Valspar corp.-Paint maker makes headway against rising mater

In fiscal year (FY) 1989, which ends October 28, Valspar Corp. (Minneapolis, Minnesota) has raised prices in an attempt to recoup cost increases from 1988. The company has found some help in a moderation of price increases of paint materials in FY 1989. If such expenses can be kept from rising much more in FY 1989, there is a good possibility that Valspar will regain much of what it lost from profit margins in 1988. Valspar’s net income for 1988 rose from $18.1 million to $18.3 million. Sales increased 7% to $480 million. In the first quarter of FY 1989, the company’s net income jumped 44% to $2.6 million, or 23 cents a share. Management has indicated that, in the present economic climate, sales and earnings should continue to grow for the remainder of 1989. Valspar’s main objective is to one of the 3 top paint manufacturers in the 4 segments of its business. It has been pursuing this goal primarily through acquisitions.
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Byrne, Harlan S.

Full text: [Barron's National Business and Financial Weekly] May 8, 1989

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The Trader

The effects of the unusually weak April 1989 employment figures on stock prices are discussed.
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Full text: [Barron's National Business and Financial Weekly] May 8, 1989

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Products research and chemical-Timely infusion of capital fu

Products Research & Chemical Corp. (Glendale, California) is attaining dominant market positions with its high-performance adhesives, sealants, coatings, and related products. Increasingly, the company is capitalizing on its own higher margin polymer chemical systems. It supplies specialized sectors of a number of industries, including aerospace, defense weaponry, construction, telecommunications, and electric power. Products Research & Chemical recently agreed to sell common stock to Courtaulds PLC at $25 a share, subject to government approvals. The sale would result in Courtaulds owning about 10.5% of the outstanding common stock of Products Research & Chemical, providing a timely infusion of more than $20 million in cash. In the defense area, the company also has a joint venture with McDonnell Douglas. The venture provides aircraft coatings that promise to reduce enemy radar reflections, making aircraft nearly invisible on radar screens.
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Byrne, Harlan S.

Full text: [Barron's National Business and Financial Weekly] May 8, 1989

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Doomsday vision–Why Bob Prechter is waving goodbye to the

Bob Prechter is convinced that the current market is possibly the worst bear market of all time. Prechter, who predicted the bull market of the 1980s and exerted enormous influence on the market itself, has come under criticism for controversy surrounding his advice to his subscribers on the Friday before Black Monday and for missing the large postcrash rise. Undaunted, Prechter rejects a softening of his predictions. “A Turn in the Tidal Wave,” published in March 1989, contains Prechter’s grim predictions. He outlines a coming depression, worldwide banking failures, government bankruptcy, exorbitant taxes, gang violence, terrorism, stagnation, poverty, and a war between superpowers. Pretcher sees the world in a transition phase from inflation to deflation. He expects precious metals, commodities, and stocks to fall simultaneously as liquidity disappears. Pretcher points out that the technical evidence indicates high risk in the stock market.
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Full text: [Barron's National Business and Financial Weekly] May 8, 1989

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Aggressive Arms Merchant-Despite Pentagon Cutbacks, General

General Dynamics Corp. continues to concentrate on military business in the face of declining defense budgets and an apparent slowing of the arms race between the US and the USSR. Today, the company is the leading defense contractor, with 15 major programs. While the US defense budget has been declining, General Dynamics has escaped major reductions by the US Department of Defense. However, the firm does run the normal risk of losing the new contracts on which it is relying for growth 10 to 20 years from now. General Dynamics’ stock has seen more than its share of value reductions, but gains in stock value are expected in 1990, probably to about $9 a share. Four major projects acquired this year will help General Dynamics’ military growth. Its nonmilitary successes also are impressive. Its Convair division is working on a $2-billion contract to provide fuselages for McDonnell Douglas, and the Cessna Aircraft Co. subsidiary is regaining its health.
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Byrne, Harlan S.

