A Call on Motorola’s Potential and on Ominicom’s Accounts

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik ebate the merits of individual stocks.

Motorola (MOT)

Jim: Now here’s a company, Mike, that seems in constant flux these days.

Mike: Am I showing my age if I say that I remember when Motorola was regarded as one of the best-run companies in America?

Jim: It’s not anymore, though it’s striving to come back. Motorola is a leading maker of wireless phones, pagers, semiconductors, two-way radios and networking systems, and it’s been through the wringer lately. It had a terrible 1998 after falling behind in the race to sell the ublic the newer digital wireless phones.

Mike: Allowing the Finnish company Nokia and others to get ahead.

Jim: Right. Motorola was huge in analog phones, but it’s been trying to catch up with its own line of digital phones. Then there was Iridium, of which Motorola is a huge backer.

Mike: Which we reviewed a while back, not at all in complimentary terms.

Jim: No, and we were absolutely right.

Mike: You could have made a lot of money shorting that stock, Jim.

Jim: Iridium is this proposed global satellite system that would enable you to make a wireless phone call from anywhere in the world.

Mike: Yeah, if you were willing to carry a phone unit half the size of a cinder block with you.

Jim: Which is just one reason why Iridium recently went into Chapter 11 bankruptcy.

Mike: Though Motorola is still committed to it, having invested hundreds of millions of dollars into the thing.

Jim: Then Motorola went through its own massive restructuring last year, slashing 24,000 jobs, or 16% of its work force. And as if that wasn’t enough, the company just announced plans to pay $11 billion in stock to buy General Instrument, another outfit we recently raved about because it’s the leading maker of those cable boxes that sit on top of your televisions.

Mike: You’ve touched all the bases.

Jim: So where do we go from here--the stock I mean?

Mike: I think we go up.

Jim: So do I. But you’ve got the floor.

Mike: It’s been a tough ride for Motorola, but I think management has gotten it together on a lot of these issues, leaving aside Iridium for the moment--as I wish they would. They are back n track with their cell phone business, belatedly. And, look, if we have the courage of our convictions, since we liked General Instrument so much as an independent company, we should still like it as part of Motorola.

Jim: I agree.

Mike: And although Motorola’s stock has rebounded pretty well from last year, I think it’s still on the way up.

Jim: It does give me pause that Motorola’s stock has more than doubled in the last 12 months; it’s trading in the mid 90s, or about 47 times this year’s expected earnings per share. That’s a bit dear.

Mike: It’s dear if you don’t expect earnings to grow much.

Jim: But we do. I’d buy it as a long-term investment, though, because it’s going to be a bumpy ride for Motorola for a while. Let’s face it, Mike, it’s unclear where Iridium will end up and what Motorola’s ultimate exposure will be.

Mike: Yes, there’s a write-down if not a write-off in Motorola’s future. Investors have to be prepared for that, because the stock could get hit pretty badly.

Jim: But then I like Motorola’s aggressiveness in buying General Instrument.

Mike: So do I. As a long-term investment, Motorola is a company that’s right in the thick of some of the most potentially lucrative technological developments ahead of us, whether we’re talking about wireless communications or broadband--that is, developing the TV into something that is actually useful to society.

Jim: Near-term, Motorola’s shares could drop as the company issues all that stock to buy General Instrument, which could put pressure on Motorola’s earnings per share, if nothing else. But long-term? Yes, it’s a buy.

Mike: And we should add that Motorola is another company that stands to gain from the economic recovery in Asia, particularly in its semiconductor business.

Omnicom Group (OMC)

Jim: This has to be one of the worst corporate names in America, Mike. It makes me think of the latest line of toy action figures.

Mike: Well, it reminds me of those huge conglomerates that always end up the villains in some Mel Brooks or James Bond movie.

Jim: Actually, Omnicom is one of the world’s biggest advertising agencies, and a prosperous one at that.

Mike: It’s also one of the giants that was created by a recent consolidation wave among ad agencies that rivaled the merger spree in the supermarket business.

Jim: Correct, and now we’re down to really only three or four huge agencies.

