Tuesday, June 06, 2017

The Two Buck Shuck and Jive*

Amazon today began targeting low-income shoppers with price cuts to its Prime membership program.   Apple yesterday jumped into the voice-controlled home speaker business to compete with Amazon’s Echo and Google’s Home.  Google’s Waymo self-driving vehicles logged 25,000 miles hands-free last week, on top of 3 million miles already driven, mainly in cities, on the way to “fully self-driving cars” in the not-all-that-distant future.
So what is GE, the great American conglomerate that Jack Welch famously built through Six Sigma training, portfolio slight-of-hand and ruthless personnel management doing these days?
Well we’re not sure because mostly what we hear from GE is that GE is, or was, going to make $2 a share next year, and whether they do or not is all anybody seems to care about.
Not whether GE is involved in self-driving cars or self-regulating homes or any other enormous market opportunities those of us lucky to be alive right now are seeing develop right before our eyes.
Just this: will they or will they not earn $2 a share?
Now, that two bucks earnings target was disclosed last spring at GE’s 2016 shareholder meeting, in CEO Jeff Immelt’s loopy, shorthanded fashion, as follows:
From a financial standpoint, people that are investing in GE right now can look out over the next couple of years and see a very clear walk to hit in excess of $2 a share by 2020. This has to do with using the GE Capital proceeds to buy back stock. We use our float. The Alstom earnings, which are very clear and measurable and we're making good progress on those, and just sustaining our industrial growth the way we have over the last four or five years.   You do those things, you get north of $2 a share by 2020—or by 2018.  (Source: Thomson StreetEvents)

After a less-than-upbeat analyst day in December and an earnings report in April that was long on earnings and short on cash flow, however, Immelt took the opportunity to walk back that two-buck number in May as being “the high end of the range,” cautioning that “resource markets” must remain “stable” to hit the two bucks.
By “resource markets,” of course, he means “oil prices,” upon which a decent portion of GE’s earnings now depend thanks to the M&A push the company made into oil and gas-dependent businesses prior to oil’s 2014 collapse—in particular the $3.3 billion purchase of production equipment supplier Lufkin that top-ticked the price of the commodity on which its business hinges the way John Paulson’s housing short top-ticked the greatest financial crisis since the Great Depression.
Given that GE’s stock sits on its 52-week-lows while the S&P 500 keeps breaking to new all-time highs, it’s clear the buy-side doesn’t believe the two-buck number, no matter how often Immelt defends it, and the sell-side seems nervous too, particularly after the first quarter’s cash flow miss. As the Merrill Lynch analyst dryly noted, GE’s Q1 cash flow disappointment “seems to be related mostly to the fact that GE’s latest contracts are coming from regions that tend to pay their bills later.”
Not a good sign for the two bucks target.
After all, GE is a conglomerate, and not in the JNJ “steady-Eddie” sense of selling basic products for the health and well-being of consumers.   
No, GE is a conglomerate that sells highly engineered, high priced products and services to airlines, oil companies, power generators, developed governments, undeveloped governments and about-to-be-toppled governments, among other unpredictable buying classes.
So how predictable can GE’s earnings possibly be?
“Plenty predicable,” a reader with grey hair might respond.  “Jack Welch made GE a beat-the-earnings-by-a-penny machine back when.”
And “Neutron Jack,” as he was known for the way he emptied buildings in his hunt for efficiencies, certainly did make GE that kind of machine, even humble-bragging about it in the 1999 annual report:
 
But “making the numbers at GE” was no doubt a whole lot easier when GE Capital was a readily available hat out of which rabbits could be pulled whenever the quarter had to be beaten by the proverbial penny.
And that trick ended in 2008 when the particularly addictive brand of Financial Fentanyl on which GE Capital had gotten hooked—CDs—froze up, leading the Feds to step in and guarantee $139 billion in GE Capital debt in order to keep The House that Jack Built from falling down like, well, like a house of cards.
It always seemed to your editor, even back when GE was beating every quarter by a penny and almost every other company in the S&P 500 wanted some of that “Six Sigma” magic (the way almost every other company in the S&P 500 today wants some of that “Zero-Based-Budgeting” magic from Warren Buffett’s ruthless buddies at 3G), that Jack had turned GE from a company that made stuff (refrigerators, lightbulbs, jet engines, turbines etc.) into a company that made the numbers.
And when all you make is “the number,” nobody knows or cares what’s behind that number.   It could be asset sales and tax gimmicks and channel-stuffing and worse, or it could be great products—and GE makes some great products, still, todaybut you wouldn’t know it because it’s all about “the number.”
In this case, two bucks.
Now, as most people who live on the West Coast know, including the folks working on autonomous vehicles and magical voice-activated home controllers and the development of a logistics infrastructure that allows anyone with an internet connection, a credit card and an address to order anything, anytime, Trader Joe’s sells a wine call “Two Buck Chuck.”
“Two Buck Chuck” took the market by storm when it came out back when, and it is still called “Two Buck Chuck” despite the fact that it is today priced at $2.99 a bottle and the brand name is actually “Charles Shaw,” not “Chuck.”
And all we can think of is how silly it is that the public perception of one of the world’s largest and most valuable companies comes down to an artificially constructed net per-share earnings number that happens to round to two bucks.
Call it the “two-buck shuck and jive.”
We’ll take the under.

