These Oldies Are Goodies
Many investors have been so preoccupied with technology stocks that they've overlooked another place with big investment potential. It's called the Old Economy. Often with little fanfare, formerly stodgy industrial and service businesses are successfully redefining themselves using the tools of the New Economy. Deregulation, for example, is allowing once-sleepy energy and phone companies to enter zippy new markets. The Internet is enabling all sorts of old-line companies to broaden their customer base and purchase supplies more efficiently. Meanwhile, technological innovations are letting lumbering manufacturers become nimble on the factory floor.
For proof, look no further than Houston's Enron Corp. (ENE) Thanks to sweeping deregulation of the utility industries, the onetime natural-gas pipeline company has recast itself as a highly profitable provider of energy and telecom services. Ten years ago, all of Enron's earnings came from gas pipeline operations and oil and gas exploration. Now, however, these traditional endeavors generate just 20% of the company's $1.2 billion in annual earnings. The other 80% comes largely from the trading of commodities that include oil, natural gas, electricity, and even broadband capacity. Its year-old EnronOnline has handled more than $150 billion in trades, making it the world's largest e-commerce site.
GOING UP. In the past year, Enron's stock price has more than doubled, to 73.06, with shares trading at a lofty 44 times estimated 2001 earnings. "Enron has had a great run," says Oscar A. Castro, manager of the Montgomery Global Communications Fund. "But it's still a good long-term investment." Another fan, Christopher J. Wolfe, equity strategist at J.P. Morgan & Co.'s private client group, expects Enron's share price to hit 100 during the next six months, as the company sees rising trading profits from volatile energy markets and rapid expansion of online trading.
Elsewhere, local phone companies are dialing up new opportunities in the long-distance market. In December, 1999, Verizon Communications (VZ), formerly Bell Atlantic Corp. (BEL), became the first regional phone company to win government approval to offer long-distance service. It has since lured more than 1 million long-distance customers in New York State. Similarly, SBC Communications Inc. (SBC), based in San Antonio, has signed up 1 million customers in Texas since July. Atlanta's BellSouth Corp. (BLS) figures to enter the market in the first half of 2001.
EASY SELL. Claude C. Cody IV, a senior portfolio manager at AIM Advisors Inc., holds shares of all three because he thinks long distance will be an easy sell. He notes that the Bells pitch to established customers, own their lines, and have support services, such as billing, in place. "It's a fairly low-cost market for the Bells to enter," adds Megan Kulick, an analyst at Merrill Lynch & Co. Over the next five years, Kulick expects the Bells to expand earnings at a 12%-to-15% annual clip, with long-distance service accounting for about 1.5 percentage points of that gain. She sees Verizon, SBC, and BellSouth notching stock price gains of as much as 42% over the next 12 months.
Allstate Corp. (ALL) is among the old-line businesses harnessing the power of the Internet. The nation's second-largest car and home insurer has traditionally sold its products through a network of 14,000 agents. In the past year, however, Allstate has begun selling insurance over the Web. Forrester Research Inc. projects that $13.1 billion worth of auto and homeowner's insurance will be sold online in 2004, up from some $1.7 billion this year. In addition, Allstate is hawking insurance over the phone. These moves have reduced the need for back-office personnel, allowing Allstate to cut 4,000 jobs, representing 10% of its nonagent workforce. Allstate hopes to double its tepid 4% revenue growth through both Web and phone sales.
Allstate's shares, at 44, have risen 78% so far this year, but J.P. Morgan's Weston M. Hicks is keeping his buy rating. There's a risk, he admits, that Allstate could flub the new strategy. But Hicks doesn't expect that to happen. "Management is very focused and determined to win," he says.
Other kinds of technological innovations, such as computer-assisted design tools, are helping aircraft manufacturer Boeing Co. (BA) ramp up profitability. In the past year, its shares have gained 79%, thanks to robust demand for jets from leasing companies and Asian airlines. But next year, commercial aircraft orders are expected to fall as much as 40%, a casualty of steep fuel prices and a faltering economy. Still, over the next 12 to 18 months, Pierre A. Chao, an analyst at Credit Suisse First Boston, sees Boeing's stock climbing from its recent 69.94 to 100. He reasons that the drive for efficiency will keep earnings growing at an average 15% annual pace over the next three years, even if airline orders fall.
Old-line companies that, like Boeing, learn new tricks stand a better chance of holding their own in a slowing economy.