higher, Best Buy
vaulted to third place in the Barron's 500
rankings for 1998, thanks to a stunning
stock-market return of 232.9% last year,
during which the shares rose from a low
of 9 to over 30 (adjusted for last week's 2-for-1 split), along with an average ROI
of 18.7%. And the good times continue: year-to-date, with Best Buy's stock up
80% from 30 to 54 versus a 7% rise in the S&P 500.
Still, for reasons that remain unclear, neither CEO Richard Schulze nor any of
Best Buy's top executives would talk to Barron's for this story, raising suspicions
that the recovery might be tailing off. Not so, insists Caruso. "If ever there was a
company sitting in the sweet spot right now, it's Best Buy."
snip........
Prime among this is the fast-growing popularity of the Internet, which is
spurring sales of personal computers, especially lower-priced ones, to the 50-odd
percent of Americans who are still without one. "Sure, you can talk of Dell and
Compaq, but when you really look at this market, it's Best Buy that will benefit
due to its No. 1 share of PC consumer sales." On top of that, Caruso points to the
ongoing digital consumer-electronics revolution, with new digital phones, DVD
players and cameras all spurring sales.
But perhaps the biggest windfall will come when HDTV sales really get going.
"Prices are already down from $10,000 to $5,300 and they'll be at $4,000 or
lower by Christmas '99," he figures, noting that Japan has overbuilt HDTV
manufacturing capacity. "At that point, sales will start to climb. We are heading
into what will be the biggest-ever product in the history of consumer electronics.
When investors finally sit up and take note, you'll start to see panic buying of
stocks that stand to benefit, primarily Best Buy." That may help explain the
continuing stock price strength. Caruso, for his part, looks for the stock to climb
from the current 54 to 63 "within months."
People in and around the computer world used to call them, rather
condescendingly, "peripherals" -- bits of hardware that were attached to
computer systems, but whose glory and growth didn't really add up to much
alongside the real brains of computer hardware.
But Massachusetts-based EMC has long
had a different view of that world, one
that has turned the company into one of
America's fastest-growing high-tech
outfits -- and that has won it fourth place
in the 1998 Barron's 500 rankings. Over
the course of last year, as revenues soared
35% and earnings climbed 43%, EMC's
stock posted a '98 market return of
210%, with the stock more than tripling
from a low of 24 to a peak of 86 5/8,
while generating an ROI of 22.3%.
EMC is now the hands-down world
leader in data storage: assembling and
selling the hardware and software that computers of all types and sizes use to
store information, and then to retrieve it time and again on demand. EMC's huge
refrigerator-and-larger sized boxes sit just about everywhere there are large
computers, recording everything from store sales and aircraft seating assignments
to credit-card payments and medical records. The boom in cyberspace has been a
bonanza with every e-commerce sale -- indeed every mouse-click on a Web page
-- creating valuable new information that has to be stored.
The need for what EMC calls industrial-strength storage -- spurred by firms'
desire to milk every bit of information for competitive advantage -- has helped
feed EMC customers. They include 90% of world airlines, most of the 30 largest
banks, all of the world's top 20 telecom firms -- adding up to a 35% overall share
of this growing market. "It's clear we are extending our lead against our
competition," says EMC CEO Mike Ruettgers. "We simply don't see anyone out
there gaining ground. Sure, there is always a possibility of new competition from
new technology but, when you get right down to it, if and when it comes, I'm
pretty confident we'll be the first to use it."
snip......
Investors seem to have caught on: since January, EMC's stock has risen 40%, to
about 120, with analysts looking for a target of 140 or more by yearend.
It's hard to believe, but there was a time when Apple Computer ruled the PC
roost and what we used to call "IBMs" were ugly, under-powered clunkers by
comparison. But well over a decade of pretty awful management errors -- the
most obvious of which was refusing to let the Mac operating system be cloned,
allowing Microsoft's Windows to become the industry standard -- erased all that,
and nearly erased the company from the corporate map.
That changed markedly last year,
however, when Apple staged a comeback
to become a market flyer, posting a
stock-market gain of 212%. Coupled with
a 15.2% ROI, that was enough to rank
Apple in fifth place in the 1998 Barron's
500.
After burning through three CEOs over
the prior four years, the company's
recovery owed everything to the return
of founder Steve Jobs as acting CEO in
1997. He forged an immediate and
unexpected alliance with Microsoft that
insured a Mac version of MS Office (the
de facto standard of the workplace), ended Apple's short-lived cloning deal,
merged the profitable Claris software unit back into Apple and terminated the
troubled Newton hand-held computer line. And all that was just for starters: Last
year, under his direction, Apple launched its new iMac computer, a model more
notable for its splashy colors than its technology, which nonetheless has been an
immediate hit not only with longtime Mac fans but with PC shoppers in general.