Full text: [Barron's National Business and Financial Weekly] May 8, 1989

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Stock Pickers Do Well, Even if Their Employers Don’t

SMITH BARNEY: D. Larry Smith, director of research, says his analysts keep in mind a financial version of the Hippocratic oath sworn by doctors: First do no harm. As a result, he says, they pay close attention to downside risks. That strategy has paid off. Last quarter, for example, most firms had at least one stock that plunged 15% or more; Smith Barney’s biggest loser was International Business Machines Corp., down 10%. To control downside risk, Mr. Smith often looks for out-of-favor stocks with a history of dividend increases. The firm’s biggest gainer in the past quarter, though, was simply unknown: Middleby Corp., a maker of fast-cooking pizza ovens, rose 61%. PAINEWEBBER: Jumbo gains in United Telecommunications Inc., up 102%, RJR Nabisco Inc., up 84%, and Federal National Mortgage Association, up 82%, helped propel PaineWebber Inc. to second place in the 12-month standings. Its average stock pick sells for 3.3 times the company’s book value, or assets minus liabilities, per share — the highest “price-to-book” ratio among the 10 firms. And the average dividend yield (dividends as a percentage of the per-share stock price) was only 1.6%, the lowest in the field. Edward Kerschner, the firm’s chief strategist, says that’s because the PaineWebber Group unit is emphasizing “ruler stocks,” or stocks whose earnings go up as straight as a ruler. The firm thinks such issues should shine as other companies’ earnings falter this year or next. DEAN WITTER: Its field-leading quarter helped pull Dean Witter up to fourth in the 12-month standings. “We had turned somewhat bearish on the prospects for the economy in the second half of the year,” says Manny Korman, director of research. Three of its top gainers in the quarter were financial stocks: BankAmerica Corp., up 39%, Kemper Corp., up 38%, and First Chicago Corp., up 30%. Other recommendations included drug stocks such as Eli Lilly Co. and Schering-Plough Corp., along with non-cyclical growth stocks such as Philip Morris. “We also, thank heaven, had very few disasters,” Mr. Korman says.
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By John R. Dorfman

Full text: [Wall Street Journal] May 9, 1989

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Stock, Bond Prices Slide; Wages Cited

With last week’s evidence of a slowing economy but rising inflation still fresh in their minds, investors bid the Dow Jones Industrial Average lower for the seventh consecutive session. The average lost 5.49 to close at 2376.47 in light trading. Longterm bond prices slipped lower even as the dollar hit its highest levels since August. John Burnett, a senior vice president for block trading at Donaldson, Lufkin & Jenrette, was disappointed that stock prices didn’t rebound after Friday’s selloff. “You’d think that we’d get some recovery action,” he said. But James Andrews, head of institutional trading at Janney Montgomery Scott in Philadelphia, said: “You have a reversal day like you had on Friday and it’s got to carry over.”
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By Douglas R. Sease

Full text: [Wall Street Journal] May 9, 1989

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The LBO That Failed: Debt-Ridden Fruehauf Sells Its Last Unit

It will go down in the texthooks as a leveraged buyout that failed. Three years ago, Fruehauf Corp. of Detroit employed 25,000 workers in its worldwide truck-trailer and automotive manufacturing operations. Then the trailer business slipped, raider Asher Edelman tried to buy the company and Fruehauf decided to fight. Its managers undertook a $1.7 billion leveraged buyout, acquiring the company’s stock from its public shareholders-and going deeply into debt to pay the bill. Yesterday, after selling off piece after piece of its business in an effort to meet its debt obligations, the 71-year-old Fruehauf was forced to sell the last major component-its Kelsey-Hayes automotive parts subsidiary. (excerpt)
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Hinden, Stan

Full text: [The Washington Post] May 09, 1989

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Stocks Dip Again; Dow Declines 5.49

Stock prices fell in slow trading today. The Dow Jones average of 30 industrials fell 5.49 points to end the day at 2376.47, its seventh consecutive decline. Standard & Poor’s industrial index dropped 1.92 to 352.24, and S&P’s 500-stock composite index lost 1.61 to 306.00.
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Full text: [The Washington Post (pre-1997 Fulltext)] May 9, 1989

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Cable is facing attacks from subscribers, networks

