24/7 Wall St.

With the trading year almost half over and results from the first quarter out, 24/7 Wall St. has created the latest installment of its Ten Worst Managed Companies In America list.

This analysis is based on: 1) one year and five year stock performance relative to the major indexes and other companies in the industry, 2) the company’s position in its industry both now and over the last five years, 3) whether management made identifiable and critical decisions which hurt the company, 4) a change in the company’s relative market strength compared to its competition, and 5) whether the company could have identified mistakes and changed course quickly enough to avoid a catastrophe.

Some readers will think it is not fair to include companies which have had a recent change of management. While it may be true that a new CEO gets a "honeymoon", if his early, significant decisions do not create a substantial change in the company’s fortunes there is little reason to hope for later improvement.

1. Sun Microsystems (JAVA). Sun’s stock has underperformed for several years. It did bounce when Jonathan Schwartz was named CEO about two years ago, but his tenure has been a great disappointment, both for investors and employees. Sun has made several expensive acquisitions including buy-outs of MySQL and StorageTek. Sun’s revenue remains flat and its operations swing between tiny profits and small losses. Sun’s chief scientist and head of sales recently left the company. News from JAVA comes in the form of almost daily and not useful PR. The company has changed its ticker symbol and has done a reverse merger to move its share price into higher territory. Whatever chance Sun had to claim a major portion of the global server market is lost. IBM (IBM) and Dell (DELL) are in the final stages of beating Sun into the ground. Its bets on Solaris, Java, and open source software have failed. Sun’s shares are off over 50% during the last year to $11.14.

2. Sears Holdings (SHLD) Moody’s summed up the problems at Sears better than anything we have read. The ratings agency said "a fair amount of Sears’ operating difficulties remain self-inflicted, in particular on the softlines side." The company’s chance at offering low pricing and high quality merchandise were lost fairly soon after Eddie Lampert put Sears and K-Mart together. He and his management were never able to challenge the Wal-Mart (WMT) and Target (TGT) models of "everyday low pricing". Much of the company’s cash was used for share buy-backs. The recent replacement of the SHLD CEO is merely window dressing. The company has been unable to explain how it plans to dig itself out of this hole. The stock is down over 55% over the last 12 months.

3. Boston Scientific (BSX) The medical device maker has made a series of mistakes. None was worse than buying Guidant for $27 billion in 2006. The newly acquired company had problems with recalls of its products early on. At one point not longer after the acquisition, BSX told Fortune that Guidant was not making any money. In early 2007, BSX posted lower profits due to charges from the takeover. What has Boston Scientific done to remedy the problems? Nothing. The trouble has been compounded by a fall-off in the company’s drug-coated stent business as medical research has indicated that the product is not as effective as once believed. Johnson & Johnson (JNJ), Abbott (ABT), and Medtronic (MDT) have entered the market. BSX is left with the option of trying to pay down its $7.3 billion in long-term debt, which could be impossible, or selling the company off in pieces. The BSX board recently renewed the CEO’s contract making that decision one of the most mysterious by a company this year. Shares were at $40 before all the M&A mistakes. Now they sit at $12.26.

4. Starbucks (SBUX) The problems at the coffee retailer can be summed up in a letter sent by founder Howard Schultz to his management in early 2007. In the letter he wrote " we desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks". He did nothing about his concerns until he fired the company’s CEO and returned to the job a year after his note. That year of indecision cost the company a great deal. The departed chief said during his tenure that Starbucks would eventually have 40,000 stores worldwide. It is now struggling with the possibility that it has too many in the US. Starbucks went from becoming a very good coffee shop to a location which sold breakfast food, sandwiches, music, and WiFi. The vision became clouded. Workers in Starbucks stores recently went through re-training. It does not seem to have helped. SBUX is now the high-priced provider of a commodity as the economy is going into a recession. People are getting their fancy coffee at McDonald’s (MCD) now. Not long ago, the shares were near $40. They now trade at $16.30.

5. Sprint (S) The cellular provider routinely shows up on lists of US companies with the worst customer service. That is not among phone companies, it is among all companies. Management did not bother to do a good job meshing its NexTel acquisition with the Sprint network and part of the result is that AT&T (T) and Verizon Wireless walked off with the customers. At this point, there is little evidence that the company is viewed any more positively by its subscribers than it was a year ago. The largest single misstep after the merger occurred when the company’s board lost its nerve on the matter of investing in a national WiMax network. It was definitely a gamble, but it could have given Sprint the chance to have a significant lead over its rivals in the business of super-fast wireless broadband. The cost of the roll-out might have been as high as $5 billion. The best indication of the board’s error was that Sprint and a number of partners are going ahead with the WiMax deployment, but they have lost almost two years in the process. The capital to underwrite the project should have been raised long ago. In the process, Sprint has lost a great deal of the edge it might have had. A nice $26 stock two years ago, now trades at $8 on a good day.