Mike: Omnicom owns some of the grand old names in advertising, if we really have the stomach to think in fond terms of advertising.

Jim: Why? Because it rots the brains of our children?

Mike: How about rotting our own brains? Look at how many years we’ve been spooning this stuff down.

Jim: Can we get back to the stock?

Mike: Well, Omnicom now owns BBDO Worldwide, DDB Needham Worldwide, TBWA Worldwide, and the old Chiat/Day, which used to be the smart-aleck of advertising.

Jim: And its clients are some of the top names in business--outfits like PepsiCo, Gillette, McDonald’s and Mars. Its people have created such characters as the talking Chihuahua for Taco Bell and the talking lizards for Budweiser.

Mike: Are there any members of the animal kingdom left to put words in their mouths? Talking cobras maybe? Wombats?

Jim: Finally, let’s note that Omnicom also has big interests in direct-mail and in public-relations firms. It owns Fleishman-Hillard, for instance.

Mike: That makes me feel better.

Jim: It makes investors feel good. Omnicom, with about $4 billion in annual revenue, has been a hot stock because it keeps turning out princely operating numbers. The stock, now in the high 70s, has doubled in the last 12 months. Over the last five years it has soared nearly sixfold. It now sells for nearly 40 times anticipated ’99 earnings per share.

Mike: Now, you whisked past something that bears more discussion. Yes, Omnicom represents many of the Fortune 500, but it has also made a strong push for some of the smallest and newest ames in business--including the “dot-com” businesses--and that’s a big part of this stock’s rise.

Jim: It’s after the Internet firms.

Mike: Right, and Internet companies need help in getting traffic through “offline” promotion. That is, they need to advertise in the old world of pulp, paper and broadcast.

Jim: Absolutely. Case in point: E-Trade, the online brokerage firm. Its print and TV ads are everywhere.

Mike: And Omnicom is the ad agency that’s won the plurality of those accounts.

Jim: Good point. Which is just one reason I’d buy the stock.

Mike: That’s funny, because it’s one reason I wouldn’t buy the stock.

Jim: Really?

Mike: I’m serious.

Jim: OK, I’ll make my case. The sharp run-up in the stock makes me a little nervous, but I like the fact that Omnicom is aggressively going after the exploding number of Internet firms that will need help.

Mike: Don’t forget, Jim, there’s also going to be an implosion for many of those firms, in the inevitable Internet commerce shakeout.

Jim: After they’ve already paid Omnicom to advertise. Plus the company is riding a strong overall wave in world advertising growth. One reason: Companies are relying more on advertising to drive sales because in this era of low inflation, it’s pretty hard for them to raise prices to boost sales.

Mike: Anything else?

Jim: Omnicom also is nicely balanced: It does nearly half its business overseas, and its top 10 clients together account for less than 20% of its business. And we’ve got Omnicom’s recent history of sustained earnings and revenue growth.

Mike: Well, at the risk of sounding inconsistent--but what is life without inconsistency?

Jim: Your point?

Mike: The run-up in this stock has brought Omnicom pretty close to a peak. This company doesn’t really make anything, and it’s in an industry that’s notoriously fickle and always stands to lose its biggest accounts at the drop of a hat.

Jim: I can’t argue with that.

Mike: There is the big risk that a major client periodically shifts agencies because its own business has gone sour, and so it shoots the messenger--the ad agency. It’s like baseball teams and the frequency with which they fire the manager even though it’s their bunch of high-priced crybaby players that let them down.

Jim: But there’s nothing new about all that. Omnicom’s record shows that it has sailed through that constant turmoil quite well over the last five years, and I see no reason to think it will fail to keep doing so.

Mike: Yes, but don’t forget another big factor: If the economy softens, companies big and small tend to slash their advertising budgets very quickly.

Jim: That’s true.

Mike: And it’s even more true when you look at the fragility of many of the players in the Internet economy.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz ([email protected]) covers the markets and corporate financial trends. Michael Hiltzik ([email protected]) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

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Motorola, Moday: $96.63

Omnicom Group, Monday: $77.31