"We have stabilized the company and returned it to sustainable profitability," says
Apple's chief financial officer, Fred Anderson. "The prior leadership here lacked
focus and lacked the clear understanding that for Apple to return to its former
greatness and industry leadership it had to produce innovative products with
innovative marketing. A large part of our turnaround story has been driven by
our innovative products backed by creative marketing."
While Apple has risen from the dead, it remains to be seen whether it can ever
run a marathon. The simple fact is that Apple's Mac, despite popularity among
some consumers and a fairly strong position in certain specific markets, most
obviously among graphic designers and to a lesser extent the K-12 education
sector, remains a niche player in today's PC world. Apple may be a big seller as
name brands go, but the Mac operating system still commands no more than 4%
of the PC user market, down from something a lot closer to 10% in the early
'Nineties.
That small market share continues to work against the Mac, despite the
availability of programs that allow it to run Windows programs without too
much performance degradation. While there are now an estimated 10,000
software titles for the Mac, in certain categories, most notably business,
investment and finance, the Mac remains a clear laggard to Wintel (Windows and
Intel) machines.
"I think we have the right strategy. I know we have a good management team,"
insists Anderson. The market, however, is not quite so convinced. Overall, even
last year's gains still leave Apple stock a noticeable laggard over the decade as a
whole, 4% versus a 300% rise in the S&P 500 Index. That has also been the
pattern this year. Since January 1, Apple stock has fallen 13% to around 35
against the market's 7% rise.
In a year in which mega-buck disaster movies like Godzilla, Deep Impact and
Armageddon ruled the movie screens, Norm Payson can be forgiven for thinking
his job was a Hollywood tragedy come true. A family-doctor-turned-would-be
corporate-rescuer, Payson is CEO of Oxford Health Plans, the company with the
unfortunate distinction of ranking 500th in the Barron's 500. A onetime Wall
Street highflyer and still one of the largest managed-health-care providers in the
U.S., Oxford crashed in flames in late 1997, the victim of over-expansion and
virtually nonexistent financial controls.
Oxford's stock returned a negative 4.4%
over the course of 1998, as most of the
damage was done the previous year, when
the shares plunged from a mid-1997 peak
of 89. (A poor performance, to be sure,
but less grim than the 70%-plus declines
posted by the likes of Service
Merchandise and MedPartners.) What
condemned Oxford to the bottom spot
was a debilitating minus-293% return on
investment, owing to some hefty
writeoffs and writedowns early in the
year, far and away the worst of any
company in the rankings.
Payson actually took over as CEO last May as part of a rescue plan in which the
investment firm of Texas Pacific Group put $350 million into Oxford in return
for the right to buy 22% of the company. "It was a scary situation," says Payson,
"a real crisis environment that from my perspective was a little like trying to
repair an airplane in flight." His first move was to rationalize operations,
focusing on the core business and exiting from operations that "we shouldn't have
got into." It was to some extent a geographic play, cutting back on activities as far
afield as New Hampshire, Chicago and Florida in favor of its original base, the
area in and around New York City.
At the same time, Oxford's new management got out of Medicaid and cut back on
its Medicare programs, all the while "working with customers to appropriately
price its products." In other words, it raised its premiums, in some cases
significantly. The crunch time came last January, the time of year when many
employers renew their employee benefit plans. While the regional cutbacks meant
that there was none of the historically normal inflow of new business, Oxford
still saw no great flight of its existing customers. Indeed, doctors -- who had
dumped Oxford years earlier because of slow payments -- appear to be returning
to the fold.
"We definitely feel that the worst is over," says Payson, "and now I think the
investment community is beginning to see the turn." Perhaps, but if so, not that
clearly. While Oxford maintains it is on track to turn its positive cash flow into
bottom-line profits by the third quarter of the current year, its fourth-quarter '98
earnings report left some folks clearly confused by special gains and charges,
making uncertain over the degree and speed of the apparent turnaround. For the
year, Oxford is expected to report a narrowed loss of about 70 cents a share,
down from a deficit of $4.21 in '98, followed by a small profit of perhaps 63
cents a share in 2000.
So far in 1999, Oxford's stock has been a strong performer, rising more than
30%, even though it has given back some gains since the earnings report was
released. The stock now is around 18. With HMOs beginning to win premium
increases and the sector regaining some friends on Wall Street, that's not a bad
comeback for a tail-end charlie.
To be sure, the Barron's 500 list will be refined in future years. Stock-market
swings, being what they are, will dominate the rankings. Still, our list may help
decide how rational the market's exuberance for a company may be.
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