2HRS2GO: Outlook helps, hinders stock growth

6 min read

You hear it all the time, because it's true: expectations are everything.

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Today's market demonstrates that amply with Gateway (NYSE: GTW) and Lucent Technologies (NYSE: LU). They reported quarters charitably described as disappointing, given the need to lower expectations for both companies. Lucent didn't even meet the revised analyst consensus, although its results were just within the range of a warning earlier this month.

Yet GTW is up, LU opened higher although it's falling slightly in the afternoon, while a stock like Excite@Home (Nasdaq: ATHM), coming off a reasonably strong quarter, has been down all day.

Some of it can be traced to simple chart action. Excite@Home rose 10 percent in the week leading up to yesterday's report, while Gateway and Lucent slid over the same period, which resulted today in profit-taking versus bargain-hunting. A slight help for GTW and LU came when their stocks fell in afterhours activity. That cleared out a few doubters.

But today's performance got a real kick because of future expectations. Gateway and Lucent not only leeched out the bad news with their preannouncements, they also painted a rosier picture ahead.

ABN Amro downgraded Gateway on a lack of near-term catalysts for the stock price, but the market is heeding Robertson Stephens, which reiterated a "buy" rating on GTW. Robby Stephens analyst Dan Niles particularly likes what he sees from Gateway's relationship with America Online (NYSE:AOL) and other Internet projects.

The market is also following analyst sentiment on Lucent, which saw at least three analysts reiterate previous ratings, two of which are moderately upbeat.

On the other hand, the Robby Stephens repeat of a "buy" rating failed to convince the market to stay the course on ATHM, because the current performance was already priced into the stock, even disregarding the immediate run-up prior to yesterday. Unlike Gateway, Excite@Home needs a catalyst to justify a strong move higher. Earnings by themselves don't do it any more in today's market.

Not that Excite@Home is doing badly. All relevant metrics look good, arguably better than AOL at the same point in its history.

Unfortunately for the stock price, ATHM investors already knew that and have known that for a long time. Coupled with the questions surrounding Excite@Home's relationship with AT&T (NYSE: T), it's easy to see why the stock has been treading water during the last seven months.

Now the market finally sees Time Warner (NYSE: TWX) as a viable alternative for investing in cable Internet access in the wake of the AOL-TWX merger announcement. Excite@Home is no longer the only perceived strong player in the field.

And that's why if ATHM shareholders want to regain the lofty heights of last May, it isn't enough to continue along the same path, solid though it may be. Wall Street wants to see Excite@Home climb a higher mountain, instead of just scaling the current one.

Is that fair? Probably not. But that's the market.

Apple addendum

Alright, I'm man enough to admit I was wrong about Steve Jobs and his pay.

When I criticized Apple Computer (Nasdaq: AAPL) for its largesse regarding the now-permanent CEO, I operated under incorrect assumptions. I was misguided. Should have known better. I apologize. ZDII sincerely regrets the error.

I was too easy on the Apple board.

"The Jobs bonus actually isn't the most egregious CEO package around," I erroneously wrote yesterday.

Turns out it is, according to executive pay watchdog Graef "Bud" Crystal, who puts out the crystalreport.com, the online heir of The Crystal Report on Executive Compensation. Crystal, a former compensation consultant, is a frequent and vocal critic of CEO pay in general, so it's saying something when he describes Jobs' package as "just about as high as they come."

Assuming far lower-than-normal volatility for Apple stock and an option exercise in seven years -- in other words, a very conservative estimate -- under the industry standard Black-Scholes Option Pricing Model, the 10 million options given to Jobs are valued at $387 million. Using a more realistic figure for Apple's normally high volatility and assuming an option exercise on the last day of the 10-year term (usually the recommended practice, though many people cash in earlier), Black-Scholes values the Jobs options at $664 million, Crystal says.

Whether it's $387 million or $664 million, Jobs received far and away the largest single-day options grant in history, combined with the largest bonus ever in the form of his $90-million-including-taxes Gulfstream V corporate jet. Crystal cites Michael Eisner of Walt Disney (NYSE: DIS) as the previous options champ, with a 1996 grant valued at $180 million, using present value at the time.

Yesterday I made another huge mistake in suggesting Apple could instead pay Jobs with stock equal to the Black-Scholes value of his options. I always prefer stock to options, because stock gives the CEO a real stake in the company. It's a demonstration of ownership and true commitment, whereas options are just more money.

But now that I've had time to consider, I wouldn't give Jobs $387 million of stock, more like maybe a tenth of that. And really, the jet should be enough.

Averaged over the last two and a half years, the Jobs jet alone equates to $36 million annually. Among 854 chief executives studied by Crystal last year, none had combined salary and bonus of more than $14.5 million. In 1997, no one took in more than $18 million. In 1996, one executive got a bonus of $102 million, but he had to give much of it back after accounting irregularities cropped up. The 1996 runner-up took home $14 million.

"I think the Apple board just went crazy," Crystal says. "They just totally acted emotionally."

Jobs may have worked for $1 a year, but he could have profited from Apple's gains over the past two and a half years simply by buying lots of stock. He didn't and only has himself to blame. It's not a grievance that requires redress from Apple, in Crystal's view.

This isn't about jealousy over rich guys. Crystal wouldn't be critical if Apple gave Jobs $20 million cash and two million or three million options.

"He's performed well," Crystal says. "But it (10 million options and a jet) is a stunning amount ... And I do worry that this would become a precedent for the other porkers in Silicon Valley."

That's the real fear for stockholders of all publicly-traded companies. Apple shareholders might see their 700 percent returns and give Jobs a package with a theoretical value of up to $750 million, and if Apple existed in a vacuum, it wouldn't matter. Give him as much as you want, give him your first-born children, fine.

But it's like Derek Jeter getting $118 million from my favorite baseball team, the New York Yankees. The guy's a fantastic shortstop, but does that mean some bum with half Jeter's numbers deserves $59 million? You can be sure player agents are already crunching the numbers.

Using Jobs as an example for his industry, what happens when other CEOs cite $1.07-million-for-every-percent-gain as a benchmark? Imagine the CEO of a 10 percent riser requesting a $10.7 million bonus or even a mere Half Jobs rate of $5.35 million.

An extreme example, granted, but the seeds have been planted for the next stage of salary escalation. Crystal notes if the current pace keeps up, CEO compensation will eventually exceed U.S. corporate earnings.

Then we'll really see creative accounting. 22GO>