6.  Circuit City (CC) Going back five years, the electronics retailer was in very good shape. From June 2003 until to mid-2006, shares in Circuit City substantially outperformed rivals Best Buy (BBY) and Wal-Mart (WMT). After modest operating income in 2003 and 2004, CC posted  large gains in profits for fiscal 2005 and 2006 which ended in February. The last two years have been a disaster. Circuit City management did not do anything to keep its customers from heading for the exits and shopping elsewhere. CC operates in an industry where most of the PC , video game console, camera, and portable media player prices are the same from retailer to retailer. Even though margins in the business are modest, sales of these products are growing much faster than almost any other sector of big box retail. Circuit City has decided to focus on offering customers additional services. As is often true at companies which are poorly managed, it decided on a strategy for differentiating itself once it was already in tremendously deep trouble. Striving to be first in customer service may have been a perfect approach—three years ago. When things were going well as late as 2006, the shares were at $30. The stock is at $3.37 now..

7.  Motorola (MOT) was the hottest handset company in the world three years ago. In 2003, the company had revenue of $27.1 billion and operating income of just over $ 1 billion. By 2005, revenue was up to $36.8 billion and operating income was up to $4.7 billion. Its Razr handset helped it take a 22% global market share. Motorola has three divisions. The handset business is the largest, but the home networking and enterprise pieces of the firm have had steady growth and reasonable margins. Motorola decided not to diversity further into these segments of telecommunication. It gambled that it could continue to gain on No.1 handset company Nokia. The company forgot that a strong product would only do well for so long in a marketplace where highly innovative electronics companies like Samsung and Sony Ericsson have tremendous product development operations. Motorola never built its next hot product. As the Razr aged, Motorola’s competitors built similar handsets and added smartphones to take advantage of the global move of cell carriers toward wireless 3G broadband. Motorola now wants to spin-off its handset business, but it is hard to imagine why that does investors any good. From over $26 in late 2006 to below $8 today.

8.  AMD (AMD) moved into a very strong position against its larger rival Intel (INTC) when it took the lead in creating the most powerful and efficient chips for PCs and servers in 2003. Revenue moved from $3.5 billion in 2003 to $5 billion in 2004. More importantly, the company shifted from an operating loss in ’03 to a $222 million profit in ’04. Just as its fortunes were improving, AMD made two awful mistakes. In July 2006, AMD bought graphics chip maker ATI for $5.4 billion, taking on a load of debt in the process. Management also started to talk about getting to a 40% global market share, at a time when it was holding about 25%. At this point AMD did have the lead against Intel in the product performance race. Then Intel dropped prices to fight back, and AMD took the bait. Its gross margins collapsed. CEO Hector Ruiz had put the company in financial peril by ruining its balance sheet with long-term debt from an acquisition which has yet to do AMD any good. He moved into a price war with a larger rival which was in better shape to weather poor margins. Perhaps worst of all, he failed to drive his engineers to maintain the technology advantages which were so critical to customers. Any one of the mistakes would have hurt the company. When the company was at the top of its game less than three years ago, AMD traded at $40. It recently hit a 52-week low of $5.31.

9.  AIG (AIG) was the premier insurance operation in the world for almost two decades. Revenue went from $81.3 billion in 2003 to $108.9 billion in 2005. But, long-time CEO Hank Greenberg got in trouble with prosecutor Eliot Spitzer who claimed that some of AIG’s transactions with certain re-insurers were set up to improve the company’s earnings. In March 2005, he left the company he had built. Like many other large financial firms, AIG made some remarkably poor investments in 2005 and 2006. Almost all were made by people Greenberg had trained, particularly his replacement Martin Sullivan. There will always be a debate about whether Greenberg created a culture which encouraged taking substantial risks. In the last quarter, AIG was forced to write down $9.1 billion on the value of its credit-default swaps. More write-offs are likely to show up in future quarters. To make matters worse, the SEC and Department of Justice are looking at how AIG valued credit default swaps, an indication that some of the numbers may have been "improved" to make the company’s financial performance look better. Several Wall Street firms have lost a great deal of money off credit and mortgage-backed paper. Few have lost what AIG has, and none have gotten themselves into the position where the liability of their actions could do permanent damage to the firm. The board was cavalier enough to push out Sullivan in favor AIG’s non-executive chairman, Robert Willumstad, a former Citigroup (C) executive. Where was Willumstad when AIG was getting into terrible trouble while he was managing the board? Moving him into the top job may be the worst CEO selection of the year. From $73 a year ago, the stock has fallen to $31.

10. Pfizer (PFE) had operating income of $14 billion in 2004. Over the most recent four quarters, that is down to $8.8 billion. Many analysts would blame that on competition from generics. Others would say Pfizer’s R&D has been badly managed and has not come to market with the number of significant new drugs necessary to replace those going off label. Wall St. had also hoped for more rapid cost reductions at the firm. It can’t keep operating margins on falling revenue without better expense control. Some of the company’s drugs have recently had safety problems, another sign that R&D controls may be week. Goldman Sachs recently downgraded PFE because trouble with anti-smoking drug Chantix and cancer drug Sutent. In April, Pfizer’s CEO said that the company was in the process of creating better shareholder value. That was after Wall St. was disappointed that the company’s Lipitor blockbuster would take advantage of troubles with competing drugs Vytorin and Zetia. Instead Lipitor sales fell in the last quarter. First quarter numbers missed almost every brokerage estimate. With its shares performing much worse than those of its competitors, investor view the company’s management style as unfocused. The shares are down from almost $39 in 2004 to under $18. 

Douglas A. McIntyre