Thursday, September 14, 2006

CEOs in the Sweet Spot

News Analysis
September 14, 2006

Business Week Online

CEOs in the Sweet Spot

Amid a spate of high-level shakeups, these chief executives can point to five years of strong returns on their watch

Chief executives have been an embattled group lately. Bristol-Myers Squibb (BMY), Ford (F ) and Viacom (VIA , VIA.B ) each replaced their top executives in recent days. Last week, Five for the Money looked at CEOs whose corner offices could be vulnerable (see, 9/7/06, "CEOs in the Hot Seat"). This week, it's the sunnier side of the suite: CEOs basking in the glow of torrid stock performance.

It's probably no coincidence that each recent CEO shakeup came at companies with languishing stock prices. In fact, Tom Freston's departure as president and CEO at Viacom could have been linked to stock performance, some analysts say (see, 9/6/06, "What Freston's Departure Means for Viacom"). Chairman Sumner Redstone's comments suggest the "abrupt news reflects [Viacom's] lackluster share price," Standard & Poor's analyst Tuna Amobi says in a Sept. 5 note.

Of course, stock performance is hardly the only criterion of a CEO's success, but it's the one nearest and dearest to shareholders' pocketbooks. A strong multiyear track record is nice, too. Here are the five S&P 500 CEOs with more than five years on the job whose stocks have posted the biggest total returns over the past five years.

1. Steve Jobs, Apple
It's hard to imagine a list of top-performing CEOs without Steve Jobs (see BusinessWeek, 2/6/06, "Steve Jobs' Magic Kingdom"). In the late 1970s, Jobs and Apple (AAPL) co-founder Steve Wozniak paved the way for the personal computer. More recently, Jobs has presided over the launch of new products that have boosted profits and captured the media's imagination. He also sits on the board at one of the biggest media companies, Disney (DIS ).

After an ouster in the mid-1980s, Jobs rejoined Apple in 1996. Two years later, he helped rejuvenate sales with the original gumdrop-shaped iMac. In 2001, Apple unveiled the iPod music player, which has since expanded its content offerings to TV shows and, just this week, feature films (see, 9/13/06, "Apple's Latest Fruits").

Jobs polished Apple's brand image, but his emphasis on aesthetics—and easy-to-use, tightly integrated products—has also made shareholders a pretty penny. In the five years ended Sept. 12, shares posted a 53% total annualized return. Since the day before Jobs returned to Apple's corner office on Sept. 16, 1997, shares have surged a split-adjusted 1,250%, compared with a 42.8% gain for the broader S&P 500 index.

Of course, Apple hasn't always made all the right moves. In August, the company delayed filing its second-quarter earnings after disclosing that it had found stock-options "irregularities" (see, 8/17/06, "Apple's Options Overdose").

While much remains unclear about Apple's options troubles, Jobs deserves credit for righting the ship he helped launch, analysts say. "We attribute the turnaround to Apple's co-founder, Steve Jobs," says S&P analyst Richard Stice in a Sept. 6 note.

2. Lew Frankfort, Coach
Talk about a winning streak. Coach (COH) Chairman and CEO Lew Frankfort has skippered the bag designer through 17 straight quarters of double-digit growth in same-store sales, a key retail performance metric (see, 10/25/05, "For Coach, Profits Are in the Bag"). Shares posted a 49.5% total annualized return in the five years ended Sept. 12.

Slowing consumer spending hasn't been a problem for the New York-based retailer. For $200 or more, Coach's customers have so far continued to buy the company's trendy handbags and accessories even in the face of rising gas prices. Coach unveils new products every month, cultivating an upscale image while selling discounted items through its factory stores (see BusinessWeek, 11/7/05, "BW 50: Coach's Split Personality").

Frankfort has helmed Coach since November, 1995, before the company split off from Sara Lee (SLE). In 2005, he brought home annual compensation of $2 million, plus $48 million in stock options. Morningstar analyst Kimberly Picciola notes, "We don't think this compensation is egregious," given the stock's gains since going public in 2000.

