MP3.com Sounds Questionable; Pep Boys Stock Stuck in Low Gear
MP3.com (MPPP)
Jim: Don’t buy
Mike: Don’t buy
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Mike: To me, MP3.com evokes the name of Joseph Schumpeter, the noted economist who embraced the notion of “creative destruction.”
Jim: I’m familiar with him and his notion, but when it comes to what this has to do with MP3.com, I have no idea what you’re talking about.
Mike: As you know, Jim, Schumpeter’s doctrine is that as companies age they die off or get knocked off by being taken over. Either way, the idea is that stronger companies or better technologies succeed them.
Jim: Right, whenever there’s a merger wave in corporate America, Mr. Schumpeter’s tenets surface yet again.
Mike: So, MP3.com distributes music according to a new technology that seems destined to knock off the old business model. That’s the model in which recording labels sell records or CDs through retailers and charge people an arm and a leg for the physical item.
Jim: I’m happy someone’s trying to address that rip-off.
Mike: Part of that arm and leg actually makes it to the artist. Anyway, what Schumpeter may or may not have pointed out is that while the destruction is constantly taking place, the businesses being created can take a while to get profitable.
Jim: Hang on, I’m still catching up with you. Your point?
Mike: San Diego-based MP3.com is a harbinger of a new age, a new creation that will supplant what’s been destroyed in recorded music. But that doesn’t mean it’s going to make any money from it.
Jim: Nor does it mean it’s a good stock.
Mike: Exactly right. This stock went public in July at $28 a share, and recently it was trading for less than half that. Last week it got a big bump up because it settled some lawsuits filed by record labels, but it’s still under $18.
Jim: Talk about destruction.
Mike: I still wouldn’t buy the shares.
Jim: Me, neither. First, though, some of our readers no doubt have heard of the MP3 format in which you can download music from the Internet. But there’s a difference between that and this company, right?
Mike: Yes. The MP3 format was not invented by MP3.com, it was set forth by the Moving Picture Experts Group of the International Standards Organization, an international body that sets technical standards in countless fields. Now even if you’re distributing digitized music, you have to compress the data first so it doesn’t take hours to download to your computer or hours to transmit. And the latest and most successful format for audio today is MP3.
Jim: Which is where MP3.com--the company--comes in.
Mike: Right, MP3.com distributes MP3 files. These are essentially recorded songs, in this case recorded by largely unknown bands, that are available largely for free for anyone who signs onto the MP3.com Web site with a computer and downloads them. Then they can play the songs over their computer sound system or even record them on a compact disc if they have a CD recorder.
Jim: Or on an MP3 player, some of which look like transistor radios, and some of which are as small as fountain pens. But here’s the rub: MP3.com expects to make money long-term off the advertising on its Web site. But for now, the company isn’t profitable, has several competitors and, as you said, is distributing mostly unknown bands. That’s because the big record labels sued MP3.com and others for alleged copyright infringement.
Mike: For allegedly fomenting piracy.
Jim: A federal judge agreed with the labels, which prompted MP3.com and others to voluntarily stop carrying the big names of music.
Mike: But MP3.com still has the latest offerings from those great bands Tri-State Killing Spree and L.A. Car Pool.
Jim: But last week MP3.com settled some of those suits--and agreed to pay some hefty licensing fees--in order to start carrying the big names of music again. That sent the stock soaring nearly 50% in one day alone.
Mike: Great. So it traded up to $19. That’s still way under its IPO price. And by the way, on the day of its IPO, the stock actually soared above $100 before starting its long slide.
Jim: Well, afraid I’m going to side with singer Alanis Morissette on this one. She recently alerted securities regulators that she planned to sell a big chunk of her MP3.com holdings. Who can blame her? Talk about a jagged little pill to swallow.
Mike: Right. MP3.com is a great service if you’re a college student, because college students have no life. But the moment they actually have to earn bread for a living or have families, they discover there are a lot of demands on their time besides wading through MP3.com’s list of 67,000 artists.
Jim: So you don’t like the stock, either?
