Business Blog: Hoover’s Business Insight Zone

Today’s Company of the Day is Delta Air Lines.

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Delta has been singing the blues for so long that it’s hard to remember that the #3 US carrier operated from the 1920s into the 1980s without ever taking an annual loss. But the tune has been very different for Delta since the terror attacks of September 11, 2001. Like some of its largest peers, Delta has undergone a wrenching bankruptcy, from which it emerged only this year. Unlike its rivals, Delta has long avoided unionization among its workers, but now faces a groundswell of unionizing sentiment among its flight attendants. On top of all this, Delta’s beloved CEO Gerald Grinstein has retired, giving way to outsider Richard Anderson.

Despite all these challenges, last week Delta reported record quarterly revenues, along with profits that were several times higher than during the same quarter of 2006. These results represent at least a temporary victory for Delta’s strategy of expanding its international routes. Although expanding Delta’s service abroad — especially in Europe and Latin America — has been expensive, it opens the door for the airline to sell more tickets at higher rates. In quarters like the one just concluded, when the airline industry as a whole enjoyed higher demand for flights, those pricey international tickets serve as a big profit center for Delta.

So far, so good. But what happens if oil prices stay as high as they are — or even go higher? During the third quarter, Delta was able to hedge itself against higher fuel prices, a move that helped the company hold its costs in line. But fuel hedges only last for so long; they can’t protect Delta from fuel prices that stay high in the long run. It also remains to be seen what Delta’s rivals, some of which are more established in their international routes, can do to counter Delta’s encroachment on their turf. Meanwhile, though Delta has a reason to sing a happy tune.

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Today’s Company of the Day is International Paper.

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Given the radical scope of International Paper’s overhaul in recent years, one is attempted to cross a pun with a dose of business jargon and say that the company “started over with a clean sheet of paper.” The whole paper and pulp industry has turned volatile as consumers have changed their behaviors in various ways, demanding more of some types of paper goods and less of others. International Paper has changed the mix of its business to build up some operations (such as high-end packaging) that yield high profit margins, while shifting away from low-margin or shrinking businesses like coated papers.

Restructuring such a vast enterprise as International Paper — the world’s largest forest products company — has meant years of buying and selling. Although the company still owns half a million acres of US forestland (with harvesting rights on nearly twice that much in Brazil and Russia), it has sold more than five million acres of woodland in the US. It has also hived off chemicals operations (Arizona Chemical), a building products maker (Masonite), and wood products factories (to Georgia Pacific), among many other deals. The result of all this cutting is a smaller but more profitable company: International Paper brought in about one-fourth less revenue in 2006 than it did in 2000 ($22 billion versus $28 billion), but with profit margins near 5% instead of less than 1%.

The company’s profit warning last week is a sign of how far it has come: International Paper’s share price slipped a bit after it announced the profits on land sales would be a little lower than expected for the third quarter of 2007. Yet the company is still on pace to turn more profit in the quarter than it did in the quarter before. That puts International Paper a country mile ahead of its loss-making performances of 2001, 2002, and 2004. That clean sheet of paper looks much better now that it has nothing but black ink on it.

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Today’s Company of the Day is Chevron.

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It’s been a good few years for the oil business. On the one hand, rapidly growing economies in China, India, and the Middle East have generated booming demand for petroleum. On the other, adverse geopolitical events (the Iraq war, unrest in Nigeria) and even the weather (Hurricane Katrina) have put a lid on how quickly the world’s oil supply can grow. The result, straight out of Economics 101, is hardly surprising: oil prices that have broken through one price barrier after another. But even $85 oil is no guarantee of growing profits for oil producers, as Chevron revealed last week. Without offering specific numbers, the California-based oil major warned investors that its profits would be down substantially for the third quarter of 2007.

