A Sleeper Named Sollyby
Salomon Inc. (SB) earned a dubious honor on Oct. 2: It was placed on the Council of Institutional Investors' list of the 20 public companies whose returns to shareholders are the worst in the country. Salomon's stock reflects a major loss of faith: It trades at 38, not far from its level 10 years ago.
Not everyone has lost faith in Solly. Furman Selz analyst Leslie Nelkin thinks it is a good long-term play. Yes, the firm has disappointed investors, turning in its first annual loss in 1994. A plan to overhaul compensation sent a lot of talent packing. But Nelkin says its client business remains strong and that trading results are due for a rebound. "The question is: Is this overdone?" he says, referring to the stock's selloff. "I think the answer is yes."
Another Solly fan is Gregory Jackson, a fund manager at Yacktman Asset Management, which paid from 33 to 40 for its 600,000 Solly shares. "They haven't hit on all cylinders yet," he says. "They'll have a great year in client services, but a loss in proprietary trading or at the commodity operation." Salomon's earnings are driven by proprietary trading and its commodities operation. Still, he says, based on a normalized earnings number--which evens out swings from proprietary trading--he thinks it can generate earnings of $5 to $6 in 1996, up from $4.50 to $5 in 1995.
Then there are the takeover rumors. "If that happens, Solly is easily worth $55 to $60," says Jackson. Even without that, he likes the stock: "Over time, this business can earn a 15% return on equity. If it does, you'll make a lot of money buying at this level." In the next year or so, Nelkin thinks Solly will hit the mid-40s, "and ultimately, 50 or more." Jackson notes that investors will need a strong stomach to handle Solly's "incredible volatility."
On Oct. 31, Warren Buffett will be able to convert 140,000 shares of Salomon's preferred stock into either common stock or $140 million in cash. "If he cashes in, people might think it's a vote of no confidence," says Jackson. Nelkin doesn't think Buffett will cash out: "I'm hard-pressed to see him make a negative statement to the market at a time when he would be pulling out $140 million from a nearly $1 billion total position."