Television’s version of glasnost has, however, fueled yet another skirmish, one that has San Diegans at the forefront. Noting the success of cable’s Financial News Network (FNN), NBC decided to fund a rival service, the Consumer News and Business Channel (CNBC), and used its clout to sign a deal to appear on Cox systems throughout the nation. San Diego, with 300,000 subscribers, is Cox’s largest system. When CNBC came on the air last month, Cox bumped FNN and went merrily on its way. Who could quibble with the change? After all, CNBC has the weight of the No. 1 network behind it and offers a glitz and a broad-based appeal that FNN can’t match. FNN has a bare- bones look, mostly talking heads with a stream of stock prices rolling across the screen. Robert McRann, Cox senior vice president in San Diego, came to that jarring conclusion the other night when he hosted his live monthly Cox show, which invites subscribers to pass along bouquets or brickbats. He spent the evening ducking the latter.
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JOE STEIN

Full text: [The Tribune] May 9, 1989

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UPDATE ON BUSINESS

WPP said yesterday that it was raising its offer to $50 a share from $45 ”in order to avoid unnecessary and potentially unsettling delay in the negotiation of a friendly transaction.” Based on Ogilvy’s 14.7 million shares outstanding, a $50-a-share buyout would cost a total of $735-million.
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Full text: [The Plain Dealer] May 9, 1989

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Speculators push Ogilvy stock price above WPP’s $50-a-share buyout offer

WPP said yesterday that it was raising its offer to $50 a share from $45 ”in order to avoid unnecessary and potentially unsettling delay in the negotiation of a friendly transaction.” Based on Ogilvy’s 14.7 million shares outstanding, a $50-a-share buyout would cost a total of $735-million.
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Full text: [The Globe and Mail] May 9, 1989

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Price of Ogilvy Stock Now Above Buyout Offer

Speculators have pushed Ogilvy Group Inc’s stock price above a new $50-per-share buyout offer from Britain’s WPP Group PLC, which wants to create what would be the world’s largest advertising company.
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Full text: [The Atlanta Constitution] May 9, 1989

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Market drifts lower on slow day Series: Business Digest

NEW YORK – Stock prices fell in slow trading Monday. The Dow Jones average of 30 industrials fell 5.49 points to end the day at 2,376.47. Declining issues outnumbered advancers with 969 issues down, 504 up and 45 unchanged. Volume on the floor of the Big Board came to 135.13-million shares, down from 180.81-million in the previous session. The NASDAQ composite index for the over-the-counter market lost 1.42 to close at 429.32. At the American Stock Exchange, the market value index closed at 345.5, down 0.99. Interest rates on securities fall WASHINGTON – Interest rates on short-term Treasury securities fell in Monday’s auction to the lowest level in more than three months. The Treasury Department sold $6.8-billion in three-month bills at an average discount rate of 8.41 percent, down from 8.64 percent last week. Another $6.8-billion was sold in six-month bills at an average discount rate of 8.39 percent, down from 8.64 percent last week. In a separate report, the Federal Reserve said Monday that the average yield for one-year Treasury bills fell to 9.16 percent last week, down from 9.22 percent the previous week.
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Full text: [St. Petersburg Times] May 9, 1989

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Ogilvy Group stock price rises above buyout offer

WPP’s new offer puts a value of roughly $750 million on Ogilvy, the world’s fifth-largest advertising agency based on 1988 billings. WPP, owner of the J. Walter Thompson agency, ranks third. Ogilvy closed at $52 a share in over-the-counter trading yesterday, up $2.12 1/2 from Friday’s close. She also declined to confirm a report in the Sunday Times of London that two U.S. investment firms, Kohlberg, Kravis, Roberts & Co. and Wesray Capital Corp., had approached Ogilvy with offers higher than WPP’s initial bid. In addition to J. Walter Thompson, WPP owns the Hill & Knowlton public relations agency. Other Ogilvy properties include Ogilvy & Mather Worldwide advertising and Scali, McCable, Sloves advertising.
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Full text: [Star Tribune] May 9, 1989

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Stocks: Prices flat to lower

The Dow Jones average of 30 industrials was unchanged at 2,376.47 points at noon EDT. The blue-chip indicator was up 1.46 points points an hour earlier NWA had gained one-half to 1051/4 after Pan Am’s announcement this morning that it is considering making an offer for Northwest Airlines. AT&T was down one-fourth to 34; Upjohn was off three-eighths to 311/2; and Delta Airlines was down one-eighth to 641/2.
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The Associated Press