*  This virtual column was posted Tuesday June 6, 2017.   On Monday, June 12, GE unexpectedly announced that one Jeff Immelt is leaving the CEO position August 1 and retiring as Chairman December 31, 2017.   One John Flannery is being appointed to take his place in both roles.  The two-buck shuck and jive is, we'd bet, history.


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2015)    Available at Amazon.com

© 2017 NotMakingThisUp, LLC



The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: the content herein is intended solely for the entertainment of the reader, and the author.

Thursday, March 09, 2017

If Donald Trump Ran a Publicly Traded Restaurant Chain The CEO Might Sound Like This

  You’d be forgiven if, after hearing the CEO of Chipotle describe its first ShopHouse Asian Kitchen restaurant concept that was opened in DuPont Circle a few years ago, you agreed with the cohort of Wall Street’s finest that declared ShopHouse might become the next leg of growth for the then-plenty-fast-growing-already purveyor of burritos and tacos “With Integrity.”
  You’d be forgiven because the CEO of Chipotle repeatedly—and by that, we mean more than a dozen times over the next few years—promoted the concept and often compared that first ShopHouse restaurant with the early days of Chipotle itself.
   In fact, so forcefully and frequently did the CEO push the ShopHouse-as-the-Next-Chipotle theme over the years, the more cynical among our readers would be forgiven for reading the following time-line of quotes from the Chipotle CEO and asking themselves, “Wait a minute, does Donald Trump run Chipotle on the side?”
   Indeed, the Trump analogy does not end there, for just today Nation’s Restaurant News broke the story that Chipotle is in fact closing all 15 ShopHouse restaurants.
  But not to worry, for the same CEO who has persistently and persuasively told us that all is well with the Chipotle business lately is the one who told us the following about ShopHouse…

10/20/11  “Some customers have commented that it’s a bit too spicy which is exactly what I heard when I opened the very first Chipotle 18 years ago....  What I love is that these customers tell me that it might be too spicy, while they devour every bite of their meal.”
1/11/12  “And it’s doing great, there’s a line out the door every day for lunch and dinner…so we are about to start construction on our second one.  …But again, this is just sort of laying the groundwork for future expansion possibilities.”
 2/1/12  “While we’re still working to perfect the concept, it reminds me very much of the first Chipotle when it originally opened.”
 3/7/12  “It’s going really, really well.   … So you can imagine the potential now that is [sic] not just limited to burritos and tacos.   So we’re very excited about it.”
 4/19/12  “But it really was designed to be kind of the same, the same thing as Chipotle.  … So any kind of cuisine can fit into this model.   So I think we’re very bullish that when and if the time comes that we want to accelerate this, we can do that.”  “And I think that it’s fair to say that the sales are very similar to the Chipotle that’s across the street.   In fact, I would say that the unit economic model in general is substantially similar to that of Chipotle in general.”
 6/5/12  “The only difference between ShopHouse and Chipotle is the cuisine.   Everything else is the same, the investment cost, the economic model, the service format, the price point, the size of the location.”
 6/14/12  “…it’s going very, very well.”
 1/17/13  “The first ShopHouse opened about a year and a half ago and it reminds me a lot of when I opened the first Chipotle.   Customers have really taken to it from day one…”
 2/5/13  “Shophouse in Washington DC continues to perform well and reminds me very much of the first Chipotle when I opened it almost 20 years ago.”
 3/5/13  “And what’s really exciting is that we’re proving that this is not just a model for burritos and tacos, but for other types of cuisines as well…    ShopHouse continues to perform well and reminds me a lot of the very first Chipotle when I opened it 20 years ago.”
 5/9/13  “And it’s doing really well. …. in so many ways it’s exactly the same as Chipotle.”
 7/18/13  “Shophouse is continuing to show us that there is significant potential for our business beyond burritos and tacos and we are really encouraged by its potential.”
 10/17/13  “Our growth at ShopHouse is much faster than Chipotle was in the early days.”
 1/30/14  “ShopHouse continues to remind me of Chipotle in its earliest days.”
 4/29/14  “ShopHouse is the Southeast Asian version of Chipotle, it’s the same sort of operating platform…   And it’s going very, very well…”
 5/28/14  “Well we’re certainly growing these concepts faster than Chipotle initially grew.”
 10/20/14  “Shophouse very much reminds me of Chipotle when I opened the first one of the restaurants.”
  3/9/17  Chipotle Mexican Grill Inc. is closing all 15 ShopHouse Asian Kitchen chain next week, the company confirmed to Nation’s Restaurant News on Thursday.  Chris Arnold, a spokesman for the Denver-based company, said that the company has a deal to sell the leases for the ShopHouse locations and plans to close the restaurants effective March 17.  “We now have a deal in place to sell the ShopHouse leases and believe that is the right decision at this time,” Arnold said in an email to Nation’s Restaurant News.


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