Fizz or Fizzle With Coke? How Strong Is Schwab ‘Hockey Stick’?

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

Coca-Cola (KO)

Mike: Say, Jim, I’m sitting here with a can of Coke that seems to have gone just a little bit flat. What could account for that?

Jim: Your symbolism is a reach, but you’re right: Everything at Coke is flat these days. This used to be a stock you bought and then forgot about, a classic blue-chip growth stock, a gold-card member of the Dow Jones industrial average. No less than Warren Buffett owns a big position in Coke, which tells you something.

Mike: This is a stock that’s so important to our sense of the market that, earlier this year, there was speculation that Coke waited to release a poor earnings report till after the market closed so as not to prevent the Dow from closing above 10,000 for the first time.

Jim: Under the late Robert Goizueta, who took over in 1981, Coke was virtually a license to coin money, and its market value skyrocketed from $5 billion to $145 billion. Then, after he died in 1997, Doug Ivester took the reins.

Mike: Goizueta was always viewed as one of those CEOs who could never be overpaid--somewhat like Disney’s Michael Eisner a year or two ago.

Jim: But, now, Mike, Coca-Cola is suddenly not “it” anymore. What went wrong?

Mike: Let’s think geographically. Coke gets something like two-thirds of its revenue and three-quarters of its profit in foreign markets, but guess what? Asia has been bad. Latin America has been bad. Europe has been not so great . . . . You get the picture.

Jim: Worse yet, Coke’s North American business, which was expected to offset all of that, has gone flat too--to everyone’s surprise.

Mike: Supposedly because Coke decided, in the last six months or so, in effect to raise prices.

Jim: I can’t blame the folks in Atlanta. You go to the supermarket, and Coke and Pepsi are selling 12-packs of soda for around $2 and change, no matter what time of year it is.

Mike: So you just buy whichever one’s on sale.

Jim: But what’s really unnerved investors is that, over the last year or more, everyone kept expecting Coke to start showing its old form, only to have Coke keep announcing disappointing results.

Mike: So people have stopped giving Ivester & Co. the benefit of the doubt.

Jim: You can see it in the stock. It’s selling in the mid-60s, so it’s down 13% over the last 12 months. But get this: In the last two years, Coke is up only 3% vs. a 60% gain in the Standard & Poor’s 500.

Mike: You know what? I have some words for investors who are worried about Coke.

Jim: We’re waiting . . .

Mike: The words are: Are you nuts? Think of all the highflying stocks that have no business selling for what they are, and here’s this crown jewel selling for about 40 times next year’s earnings.

Jim: Now Coke’s a stock you buy because it’s undervalued, right?

Mike: Look at all their markets--do you see one that is still weakening? Is Asia weakening further?

Jim: No.

Mike: Is Europe weakening? No. Latin America? No, stabilizing. And I trust Coke to get its act together in North America and to execute its strategy of keeping prices steady here. So what’s the problem?

Jim: We’re in total agreement. I would buy this stock in a heartbeat. Look, a key reason Coke is temporarily suffering overseas is that it’s made a huge investment in new plants in other countries, even Russia.

Mike: Right, and to me that’s the model of how American corporate investment should be overseas--invest when things are bad. They know that when Russia is on its backside, it’s exactly the time to put money in there. They don’t change their game plan because they’ve been thrown for a couple of losses, and they’re not counting on every dollar of investment producing $1.10 in net income in the next quarter.

Jim: Exactly. But when those countries do come back, Coke will be sitting pretty.

Mike: They’ll end up with a monster market share and additional profits.

Jim: I’m also not worried about Coke at home. It’s got those tremendous resources to pour into marketing to help make the price hikes stick. And even if prices stay low, those same resources help Coke fight a price war. Don’t forget: This is a company that sells sugared water, nothing more, and yet it has $19 billion in annual sales. Coke knows how to weather its slumps and come back even better.

Charles Schwab (SCH)

Jim: I’ll tell you flat out, Mike, that I like Schwab--the company, the stock and the man.

Mike: You’ve interviewed him, haven’t you?