Not to worry. If Chevron’s Q3 numbers turn out looking at all weak, that will be only by comparison to the record $5.4 billion in profits the company racked up in the second quarter. A key reason for the record earnings then, and the less-than-record earnings now, is refining margins. Usually, gasoline prices reflect changes in crude oil prices — not immediately or perfectly, yet within an easily understood range. But earlier this year a variety of temporary conditions, including low gasoline inventories and pinched refining capacity across the US, led to a short-term disconnect that favored big refiners like Chevron. Now crude oil is more expensive than it was, but gasoline is less expensive, and that combination cuts into Chevron’s refining margins.

Even with all these quarterly fluctuations, Chevron is still on pace to break its own profit record for the fourth year in a row. Longer-term problems could loom, especially if concerns over global warming lead to increased carbon regulations, or if it turns out that worldwide oil production has permanently peaked. For now, though, Chevron can attest that it’s a very good time indeed to be an integrated petroleum company, making money up and down the chain of production.

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Today’s Company of the Day is Magna International.

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Magna International is a magnum-sized player in the auto parts game. Although its Canadian automotive roots go back 50 years, Magna now supplies car and truck parts to manufacturers throughout Europe and North America. Mind you, these aren’t the sort of parts you’re likely to pick up at AutoZone, but rather major body, powertrain, and interior components. Through its various divisions, Magna produces body panels and bumpers, chassis systems, lighting, carpets, windows, seats and seating hardware, engines, and transmissions, as well as complete vehicle assemblies. The company’s largest division, Magna Steyr, assembles Mercedes-Benz, Saab, Chrysler, and Jeep vehicles for the European market. (In 2006 the parent company won 45% of its revenues — more than $10 billion — from customers in Europe.) Magna Steyr also reaches beyond the automotive industry by making components used in European Space Agency launch vehicles.

Although Magna International trades on the New York Stock Exchange, the Stronach family still controls it 50 years after chairman Frank Stronach founded the little tool and die company that later grew into Magna. In recent years, Magna has zigged toward acquisitions and growth while most North American car parts makers have zagged toward downsizing and, in many cases, outright failure. Magna draws most of its business from top car companies like Daimler, BMW, and Detroit’s Big Three, and over the years has succeeded in winning contracts to make or assemble more parts of cars for these gigantic clients. Magna has also engaged in a long string of acquisitions, in particular by buying parts-making operations from big car makers like Daimler and Porsche. It has also kept up a brisk pace of expansion into new geographic markets such as Russia. Moves like these have allowed Magna to thrive even as many of its peers and customers have fallen on hard times.

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Today’s Company of the Day is the United Auto Workers.

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If negotiations keep going as smoothly as this, the members of the United Auto Workers may award their leadership with a little extra time off. Last month’s UAW strike at General Motors was short enough at two days, but even it was trumped by the six-hour strike this week at Chrysler. Each of the strikes helped lead to new four-year contracts for the UAW, and in each case the parties at the bargaining table agreed to set up trust funds to cover the health-care costs of retirees, which have weighed heavily on Detroit’s Big Three in recent years. This week’s deal also allayed fears that Chrysler’s deep-pocketed owners at Cerberus Capital Management would try to play hardball with the union. (In fact, some observers questioned whether the strike was needed at all, since the sides came to terms on the same day that the walkout was called.)

The UAW, which traces its origins to the Depression era, represents the interests of 640,000 active automotive workers and half a million retirees. The union enjoyed its heyday — and held its biggest labor strikes — during the decades-long industrial boom that followed World War II in the US, but has suffered over the past 30 years as the US automotive industry has lost ground to competitors based overseas. The Big Three have argued that those rivals enjoy entrenched advantages over them, especially in the area of health care costs. (Workers in Japan and Europe typically receive health benefits from their governments rather than from their employers, as in the US.) Certainly the Big Three have lost ground to these rivals; Toyota has overtaken GM as the top worldwide car maker, not to mention Ford as the #2 maker in the US. Now Ford faces its turn with the UAW, and though the unions leaders say that talks are going well, Ford is also hurting worse than its American peers. Even a long strike might not let the UAW squeeze blood from that turnip.

