These dinosaur companies are too big NOT to fail

 

When Google reorganized in the spring of 2015, becoming Alphabet (GOOGL), CEO Larry Page made an observation that most of us involved in the investment game have had cause to make at one time or another. Companies have often been worth $200, $300, and even $400 billion. A small but considerable number have even passed the $500 billion mark. But few ever get much further than that. As for the $1 trillion line, only one publicly traded company, PetroChina, has ever crossed it, and that brief sojourn in now considered an aberration. No company has yet done it on American markets.

It has happened too many times for it to be a coincidence; when a company is so large as to be worth half a trillion dollars, if not before then, it begins to crush itself with its own weight. In practical terms, companies become difficult to manage beyond a certain size, and that opens the door to waste and corruption. They also can’t possibly be as agile as a smaller companies. Finally, they simply run out of potential customers, as there are only so many people, and only a fraction of them have any money to speak of.

Today, I list a few companies that have drifted into this monstrous death spiral, this elephant’s graveyard, if you will. These will not necessarily be the very biggest companies—I won’t be picking on Apple (AAPL) today—or the most obviously in trouble, with, perhaps, one exception. As always, remember to consider these ideas just that, ideas, and do your own research before making any investment decision.

Visa (V)

The story here is not what you might think, and certainly not a result of the increasing acceptance of mobile payments, as Visa has found its way into that game. The problem is twofold. First, Visa gets nearly all its revenue from service fees, data processing fees, and international transaction fees, and the margin on each of these sources is dropping due to increased competition. That is a trend that will almost certainly continue, and Visa can’t counter it by taking on incrementally more business because there’s no part of the world that has money that doesn’t already have access to electronic payment. This is why, despite Visa’s rising revenue and apparently successful transition into mobile technology, its P/E of 35 is far too high.

The second problem is that Visa inked a deal to acquire Visa Europe only days before the “Brexit” vote, the surprising result of which will drastically complicate European financial transactions for no one knows how long. No doubt Visa was nearly as remorseful over acquiring Visa Europe as the British themselves were at having voted themselves out of the European Union.

V

Chart courtesy of www.stockcharts.com

Baidu (BIDU)

Baidu, often described as the Chinese Google, has enjoyed rapid growth in recent years, but the singular nature of China, being technologically advanced while closed to free information, means that success in China is unlikely to translate into success elsewhere. Baidu is apparently losing market share to smaller rival Qihoo 360 (QIHU), while even more dangerous rivals, Sohu.com (SOHU) and Tencent Holdings are making noises about getting into the search-engine game.

Baidu does business in a bottle, and the bottle has a cork on it. This is not a company that needs to be trading at 40 times its projected 2016 earnings.

BIDU

Chart courtesy of www.stockcharts.com

Pfizer (PFE)

Pfizer is one of the giants that make up “big pharma.” It’s hard game, as new drugs are expensive, risky, and time consuming to develop. Accordingly, Pfizer has chosen to grow through acquisition, having acquired Medivation (MDVN), for $14 billion in August, largely for its cancer pipeline, and Anacor Pharmaceuticals in June, primarily for an eczema treatment in its pipeline. This tactic is nothing new, as Pfizer has grown primarily by acquisition for the last fifteen years now.

And what a remarkable fifteen years it has been! PFE shares, which now trade at $33.65 were trading at a cost adjusted $41.90 in October of 2001.

It goes without saying that the more a company grows through acquisition, the less it functions as a single unit, and the more it comes to resemble a conglomerate. Also, the less the various components of the company feel loyalty towards each other and the more difficult it is to manage them. Pfizer is a case of company that staunchly refuses to learn from its own bad example.

PFE

Chart courtesy of www.stockcharts.com

Royal Dutch Shell (RDS.A)

Crude stockpiles have fallen over the last few weeks, but the majority of the recent rise in oil prices has been due to an OPEC deal the details of which are not only unknown to US investors, but as of yet undetermined by OPEC. Most big oil companies are trading at what seem to be highly optimistic valuations at present, but of these, the greatest dinosaur looks to be Royal Dutch Shell, which received 75% of its 2013 revenue from “upstream,” which means the recovery of oil, natural gas, and natural gas liquids.

Royal Dutch Shell, headquartered in the Netherlands, is so big that before the oil crash of 2014, it constituted, all by itself, the overwhelming majority of the Dutch GDP. Through aggressive expansion, (and taking on of debt), the company did more than its share to depress world hydrocarbon prices, and now finds itself trying to sell off some of its less profitable ventures, such as its operations in Nigeria. But is anyone buying?

The bottom line is that the company is over-extended. Not fatally, perhaps, but seriously. Investors should stay out until both prices and interest rates stabilize. Only then will we really know how bad the damage is.

RDS-A

Chart courtesy of www.stockcharts.com

Microsoft (MSFT)

If you recall, I did suggest that one of the companies on my list might be a bit obvious. MSFT shares have doubled in price since January of 2013. It’s been quite a run, especially when you consider that the company’s 2016 revenue has risen only 20% since 2012, while its earnings have risen only 5% over the same time period. (Microsoft has already reported results for its fiscal 2016.)

Why such activity in the stock, when the money isn’t there? Normally that would be a sign of expected strong growth, but nobody really expects Microsoft’s numbers to improve any time soon. Revenue fell 2% in 2016 and analysts think it will bounce back in 2017 by the same amount, which is not at all impressive. Then there is the slow decay of PC sales, which cuts into two of Microsoft’s biggest earners: Windows and Office. Just because it has been discussed a lot in the media doesn’t mean it has really been priced in yet—when a company has a powerful revenue stream for a long time, the Street often underestimates the threats to that income stream. That looks to be the case here.

MSFT

Chart courtesy of www.stockcharts.com

Symbols: BIDU MSFT PFE RDS.A V
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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