Full text: [Orange County Register] May 9, 1989

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Talking Business with Brindisi of S.C.A.; When Executives Act Like Raiders

A former senior partner with Booz Allen, Mr. [Louis L. Brindisi] spoke recently about why he thinks companies should develop ways to reward executives through more generous use of stock options. Q. You have been promoting the concept of paying executives to think like corporate raiders. How should this be done? A. It can be accomplished in two ways: through restricted stock, meaning that you give executives of companies shares subject to the achievement of certain performance goals. Also, you can set that in terms of stock price or in terms of cash-flow levels or return on equity. The second way is to give them large stock-option grants. The management group in a leveraged buyout group might have 10 to 15 percent of the stock. But in most public companies, the management might have 1 percent. That’s where some of the problem lies. Q. This idea goes against most companies’ long-term practices. Are many companies beginning to develop such programs? A. Yes, but still too few. Of the Fortune 500 companies, maybe 10 percent are paying their top executives to think like raiders. Also, I find that companies that are in turnaround situations are doing this more and more. One problem with stock options is that typically they have gone to people in the middle management level. The strategy is to concentrate the stock ownership and opportunity in the hands of the top management of the company. They can really drive the stock price. Q. When you talk to groups and boards, there must be some resistance to this idea, some feeling that executives are paid quite handsomely now and that there is little wrong with the way they are compensated. How do you respond?
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Hicks, Jonathan P.

Full text: [New York Times] May 9, 1989

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Ogilvy stock price rises above $50-a-share offer

WPP’s new offer puts a value of roughly $750 million on Ogilvy, which is the world’s fifth-largest advertising concern based on 1988 billings. WPP, owner of the U.S. agency J. Walter Thompson, ranks third. She also declined to confirm a report in The Sunday Times of London that two American investment firms, Kohlberg, Kravis, Roberts & Co. and Wesray Capital Corp., had approached Ogilvy with offers higher than WPP’s initial bid. Together WPP and Ogilvy would be about the same size as the world’s biggest advertising company, Britain’s Saatchi & Saatchi, with about $13.5 billion in 1988 billings.
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PETER COY

Full text: [Houston Chronicle (pre-1997 Fulltext)] May 9, 1989

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Losing streak hits 7 as market jitters persist

Stock prices drifted lower Monday, as the Dow Jones industrial average dropped for the seventh session in a row, its longest losing string since 1982. The Dow fell 5.49 to 2376.47. In its downward stretch, the average of 30 blue-chip stocks has lost 42.53 points, or 1.8 percent. Traders attributed Monday’s weakness to continued nervousness over the near-term course of the economy. In particular, investors are leery about Friday’s report on the producer price index. Wholesale prices have shown unsettling increases in recent months, stirring inflation worries.
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Chicago Tribune wires.

Full text: [Chicago Tribune (pre-1997 Fulltext)] May 9, 1989

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Random Thoughts

Investors have some pretty firm ideas about what constitutes sufficient compensation. An investor in a bank stock will require his institution to earn a premium of roughly six percentage points – depending on the bank’s risk or “beta” – over the prevailing rate on the long-term government bond. This is what is called the bank’s cost of equity, or the minimum return on equity acceptable to the shareholder, which in today’s market will usually sum to about 14% or 15%. Otherwise put, a bank’s market-to-book ratio depends on both its economic spread – the spread between the return on equity and the cost of equity – and the growth rate of earnings. The ratio of market to book toward which the bank gravitates can be computed by dividing the ROE (minus the projected growth rate) by the cost of equity (minus the projected growth rate). The fact that the stock price is determined both by the economic spread and the growth rate of earnings means that there are times when a lower return-on-equity strategy is preferable to a higher return-on-equity strategy. For example, Bank A has an ROE of, say, 20% and a sustainable earnings growth rate of, say, 3%. Assuming that its cost of equity equals 14%, this bank will sport a market-to-book ratio of 1.55.
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SANFORD ROSE

Full text: [American Banker (pre-1997 Fulltext)] May 9, 1989

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