Buy Like Buffett

Well it finally happened. General Motors (GM) filed for Chapter 11 bankruptcy protection today. Bankruptcy appears to have been necessary as the US automaker was saddled with billions in debt and obligations. The bankruptcy courts have given GM 15 billion in emergency financing so that the company can continue to operate. It took the perfect storm to drive GM to bankruptcy but it happened in 2008. GM was undone by years of declining auto sales combined with an oversupply of bonds, underfunded pension obligations and unfavorable contracts along with the worst economic environment since the Great Depression. Chrysler has undertaken similar steps and still faces the possibility of extinction. GM hopes to rebound a leaner stronger more efficient company that investors are willing to invest capital in soon. Only time will tell if GM emerges from bankruptcy as an innovative new auto company or the same old repackaged auto supplier of the past 20 years.

Finance auto industry, bankruptcy, Chrysler, General Motors

Bill Ackerman, hedge fund manager of Pershing Capital, has been raising his stake in distressed mall owner General Growth Properties (GGP). I already commented on General Growth’s financial problems in an earlier post. General Growth is trying to stave off bankruptcy by restructuring debt that is due in the near term. Given its financial position there is no fundamental reason to invest in GGP. The stock is currently trading at $1.60. This might ibe an interesting speculative play if they can find a way to avoid bankruptcy.

Finance bankruptcy, debt, General Growth Properties

The US newspaper industry is facing tough times. The Tribune Company, the nation’s second largest newspaper publisher, filed for Chapter 11 bankruptcy protection. The company has been saddled with debt and declining sales since billionaire Sam Zell took the company private last year. I paid particular attention to this bankruptcy announcement because they own my hometown newspaper, The Baltimore Sun. Tribune Company also owns some of the largest newspapers nationwide including Newsday, L.A. Times, and the Chicago Tribune.

Tribune is not the only struggling newspaper publisher. Gannett, EW Scripps and the New York Times all face similar problems. The newspaper industry as a whole is in trouble. Newspapers are becoming increasingly irrelevant. Newspapers throughout the country have experienced declining revenue from subscriptions losses and lower ad revenue. Ad revenue declined 18.3%, 11.1%, 17% over the past quarter at the New York Times, Gannett and EW Scripps respectively.

Subscribers have abandoned newspapers for online content. Following this trend advertisers have moved ad dollars from print media to online media. The newspaper industry is at a crossroads. In the age of 24 hour news, newspapers seem out of date. By the time you read the newspaper you have probably already seen the news. National news has been replaced by CNN, Fox, MSNBC or your local news station.  

Newspapers have become a niche item. People are no longer concerned with having a physical product to hold in their hands. Newspapers only sell well during major historical events. Special events such as this past presidential election demonstrate that people do still want a tangible product but only when a significant event occurs. Newspapers sold out of issues the day after the election.

I think the only hope for the newspapers publishers is to reinvent themselves. They should move their focus from print to online. Publishers should allocate more capital to their online websites. They need to get their online sites on par with the larger media conglomerates. They need to utilize their advantage over major news outlets which is in having the scoop on all local news. They need to focus on becoming a 24 hour news site on all things locally. They could use the print editions for special issues and weekend editions only.

Until newspaper companies can find a way to reinvent their business models, I wouldn’t buy these stocks even at these prices.

Finance Baltimore sun, bankruptcy, EW Scripps, Gannett, New York Times, newspaper industry, Newsweek, Sam Zell

Why do executives get paid millions of dollars a year to run a company into the ground? Why do these same executives earn hundreds of millions of dollars in bonuses, stock options and golden parachutes after driving these companies into bankruptcy? I was watching CNBC the other day and saw an alarming statistic. The average CEO’s salary is more than 435 times the average worker’s salary. That is unbelievable. I am an advocate of the whole pay for performance philosophy. But not when CEO’s like Richard Fuld of Lehman Brothers, James Cayne of Bear Stearns, Kerry Killinger of Washington Mutual, Martin Sullivan of AIG, Daniel Mudd of Fannie Mae and Richard Syron of Freddie Mac were paid hundreds of millions of dollars in salary and bonus packages to drive their companies into Chapter 11 bankruptcy. Why is it that when a company falls into financial trouble the employees are always the ones who have to suffer the losses?

The latest example of poor management can be found in the US auto industry. Richard Wagoner of GM, Robert Nardelli of Chrysler and Alan Mulally of Ford have been paid millions of dollars to fix the three largest domestic auto manufacturers. They have failed miserably. Their companies are on the verge of going out of business. So you would think they would be willing to take a cut in compensation? Of course not. A CEO would rather lay off 30,000 employees then eliminate his own bonus.