Mike: I do not. And it’s not only because of MP3.com’s financial situation, but because it’s totally unclear how the recorded-music industry is going to figure out what digital technology and distribution to embrace, how it will adapt to it so that the record labels still make money, and whether MP3.com will still be around when all that is settled.
Pep Boys--Manny, Moe & Jack (PBY)
Jim: Don’t buy
Mike: Don’t buy
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Jim: I’ve never understood why this company insists on keeping those first names of the Pep Boys’ founders, because it’s such a mouthful.
Mike: Never mind that. Take a look at the chart of Pep Boys’ stock. If you think of it as the route being taken by a car, that car would be rolling down the hill so fast it would need a brake job--which it can get from Pep Boys. This stock has plunged more than 60% in the past 12 months.
Jim: Too bad, because Pep Boys has one of the most familiar brand names in auto parts and servicing. Based in Philadelphia, it’s been around since 1921 and now has more than 660 stores in 37 states, many in California. But this chain has been struggling for the past three years.
Mike: Starting at the top line, where its revenue growth is anemic.
Jim: It gets worse at the bottom line. This company peaked in 1996, and its earnings haven’t come close to matching that year’s profit ever since.
Mike: So what’s the problem?
Jim: For starters, Pep Boys is in a fiercely competitive market. There are not only such rivals as AutoZone and CSK Auto, which owns Kragen Auto Parts among others, but also the mass-merchandisers such as Wal-Mart Stores and Sears, Roebuck that are giving Pep Boys trouble.
Mike: Pep Boys has faced that competition for years, yet it’s making no headway. It’s just scraping the pavement with its undercarriage, so to speak. I mean, this is one of the most uninspiring stocks we’ve seen in some time.
Jim: Afraid you’re right, Mike. In this year’s first quarter, Pep Boys’ merchandise sales in its stores open at least a year--that is, excluding newly opened outlets--fell 0.3% from a year earlier. Its “same-store” service revenue rose 4.6%, but that’s not enough to get investors excited. So Pep Boys is rolling out some other new programs.
Mike: Such as?
Jim: One is a program for people thinking of buying used cars, and I like the idea. If there’s a car you’re pondering, you can bring it to Pep Boys and its service folks will check it over completely to see whether it’s a lemon or not. Some auto dealers and others do that, but it’s a smart way to--excuse the phrase--drive more traffic into its service bays.
Mike: It also has some new program to sell more accessories for sport-utility vehicles, because they’re so popular. But what auto parts chain won’t try to do that? I guess what really bothers me is that, in a period when retailing overall has been so strong, this chain is struggling to stay even.
Jim: To me, it’s a cost problem. Whenever you have revenues at least holding steady--they were about $2.4 billion in the company’s fiscal year ended Jan. 31--but earnings are disappearing, it’s a cost problem. And sure enough, analysts at Merrill Lynch and elsewhere have noted that Pep Boys’ distribution and overhead costs have been going up, in good part because of higher payroll expenses.
Mike: Because it’s getting harder to find good help at places like an auto-parts store, and you’ve got to pay up for it.
Jim: The signs point to Pep Boys being a bloated company with minimal revenue growth--clearly that’s what Wall Street sees too--and there’s nothing to indicate that situation will soon change dramatically. So it’s hard to see why the stock is a buy, especially when you realize that Pep Boys has been fighting this problem for more than three years.
Mike: The company is struggling and it’s very hard to say at this point whether its initiatives are enough. For now, this stock is a klunker.
Jim: That’s not new, either. Pep Boys’ stock has trailed the performance of the broader market for the past four years, and this company is long overdue for an overhaul.
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For the Record
Public Storage (PSA)
Jim: By the way, Mike, we should clarify a couple of points we made about Public Storage back on May 16.
Mike: Right. We remarked then that PSA’s co-founder, B. Wayne Hughes, takes management fees from the company. In fact he hasn’t done so since 1995, when he merged together several companies he controlled, including the company that paid those fees and the company that received them--though today, as PSA’s filings with the government disclose, he and members of his family still do business with PSA as private investors and businessmen. We also suggested that PSA has done worse than REITs in general; in fact it turns out PSA stock has pretty much tracked the REIT sector, which as we said has not done well in the last couple of years relative to the broad market.
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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment. Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.
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).