Jim: I’ve had the pleasure of spending time with him, and he’s quite a story. He’s always been very shy, has suffered dyslexia all of his life, and he has these boy-next-door looks that have been an enormous asset to his company over the years. His advertisers learned early on that Schwab’s face translated into trustworthiness--people look at him and are willing to trust their savings with his firm. That’s why, even today, it’s no accident that Schwab’s commercials have his face nearly filling the TV screen.

Mike: He’s also a guy who has the distinction of having taken Bank of America to the cleaners not once, but twice.

Jim: Yet another reason to like him.

Mike: Indeed. He sold his company to BofA in the early ‘80s and then, when BofA was struggling badly, he bought it back and turned it into a powerhouse.

Jim: Bought it back for about half the price he sold it, I might add.

Mike: Talk about selling high and buying low. Anyway, Jim, you’re probably too young to remember the days when Charles Schwab was mainly a brokerage company.

Jim: No, I’m not too young. Unfortunately. Schwab became prominent by pioneering discount brokerage services following the deregulation of trading commissions in 1975.

Mike: Yes, but look what’s happened. Today Schwab is an Internet stock.

Jim: That leads into a good point. This company has a history of reinventing itself to adapt to changing times. I mean it’s not just discount brokerage. You remember how Schwab really took off in the early ‘90s when it became sort of a one-stop shopping center for mutual funds with their OneSource program, which was promptly copied by others in the industry. And now we come to these times.

Mike: And the question is: Are there challenges facing Schwab in its current reinvention of itself that it hasn’t had to grapple with before?

Jim: Yes, but I think that’s been true with all of t0he changes they’ve had to make over the years. The current challenge is that Schwab has turned into the most popular online brokerage service in the business, even though they’re not the cheapest.

Mike: Nor have they ever been.

Jim: Correct. Unfortunately, Schwab’s online presence has turned it into one of these Internet stocks that are full of pyrotechnics every day. I think that’s somewhat of a curse for this company. I don’t think that Schwab, with its tremendous assets and its basic business strength, should be trading with the same volatility as a lot of Internet companies, but it does.

Mike: Right. And it’s got a price-to-earnings ratio well up into the 80s to show for it--a Yahoo-scale multiple.

Jim: Yet the point is that Schwab has the track record to back up a P/E like that. In the last five years, Charles Schwab is up 2,500%.

Mike: With most of that coming in the last year or nine months. In fact, technical analysts have a term for a stock chart that looks like this--a “hockey stick.”

Jim: But if you look at any chart, you’ll see that Charles Schwab has been outperforming the market . . . for the last decade.

Mike: Now let me give you my views on where Schwab stands today: Yes, it’s facing huge technological problems, mostly because it’s got so many customers for Web-based trading that its systems have gone down with really a rather disturbing regularity of late.

Jim: Just last week, in fact.

Mike: And that’s something that plagues a lot of the online brokerages, because they simply cannot keep up with the demand. Now, you know that I’m skeptical of companies in the Internet stakes that are trading at huge multiples simply because they were the first ones into their market, or they’ve got some sort of flavor-of-the-month brand name.

Jim: Right.

Mike: Frankly, I don’t see Schwab as falling into this category. When you’re talking about online brokerages, you’re talking about an industry that is filled with clownish operators who are not going to be able to execute over time, who are going to make their customers angry and are going to get sued because they can’t handle trades when things get hot. I think Schwab is the one company you can pretty much depend on to overcome these problems, and will be one of the few left standing.

Jim: I don’t think there’s any question about it. Not only that, but the main thing about Schwab to me is that online trading is simply a part of Charles Schwab. The fact is, this company is a huge accumulator of assets of all kinds, and collects a fee for holding all those assets. It has great technology, it’s got great management, it’s got an eye for innovation, its earnings have doubled in just the last three years, and I would definitely buy this stock. Now obviously, because of online trading and the Internet, Schwab is a lot more volatile a stock now, and you really are gonna have to strap yourself in.

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment. Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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Coca-Cola

Monday: $67.13

Charles Schaw

Monday: $119.19