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Today’s Company of the Day is Major League Baseball.

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For baseball fans, it’s the most wonderful time of the year: the League Championship Series are getting underway and the World Series is right around the corner. For Major League Baseball, the past few years have been a pretty wonderful time year-round: the league and its clubs are making more money than ever, and even though baseball has taken a back seat to football, the game’s popularity is well-entrenched. Maybe even more surprising, labor harmony has reigned for many years now.

It wasn’t so long ago, in historical terms, that the rift between players and management led to the debacle of the 1994 season, in which a work stoppage meant that the World Series was cancelled for the first time in 90 years. But the league rebounded across the second half of the 1990s, thanks especially the successful culmination, in 1995, of the Orioles‘ Cal Ripken to break Lou Gehrig’s consecutive-games record and the epic home-run battle between the Cardinals‘ Mark McGwire and the Cubs‘ Sammy Sosa in 1998. Even the steroid scandals of recent years — which have cast all sorts of doubt on the purity of McGwire’s and Sosa’s performances, not to mention the re-breaking of all home run records by Barry Bonds — haven’t been able to derail Major League Baseball’s financial success.

A key driver for this success has been a wave of new stadiums — many designed by HOK Sport — modeled on Oriole Park at Camden Yards. Baseball palaces like AT&T Park in San Francisco, Miller Park in Milwaukee, and the new Busch Stadium in St. Louis have packed in the fans. Say what you like about MLB commissioner Bud Selig (he is not widely liked by fans), but he has presided over an era of prosperity unprecedented in the history of the National Pastime.

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Today’s Company of the Day is Alcatel-Lucent.

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Question: What do you get when you merge two bloated, not-very-efficient companies (Alcatel and Lucent) that operate in a chaotic sector (telecommunications equipment) and lag far behind the industry leader (Cisco Systems)?

Answer: A bigger, more bloated, and still not-very-efficient company that lags far behind the industry leader.

Alcatel-Lucent took its current form in late 2006, when Alcatel plunked down $11.6 billion to buy Lucent in a merger that has not, shall we say, elicited cries of delight from both sides of the Atlantic. While advocates of the merger touted all kinds of advantages that would come from the combination of the two companies’ customer bases and technology portfolios, the unstated subtext — one that the principals behind the deal likely wouldn’t admit — was that misery loves company.

Despite the stoic efforts of CEO Patricia Russo and her team, the misery hasn’t gotten better since the two companies joined forces. While Cisco Systems keeps pacing the field in terms of both technology and financial health, Alcatel-Lucent has lowered its 2007 sales forecast three times. (One is tempted to add “so far.”) What’s holding up progress? Besides the usual tumult in the telecom equipment market — which, like semiconductors or biotechnology, constantly sees new technologies supercede old ones — Alcatel-Lucent must also deal with the overlong legacies of its predecessor firms, which could hardly help but inherit some of the bloat and bureaucracy of their old-style telephone company ancestors. Then, just for a garnish, you can factor in some trans-Atlantic cultural friction, too. Even if Lucent had been perfectly organized on its own (it wasn’t) and if Alcatel had been perfectly organized on its own (ditto), the combination of the two companies couldn’t help but be tricky. Layer the legacy problems on top of the cultural ones and the technological ones, and you arrive at the mess that Alcatel-Lucent faces now.

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The Company of the Day is Bear Stearns.

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Should we be bearish or bullish on Bear Stearns? That has been a hotly debated question in financial circles since earlier this summer, when the venerable investment bank took a loss of billions on two of its hedge funds that were tied heavily to subprime mortgages. The chatter picked up again during the past few weeks, when the company reported bad quarterly earnings figures, and prognosticators began projecting various buyout scenarios that featured white knights — that is, strategic minority investors — of various financial stature, up to and including Warren Buffett himself. And no wonder, since the company’s problems have turned its shares into a bargain: even after a rebound in recent days, Bear’s stock has lost nearly a quarter of its value during 2007.