The bag retailer isn't slowing down yet, some analysts say. "We think that as long as category growth in premium accessories remains strong, [Coach] will deliver on its growth plans," says JPMorgan analyst Brian Tunick, who has a neutral rating on the shares, in an Aug. 1 report. (JPMorgan (JPM ) has a non-investment banking relationship with Coach.)

3. Eli Harari, SanDisk
Success hasn't come in a flash for SanDisk (SNDK ) President and CEO Eli Harari. When the tech boom turned bust in 2001, his flash-memory outfit's share price tumbled from its March, 2000, peaks. In the past five years, though, the company's shares have posted total annualized returns of 46.9%.

Harari has helmed the Sunnyvale (Calif.)-based company since he co-founded it in 1988. While SanDisk's flash memory cards are used in digital cameras, cell phones, and USB flash drives, the company earlier this year unveiled a music player to compete with Apple's megahit iPod (see, 5/8/06, "Will SanDisk Sour Apple's Tune?").

On July 31, SanDisk also announced its $1.35 billion acquisition of Israeli firm M-Systems, which makes storage devices for computers (see, 8/1/06, "Flash Free-for-All?"). The deal drove the stock up 4% in one day.

Strong performance will likely remain more than just a memory for SanDisk, analysts say. "We see significant near-term upside and reiterate our $68 price target," says Bear Stearns (BSC ) analyst Gurinder Kalra in an Aug. 30 report. Kalra has an outperform recommendation on the stock.

4. Bob Simpson, XTO Energy
It's no secret that energy stocks have performed well in recent years. XTO Energy (XTO ), led by Chairman and CEO Bob Simpson, has stood out even among the oil-rich crowd. Shares posted a 46.5% total annualized return in the five years ended Sept. 12.

The Fort Worth (Tex.)-based oil-and-gas company has been buying productive oil fields and squeezing more out of them through technology (see BusinessWeek, 4/5/05, "BW 50: XTO Energy Profile"). Simpson co-founded the company and has served as CEO or held similar positions since 1986.

As XTO shareholders have gained, so has Simpson. Too much, some analysts say. In 2005, Simpson's pay package included $32 million in cash—an "extraordinary" sum, according to Morningstar (MORN ) analyst Eric Chenoweth. "We like to see veteran management with such a significant stake in company stock, but a number of other factors reduce our enthusiasm for this team," notes Chenoweth, who rates the stock four stars out of five but gives it a "D" grade for corporate stewardship.

Higher production guidance and lower costs bode well for future earnings, some analysts say. On July 26, S&P upgraded the stock from hold to buy, citing the company's success in two Texas energy plays.

5. Michael McCallister, Humana
Is there a CEO in the house? Six years ago, Humana (HUM ) was in critical condition, hemorrhaging red ink (see BusinessWeek, 7/12/04, "Vital Signs at Humana"). Since before Michael McCallister took over in February, 2000, the Louisville-based insurer's shares have climbed 87.2%, including a 40.1% total annualized return over the past five years.

Investors continue to like the company's prospects. On Sept. 13, shares hit a new 52-week high of $66.30. A day earlier, Jefferies (JEF ) analyst Brian Wright began coverage of the stock with a buy rating and a $75 price target, citing potential growth for Humana's private Medicare plans.

Humana's exposure to government programs could help drive continued earnings growth, analysts say. Humana has the best long-term track record in private Medicare and is the second-largest player, according to Citigroup analyst Charles Boorady, who has a buy rating on the stock. "Humana is a Medicare bellwether," Boorady says in a July 31 report. (Citigroup (C ) has an investment banking relationship with Humana and makes a market in the company's securities.)

With CEOs seemingly dropping like flies lately, a rising stock price doesn't necessarily guarantee a company chief's longevity. As these five CEOs can probably attest, though, it sure helps.

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