WALL STREET, CALIFORNIA : STOCK EXCHANGE / JAMES PELTZ AND MICHAEL HILTZIK : Is Penney Worth Your Dollar? General Instrument Is

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

J.C. Penney (JCP)

Mike: Our first stock today is J.C. Penney, and here’s my question, Jim: Is this company today’s version of Montgomery Ward?

Jim: Penney does seem to be the latest chapter in the tired, old story of department store chains falling behind the times. Does the name Sears mean anything to you?

Mike: Maybe the lesson is that when you list retailers, someone’s got to be last.

Jim: Penney, of course, is the quintessential mid-market department-store chain, with about 1,150 stores. It’s long been considered a primary source for moderately priced women’s apparel, mong other things, and it owns the Eckerd drugstore chain.

Mike: Stop! You’re putting me to sleep already. Moderately priced, conservative, unexciting women’s apparel . . .

Jim: Looks like it’s putting lots of women to sleep, too, judging by Penney’s lackluster results. Point is, this is a chain that’s always in search of a strategy and never seems to find the right one.

Mike: Now, as I look at its history, it seems Penney’s current chief executive, one James Oesterreicher, took over in the early ‘90s and had success managing Penney’s rebound from a terrible slump. But apparently he never recovered from that victory, because he hasn’t been able to build on it.

Jim: Right. Penney decided in the early 1990s to remake itself as an upscale chain, selling pricier and more fashionable goods. But it ran headlong into a severe recession and the whole scheme fizzled. Then Oesterreicher took over and managed a brief comeback. But it’s been downhill ever since about ‘94-’95, because Penney is one of these chains that’s caught in the middle. It’s got the upscale Nordstrom and May Department Stores’ Robinsons-May outlets on one side . . .

Mike: . . . And specialty retailers such as Gap and AnnTaylor.

Jim: And on the other side are such discounters as Wal-Mart and the Target unit of Dayton Hudson. Penney is left withering in the middle, which is why its stock has dropped another 25% or so in the last 12 months.

Mike: Plus, every new strategy it cooks up is greeted with yawns or, worse, with derision by investors. For example, recently Penney said it would make a bigger effort to promote its house rands of apparel . . .

Jim: Some of which, like the Arizona jeans line, have had moderate success.

Mike: . . . And the reaction on Wall Street was: Duh! Every other retailer in its position has been doing this for years.

Jim: So you wouldn’t buy this stock?

Mike: You can make an argument that Penney is on the cusp of a turnaround, because the smart money would say Oesterreicher is going to be dumped at some point and, besides, how much lower can Penney go? It’s not a bad argument if there was any sign whatsoever that a turnaround was coming. But I don’t see it, so I would not buy this stock.

Jim: I’m going to take a flier and recommend it. Hey, stop laughing! Let me make a case for Penney . . . not that it’s easy.

Mike: Rather like making a case for Larry, Curly and Moe.

Jim: For starters, its Eckerd drugstore chain has done pretty well. It’s had a bit of earnings trouble lately but its sales growth is good. Also, Penney plans to issue a tracking stock for Eckerd, which will reflect how Eckerd is doing separately from the department-store results.

The Eckerd offering will probably happen in the fourth quarter, and Eckerd alone could be worth about $25 a share--or more than half of Penney’s current price.

Mike: But this is not Eckerd, this is a tracking stock, meaning investors won’t have any ownership in Eckerd. And the hope of a lot of investors wasn’t for Penney to spin off a tracking stock but to spin off Eckerd entirely. Because Eckerd could conceivably do better were it not saddled with the mediocre corporate management of J.C. Penney.

Jim: Still, after the Eckerd stock is issued I expect Penney’s stock to go up. There’s another reason I’d buy the stock: Penney’s got a new TV advertising campaign to further bolster its stable of private-label apparel.

Mike: “Come see the softer side of J.C. Penney?”

Jim: Something like that.

Mike: Look, it seems to me that with the exception of more promotion for its private labels, you’re simply betting on a lot of financial engineering by the folks in Plano, Texas, where Penney is based.

Jim: OK, I’ll concede the point. But the stock’s selling for a cheap 13 times expected 1999 earnings per share. Plus, I’m paid to wait for Penney to get its act together because the stock as a rich 6% dividend yield.

Mike: I wondered when you were going to point that out, because it’s one of the few stocks left in the world with any dividend yield.

General Instrument

(GIC)

Jim: Our next stock, Mike, is General Instrument, which is one of the leading makers of those little boxes that sit on top of your television set to control your cable selections.

Mike: The leading maker--it’s got close to 90% of the market.

Jim: General Instrument supplies all the major cable TV operators in the country, and it has been considered a core holding if you’re investing in cable or media for quite some time.

Mike: In part because, unlike some of the cable systems, GIC actually reports a profit.

Jim: And investors have responded, needless to say. The stock has more than doubled just in the last year, and it’s trounced the Standard & Poor’s 500 index over the last few years. So right now it’s selling for a princely 51 times earnings. But . . .

Mike: I hear a “but”?

Jim: But even though that price gives me pause, I think this is a great company.

Mike: Ah . . . not really a “but.” More like a “nevertheless.”

Jim: Fair enough. I would definitely recommend this stock.

Mike: I would too. You and I have talked ad nauseam about the Cisco/United Parcel Service paradigm--namely, that the best way to play an emerging industry like the Internet is not to try to figure out which dot-com company will prevail, but invest in the companies that supply them. eneral Instrument is another one of those companies in a different market. It’s a supplier to the entire cable industry, which relieves the investor of the chore of deciding which of several identical-looking cable operators is going to succeed in the long run.

Jim: Right. Because no matter who it is, its signal is probably going to zip through a General Instrument box.

Still, we should point out that there have been some crosscurrents that have affected this company. On one level, you’ve had a big wave of mergers recently involving cable companies, which in effect reduces the number of customers that General Instrument has out there.

Mike: Does it, though? Cable operators may merge, but their subscribers don’t. If you merge a cable operator serving 4 million households with one serving 5 million households, you still end up with 9 million customers, many of whom will need one or more set-top boxes.

Jim: But just as supermarkets can wrestle better terms from their suppliers if they merge--because now they’re placing gigantic orders with the food companies--the thinking is that the fewer cable operators there are, the more they can pressure General Instrument on prices.

Mike: That’s conceivable, but there’s a counter-countercurrent here . . .

Jim: A what?

Mike: These boxes are getting more and more sophisticated and smarter, and that will help prop up demand. In time many people will get their Internet service from a TV box, as well as other services. As cable operators try to expand the programming choices for subscribers, the box is going to become a much more important part of the system.

Jim: Absolutely. General Instrument’s biggest customer now is AT&T;, which has been buying up cable companies like there’s no tomorrow because it sees cable as the trunk line of future telecommunications.

Mike: Meanwhile, product cycles for cable boxes are going to become a lot shorter. Just as nowadays the desktop personal computer you bought is obsolete before you’ve actually dotted the ‘s on the check, there will be very rapid redevelopment of set-top boxes. Mark my words, a lot of the functions of today’s PC are going to migrate to the TV, including Web surfing and game playing. Why? Because the TV is still the easiest appliance in the home to use.

Jim: Right, and we’re talking about a company that makes a device that’s literally attached to that TV.

Now, the only caution flag I would raise about this stock is that when it trades at a price-to-earnings multiple like this, buckle up for an occasionally bumpy ride. General Instrument’s price doesn’t leave much room for error if the company should hit an earnings glitch. Agreed?

Mike: Yes, but I’d add that even if the bumps come, they’re going to be short-lived. Over the long-term this is a great stock to own.

*

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).