TCS Daily


Investing After 9/11

By James K. Glassman - February 5, 2002 12:00 AM

The Washington Post

In the first week of trading after Sept. 11, stocks fell sharply. But, as investors began to realize that the terrorist attacks didn't really mean the end of economic life as we knew it, most of the market quickly rebounded.

Look at General Motors Corp., a bellwether. It fell from $51.58 the day before the hijackings to $40.25 on Sept. 21, the end of that hellish week when the markets reopened. But it was above its pre-attack levels by late November and has remained in the neighborhood of $50 ever since.

Even more remarkable, stocks in industries that you would have expected to suffer have recovered dramatically.

Take Ace Ltd., a Bermuda-based international insurer. The company's after-tax losses related to the attacks totaled $559 million, and, in anticipation, investors drove the stock down from $33 to $20.50. But like many other firms in the reinsurance (that is, insurance of insurers) market, Ace began to benefit from higher premiums. By Friday, Ace had risen to $39.06 -- a gain of more than 90 percent.

Southwest Airlines Inc., the fourth-largest U.S. carrier, dropped below $13 when trading resumed after the attacks. Since then, it has risen 40 percent -- above its pre-terror levels. Marriott International Inc., the hotel chain whose brands include Courtyard and Ritz-Carlton, plummeted from $40.85 to $27.30 but was trading at $40.50 Friday, having regained nearly all its loss.

Not every stock, however, tells such a happy story. Many excellent companies, knocked flat to the mat, haven't gotten back up. It's time for investors to check them for signs of life.

Begin with the obvious: Boeing Co., the world's largest manufacturer of commercial airplanes. Because of a slowing economy, air travel was sluggish six months before the attacks, but business dropped by 32 percent in September and by 26 percent in October. Many people are still reluctant to fly -- because of both safety fears and long lines caused by new security rules. To cut costs, U.S. airlines have reduced their capacity 15 percent by putting planes out of service.

So it's no surprise that Boeing Co. executives have watched demand for new planes fall sharply -- from 522 airliners in 2001 to between 350 and 400 in 2002 to likely fewer than that in 2003, according to Morton Siegel of the Value Line Investment Survey. The company has cut production of its new plane, the 717, and it took a $700 million write-off in the fourth quarter. Meanwhile, to add insult to terrible injury, six weeks after the terror attacks, Boeing lost the intense contest to build the Joint Strike Fighter for the Pentagon -- a project that could bring in $200 billion in revenue for the winner, Lockheed Martin Corp. Mainly because of the economic slowdown, Boeing stock had dropped from $69.85 in mid-May to just over $50 before the attacks. Afterward, it skidded to $30. On Friday, it closed at $41.46 -- a recovery, certainly, but still well below pre-attack (and May) levels.

Have investors underestimated Boeing? Perhaps. First, it is difficult to believe that commercial aircraft sales won't pick up -- if not in the next two years, then toward the middle or end of the decade. Investors who have a long-term view (this means you!) benefit from the fact that so many other investors have a far shorter perspective. The market appears to be pricing Boeing low, basing its judgment on the next few miserable years, but the correct price for any stock today is determined by its expected earnings over its future lifetime, and in a world getting smaller and richer, Boeing has to benefit.

The company has always had a powerful marketing team and innovative designers. It is pushing ahead, for example, with its "sonic cruiser," which flies just below the speed of sound. Second, Boeing -- America's 14th-largest company, with $58 billion in sales and 187,000 employees -- does more than make commercial airliners. It builds jet fighters, bombers, the popular C-17 cargo plane, AWACS radar-surveillance aircraft and flying tankers.

Its Space and Communications group, based in Seal Beach, Calif., is the largest company of its kind in the world, and it had a superb year in 2001. As NASA's largest contractor, the group performed six space shuttle missions, and it heads the U.S. industry team for the international space station. Boeing's 200th commercial satellite just went into orbit, and the space group is developing U.S. missile defense systems. While one part of Boeing is hurt by the war on terror, this part is helped. Last year, Space and Communications brought in $10 billion in revenue. By 2003, the figure is forecast to rise to $14 billion.

In 2001, Boeing generated about $3.5 billion in cash flow, easily enough to service a relatively modest debt and provide new capital investment. Its problems are probably temporary, and they aren't company-wide. "Looking past the drop in demand," writes Siegel, "we foresee new peaks in share earnings and prices." He thinks the company, which now earns less than $3 a share, could earn more than $6 by 2006 -- for a price-to-earnings ratio, based on today's price, of less than 7.

It's also reassuring that Boeing is on the recommended list of Al Frank's Prudent Speculator, a newsletter whose selections have returned an annual average of 23 percent since 1977. Standard & Poor's Corp., the highly regarded research service, has also given Boeing a top ranking -- five stars -- and Dow Theory Forecasts, a cautious newsletter, designated the stock as one of 26 on its "buy" list. Value Line's Siegel, however, reminds investors that "patience and fortitude may be necessary." That's the price that long-term investors in great companies have to pay, but the rewards are worth it.

Another solid company that remains in the doldrums is Carnival Corp., the world's largest cruise line, which also owns Holland America, Westours and Windstar, plus one-third of Britain's venerable Cunard Line. As the populations of the United States, Europe and Japan age, and as ground and air travel become more troublesome, low-hassle cruises should grow more popular. For now, however, the business is horrendous. Carnival's bookings fell by more than half in the first 10 days after the terror attacks, and the stock plunged commensurately -- from $34.90 to $16.95. Like Boeing, Carnival's shares have recovered (closing at $26.88 on Friday), but they remain far below their high of $53.50 reached two years ago. Carnival cut prices and doubled its commissions to travel agents, and business is at last returning to pre-Sept. 11 levels.

Meanwhile, two top competitors, Royal Caribbean Cruises Ltd. and P&O Princess Cruises PLC, have agreed to merge. British officials are holding the deal up on antitrust grounds, and Carnival has made its own bid for P&O. While the outcome is in doubt, the uncertainty may make Carnival shares an even better deal. Although I am not much of a cruise fan myself (I get claustrophobic in cabins with portholes, and I don't like buffet lines), I have wanted to buy Carnival for a long time. Now, it looks both cheap enough and strong enough.

The third enticing but troubled company is Starwood Hotels and Resorts Worldwide Inc. -- with about $4 billion in annual revenue from 725 properties with 215,000 rooms in 80 countries. Starwood's brands include Sheraton, Westin, St. Regis and W, and before Sept. 11 it was roaring. But the third quarter showed only a small profit, and the fourth quarter -- earlier expected by analysts to produce earnings of 46 cents a share -- ended up with a loss. Starwood earned less than $1 for the year -- its worst performance since its transformation in 1998 from a real estate investment trust to a plain-vanilla corporation.

Like Carnival, Starwood peaked in mid-May above $40 a share. By Sept. 21, after a drop of nearly 50 percent after the terror attacks, it was down to $17.10. The stock has slowly rallied, but it's still far below its high. Value Line's Justin T. Sebastiano sees it offering "good recovery potential" over the next three to five years, and it has a solid balance sheet.

The point of this exercise, however, is not to encourage you to rush out to buy a trio of stocks but to remind you that companies that are out of favor can often be the best buys. Still, as President Bush warned Tuesday in his State of the Union speech, the war on terror is far from over. Companies that make commercial airliners, carry tourists over placid waters and welcome business travelers and vacationers to plush hotels remain at risk. How much risk, you'll have to decide for yourself, but my guess is that the potential reward outweighs it.
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