The management of GM, Ford and Chrysler have mismanaged the auto companies and are now seeking 25 billion dollars to stay afloat. I think that if Congress does give the auto manufacturers federal assistance that they will keep doing business as usual. This means laying off a significant number of employees in 2009 while management takes no reduction in compensation. Don’t get me wrong. I think the Federal government should help the auto makers but with some stipulations: (1) management needs to be replaced (2) salaries need to be much more realistic (3) management needs to develop a workable business plan. So what happens to the typical corporate CEO after he is let go from a failing company that he has mismanaged? He is given a signing bonus along with a hefty compensation package at another firm and begins the process all over again.

Finance bankruptcy, Bear Stearns, CEO, CNBC, Ford, GM, Lehman, leverage

General Growth Properties (GGP) is the 2nd largest mall owner in the United States. General Growth Properties owns over 200 malls and shopping centers throughout the country. I first noticed General Growth because they own a lot of malls that I frequently visit. Malls such as White Marsh Mall, Owings Mills Malls, Towson Town Center and the Mall in Columbia to name a few. General Growth has a portfolio of attractive real estate holdings that any company would love to own. So why is GGP in at risk of declaring bankruptcy? GGP borrowed too heavily to finance its property acquisitions which include its 12.6 billion dollar merger with the Rouse Company. The economic recession has hit the retail industry especially hard. GGP has seen decreased demand for properties that they lease.

Mall traffic has slowed substantially and this has hurt the earnings of existing tenants. General Growth Properties is now saddled with over 24 billion in long term debt and has only 100 million in cash. The major assets on General Growth’s balance sheet are the mall properties. GGP may soon default on 1.5 billion in debt that is due in the next 6 months. They are actively seeking financing. But General Growth may be forced to liquidate its real estate holdings to pay off its debtors. General Growth has seen its stock slide from 50 dollars per share to 50 cents. GGP has ceased paying its dividend and seen its credit ratings slashed to junk status. Unless emergency financing is secured General Growth may soon be having its own going out of business sale.

Investing bankruptcy, general growth, GGP

Citigroup announced that they would be laying off 53,000 workers yesterday.  Citigroup has already laid off 23,000 employees earlier this year. Citi has lost 20 billion dollars over the past year and has had four straight quarterly earning losses. Citigroup is on its third CEO in the last year. Citigroup has watched its stock price decline to $8.00 per share and its market cap has shrank to 43 billion. Citigroup is also facing mounting losses from its mortgage, credit card portfolio and will likely need to raise additional capital. Citigroup is trying to return to profitability by selling off assets and implementing a number of cost cutting initiatives. This strategy will help Citigroup in the near term. But it does not solve the long term issues that plague Citigroup.

Beginning with the ill fated acquisition of the Travelers Group, Citigroup has struggled since the late 90’s to find its niche in the banking industry. Citigroup grew to prominence by making large acquisitions and through aggressive cost cutting. These tactics allowed Citigroup to flourish in the 90’s. The problem with relying on these methods to fuel growth is that eventually you run out of major acquisitions to make and costs can only be reduced for so long. This is the problem for Citigroup. They don’t seem to be exactly sure what kind of business they are. They have been trying to redefine their business model for the past 10 years. Is Citigroup’s main business consumer banking, investment banking, insurance or as a credit card issuer? Is Citi more focused on international growth or increasing their domestic presence in US banking?  Can Citigroup be a smaller player and still survive among the banking giants?

Citigroup is now trying to find its place in the new financial landscape. Citigroup faces a much more challenging environment with Bank of America, JP Morgan, Wells Fargo and US Bancorp all aiming to become larger players in the diversified financial services industry. The failed merger with Wachovia would have helped Citigroup by significantly increasing their number of branches in the US. It would have also given them a foothold in the southeast region of the US. However, it would not have addressed the larger problem at Citigroup of no organic growth.  Citigroup’s main focus should be on increasing profitability through organic growth and not acquisitions. Citigroup needs to maximize the earnings in the businesses that they already own.

Citigroup currently pays a dividend of 64 cents per share which amounts to a 6.7% yield. The dividend does not appear sustainable based upon the company’s weak balance sheet and deteriorating loan portfolio. Will Citigroup survive? Definitely. Citigroup is a company that has been deemed too big to fail. The Federal Government’s 25 billion dollar cash injection makes that a certainty. Citigroup will survive but the days of Citigroup as a thriving company in the financial services industry may be a distant memory.

Investing BAC, bankruptcy, C, Citigroup, JPM, WFC