The likelier course for Bear Stearns is that it will keep blazing its own trail. Although billionaire British financier Joseph Lewis has built up a 7% holding in the company, it doesn’t look like he has any plans to change the way it operates; in other words, he may simply be buying Bear while it’s cheap. Beyond that, the company itself has denied rumors that it is holding talks with any potential strategic investors, be they Citic or Bank of America or Mr. Buffett.

And then there’s the deeper issue of culture. Bear’s CEO, James Cayne, lacks for nothing when it comes either to analytical acumen (he has won more than a dozen national championships in contract bridge) or self-confidence. The traders who work under him tend to relish the rough and tumble of the markets, and Bear is hardly a place for much hand-holding. So despite its troubles this year, and regardless of how much fun it is to speculate on Buffett or someone else making a meal of Bear stew, odds are that this Bear will rumbling along — and roaring again — for a long time to come.

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Today’s Company of the Day is Research in Motion.

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“Put the Blackberry down and back away!” Okay, we’re not quite to the point of armed intervention, but plenty of people do feel an obsessive connection to their BlackBerries. That’s just fine by Research In Motion, the Canada-based maker of the wireless e-mailing devices. The company was in the news again last week for all the right reasons when it announced boffo earnings and robust projections for the upcoming quarter. Considering that RIM’s revenues, profits, and profit margins have already risen steadily across this decade, that’s good news indeed. While RIM’s traditional stronghold has been among business users, an increasing part of its success is coming from the consumer side of the business; in the past quarter, for the first time in the company’s history, consumer subscriptions to the BlackBerry service grew even faster than business subscriptions.

While the BlackBerry was ahead of its time in delivering e-mail to mobile devices, RIM now faces stiffer competition from new generations of smartphones. To keep up its momentum in the face of these challengers, RIM is planning to introduce new software that will allow BlackBerry users to share calendars and other electronic files (including images and music as well as documents) while they’re on the go. This comes on top of RIM’s recent acquisitions of Ascendent Systems (voice mail and mobile telephony software) in 2006 and SlipStream Data (data compression and acceleration) earlier this year. BlackBerries also work in more places than ever, since RIM has expanded the geographic footprint of its services by partnering with wireless service providers across Asia, Europe, and the Americas. It’s a sign of the device’s broad success that many companies have now instituted “No BlackBerry” rules for meetings. Without rules like these, many BlackBerry users find that they just can’t tear themselves away from their electronic lifelines.

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Today’s Company of the Day is Exxon Mobil Corporation.

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Talk about the Standard by which all others are judged — Exxon Mobil dominates its industry as few other companies can. The world’s largest integrated oil company is the foremost heir of the old Standard Oil, the business empire built by John D. Rockefeller and broken apart by a US federal antitrust ruling in 1911. Before it changed its name to Exxon about 40 years ago, the company operated as Standard Oil of New Jersey, a.k.a. Jersey Standard. During this period it operated with the signature bluff style that still characterizes many of its positions: Exxon is very big, very strong, very smart, and very determined to dominate its competitors — and doesn’t care who knows it.

The company took on its present shape in 1999, when Exxon acquired Mobil Corporation, another Standard heir that used to operate as the Standard Oil Company of New York, or Socony. Besides reuniting two of the constituent parts of Rockefeller’s behemoth, the merger paired Exxon’s gigantic production operations with Mobil’s marketing savvy. The results, especially given the sky-high oil prices of recent years, have been impressive. For each of the last two years, Exxon Mobil has brought in more than a billion dollars of revenue per day, and the company set consecutive US records for annual corporate profits in 2005 and 2006. (If that’s not impressive enough, try this: the company’s market capitalization is roughly equivalent to Microsoft’s plus Citigroup’s.) As for the future, Exxon Mobil predicts more of the same; while some of its rivals, BP and Shell among them, are building out portfolios of alternative energy sources, Exxon Mobil scoffs at wind and solar, staying true to the black gold that has served it so well thus far.

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