Martha Stewart’s Stock Is Not a Good Thing, and What Ails Humana

Martha Stewart Living Omnimedia (MSO)

Jim: Up first today is a new stock that encompasses the growing empire of Martha Stewart, the nation’s most famous homemaker. Now, based on the women I’ve talked to....

Mike: Tread carefully here, Jim.

Jim: I am, believe me. Anyway, it seems no one is neutral about Martha Stewart and her seemingly endless knowledge of how to do everything around the house, in the garden, on the stove and in the living room in order to enjoy the good life. And she makes it look so effortless. But everyone either seems to love her or hate her.

Mike: That’s a testament, I believe, to her sheer ubiquitousness. There’s the television show, the magazine, her Web site.

Jim: And now she’s the subject of another medium: Wall Street analysts’ reports on her newly minted company, Martha Stewart Living Omnimedia. What a mouthful of a name, by the way.

Mike: She’s omnivorous! Martha went public in October at $18 a share. So here’s the question before us: Is her IPO worth owning? Or is it nothing more than primroses and potpourri that can lose their scent pretty fast?

Jim: Sounds as if you took the words right out of Martha’s mouth.

Mike: By the way, that was a red-letter day when her company went public, because she shared IPO honors that day with Stone Cold Steve Austin.

Jim: Yep, the World Wrest-ling Federation went public the same day, and it was 10 rounds, winner-take-all.

Mike: And she won that day, because her stock jumped higher on a percentage basis than the WWF’s.

Jim: Martha’s stock got as high as $39.75 a share. But it’s been sliding ever since and now trades in the low 20s.

Mike: Sort of like the air seeping out of an undercooked souffle.

Jim: Yeah, sort of. By the way, I noticed that Martha also made Mr. Blackwell’s annual list of the 10 worst-dressed women.

Mike: With some unkind words, of course. Shall we just let sleeping dogs lie?

Jim: Something about her being the centerfold for the Farmers’ Almanac. But listen up, Mr. Blackwell: That IPO made Martha a billionaire. Who’s got the last laugh?

Mike: Anyway, the subject here is not Martha but Martha Inc. Now let me set forth my biggest problem with this stock.

Jim: You have only one?

Mike: Well, it’s a big problem. If you look at a pie chart of her company’s revenue, you’ll see about 65% comes from publishing, 10% from merchandising, and so on. I dispute this. I say 100% of the revenue comes from Martha Stewart. She is the whole ballgame.

Jim: I love how you worked “pie” into that.

Mike: And not to be crass about it, but she is as important to this company as John F. Kennedy Jr. was to the success of George magazine. I’m not being flip here. The fact is, the name means a lot, and you have to be concerned about what happens if Martha, who’s about 58, ever goes away.

Jim: Or if that pie gets too big for even her to manage.

Mike: Of course, the company argues that it’s offering advice, information, entertainment and products in various forms that will be popular no matter who’s running the company. To which I say baloney.

Jim: Why?

Mike: Because a lot of what this company offers is fungible. That is, if you take Martha herself out of the picture, much of that stuff is similar, if not identical, to what you’ll find from Good Housekeeping or House & Garden or the other outfits in publishing, the Internet and so forth that cover the same topics.

Jim: Even with Martha in the picture, this company isn’t perfect--much as her detractors would like to think.

Mike: That’s right. For example, her hourlong TV show has suffered declining ratings recently. So maybe she doesn’t have the magic touch with everything.

Jim: Let’s give her some credit, though. Her company is profitable, though for the nine months ended Sept. 30, earnings dropped from a year earlier despite a 25% gain in revenue.

Mike: That’s because she’s been plowing a lot of cash into her Web site and other ventures. But forecasts are for the company’s earnings to start growing again.

Jim: Correct. But here’s my problem with the stock: Even in the low 20s, it’s selling for 115 times the company’s expected per-share profit for ’99. That’s extremely dear, and I simply don’t see Martha Stewart’s company growing fast enough to justify that price.

Humana (HUM)

Mike: I have a theory about Humana, Jim.

Jim: So do I, but go ahead.

Mike: I believe Humana is counting on getting plenty of business for its hospitals and HMOs by making its own shareholders sick.

Jim: I can’t think of a more bloodied and bruised group.

Mike: This company has a stock chart that looks like the medical record of a tuberculosis patient. It’s just a steady decline--like consumptives in the old days. They never get better. They just go up to the magic mountain and die of nosebleeds.

Jim: Obviously you’re not a fan of this company. I’m not either, except maybe in one respect, which I’ll get to in a minute. What is astonishing is that Humana is one of the largest HMOs in the country. It has something like 6 million members, and it has done everything wrong that you can think of.

Mike: And some that I hadn’t been able to think of until I started reading up.

Jim: And all of this is against a horrible backdrop for the HMO industry in general. If ever there was a time when you should be on your toes as the rest of your industry is going to hell, this is it. You have rising health-care costs. The industry has been hit hard by federal and state cuts in its Medicaid and Medicare reimbursement levels. Then, to make things even worse in Humana’s case, it made a big acquisition last year of another medical outfit, Physician Corp. of America. That merger has not gone well.

Mike: Humana, like other HMOs, appears to be getting higher premiums lately. On the other hand, the overhang of medical expenses for companies like this is huge. There is unprecedented hostility to the kind of medical-cost management that these guys shoved down everybody’s throat. You know--you can’t have these tests, you can’t see this specialist, and so on.

Jim: Right.

Mike: Of course, the industry managed costs in about as ham-handed a way as possible. You would have thought that Bill Gates was their customer-service consultant.

Jim: So now we’re talking about not only legislation affecting their business, but also litigation, with some potential class-action suits against the industry, alleging in some cases fraud and racketeering.

Mike: And now companies in the HMO business are already backing off and are poising themselves to swallow larger costs in order to get the country behind them again. But the economics of this business are just completely out of whack. And we’d be happier about this situation if we were confident that companies like Humana were in the hands of pros.

Jim: Exactly. But Humana isn’t, and that came to a head last spring. Quarter after quarter, Humana had told Wall Street that its earnings were going to come up short, so its chief executive, Gregory Wolf, left in April.

Mike: Humana still hasn’t found a permanent replacement, and the credibility of this company on the Street is absolutely nil.

Jim: That’s why the stock has dropped more than 55% in the last 12 months. Don’t forget: This is a $10-billion company whose stock now trades for around $8 a share. And that’s only 13 times its estimated earnings this year. That’s not even half of the general market’s price-to-earnings multiple.

Mike: I suppose you could make the argument that Humana has been down so long that there’s no place to go but up. But you can also stay on life support indefinitely.

Jim: I wouldn’t buy this stock except under one circumstance, and that would be as a takeover-speculation play. Let’s face it: This

is a company with a huge number of patients that is selling for dirt right now. Its executive suite is in turmoil--though there are some other major health-care operators out there that aren’t run very well either.

Mike: But their executives get paid as if they were run pretty well. Wolf got more than $1.5 million last year, before he resigned. I have real questions about what this business is going to look like going forward. It may get better over the next few years, or it may not. The basic problem is that nobody really knows how health care is going to be structured. This industry is staring into the abyss right now.

Jim: Although there’s one positive: Humana’s insiders have been buying up its own stock pretty heavily.

Mike: But that’s one plus in an absolute tidal wave of bad signs.

Write or e-mail james.peltz@latimes

.com or michael.hiltzik@latimes.com with a stock you would like to see discussed in this column.

Martha Stewart Living Omnimedia

Monday: $22.00

Humana

Monday: $7.94