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Public companies' shares find nowhere to hide

Rochester Business Journal
July 23, 2010

The Rochester area's top 25 publicly traded companies have lost roughly a quarter of their collective value since the market collapse began some 21 months ago-less than the 28 percent drop in the Dow Jones Industrial Average, but no less painful for shareholders.

"This disaster, this downdraft, really took down just about everything," said Dennis Lohouse, a principal at Forte Capital LLC in Brighton. "There was no place to hide. Even stocks that are usually pretty good in recessions, like Procter & Gamble, that was no place to hide either."

Stock prices for 19 of the top 25 homegrown public companies have declined since Oct. 9, 2007. Shares of Rochester's erstwhile showcase public companies, Eastman Kodak Co. and Xerox Corp., have dropped substantially, Kodak by some 80 percent and Xerox by nearly 50 percent.

"Xerox stock was doing a little better and has retreated," Lohouse said. "Much of that is based on the global economy. Xerox is very economically sensitive. Even though the company has done the right things, they can't escape what's going on in the broader market.

"Kodak over the last two and a half years has gotten hit very hard. For me, that's just more of the same but illustrates a point I've made about them for many years: They've become extremely sensitive to consumer spending and economic trends, much more so than they ever were before. The market for digital products in general declined because discretionary income was declining."

Shares of Paychex Inc., which ranks first on the RBJ 75 list of public companies based on 2009 net income, have lost roughly 30 percent of their value since the Dow hit its high.

"Paychex, as you would expect in an environment where payrolls are declining and small businesses are either going out of business or simply cutting back, it's difficult for their business as well," Lohouse said.

Of the six stocks that have gained ground during the downturn, the most dramatic showing belongs to Monro Muffler Brake Inc., whose shares have climbed some 70 percent. The popular explanation is that automobile owners are trying to preserve cash by maintaining their vehicles instead of buying new.

Monro chairman and CEO Robert Gross agrees, to a degree.

"For starters, the stock over the last 10 years is up 1,000 percent," Gross said, "so it's not a new phenomenon that came with the recession. Our comparable-store sales are up for nine straight years.

"But things accelerated to our advantage when the economy went in the tank. That obviously means people aren't buying new cars."

Sales of new cars were in the range of 16 million annually for six straight years earlier in this decade, Gross noted. Sales dropped to 13 million in 2008 and 10 million in 2009. Projections for 2010 call for 11.5 million.

"The average age of the fleet in the country is getting older," he said. "A car with 120,000 miles on it is going to need more work than a car with 30,000 miles on it. But it's cheaper to put $1,000 or $1,500 a year into maintaining a vehicle than to payments to buy a new vehicle, which depreciates the minute you drive it off the lot."

The escalation of Monro stock involves more than the decline in sales of new cars, Gross said.

"We're in a high-service, low-trust business," he said. "Forty-five percent of our customers just don't want to get ripped off. The bar for good customer service in our industry is not set that high.

"We're a company-operated store. We don't have any franchises. We can invest in training our people."

Monro also provides good benefits for its workers, Gross said.

"We have less-transient employees," he noted. "Our store managers' pay is 80 percent salary, one of the highest in the industry, so our guys are not motivated to do bad things to get the customer in. Our company is healthy. We don't have to sell a brake job to someone six months before they're going to need it because we need cash."

Monro's stock price has no impact on how its business is run, Gross added.

"It helps us recruit people because we're one of the few companies that gives stock options all the way down to our store managers," he said. "We want them to feel like owners. Those customers are their customers. I can do everything right, sitting in my office, but it's the guys that see the customers every day that are Monro.

"If we do a better job than everybody else taking care of the customers, and we do a better job of taking care of our employees, the stock price will take care of itself. So far, that's served us very well."

Shares of Seneca Foods Corp., Financial Institutions Inc. and rental management firm Home Properties Inc. have been up slightly during the financial storm. Two other local stocks, IEC Electronics Corp. and Transcat Inc., have increased in value but are still trading well below $10.

Until recently, Home Properties stock had been up by 5 percent or more since the Dow peak and had flirted with $50 a share.

"The real estate they're involved in is perceived to be pretty high-quality and was not really subject to the same kind of stresses that retail housing or consumer housing have had," Lohouse said. "If you were a builder or a mortgage provider, any of those retail pieces got hit very hard.

"And there has been a great demand for yield in securities. Dividend yield or income yield has been valuable to investors who are looking for rent on their money. A security like Home Properties provides that."

The recession was largely triggered by the subprime mortgage crisis and the bursting of the housing bubble. That, in turn, spawned a credit crisis in the banking and financial services sectors.

"It seems like where you get in trouble with credit is lending outside of your footprint, lending outside of your expertise, and syndicated lending," said Robert Bolton, managing director at Mendon Capital Advisors Corp.

"The bank management teams that stuck to their backyard and stuck to their product lines and revenue streams where they maintained an expertise are the guys that avoided a lot of blowups."

For Paetec Holding Corp., the timing of the recession was a double blow to the gut.

On Oct. 16, 2007, one week after the Dow's high, Chairman and CEO Arunas Chesonis joined now-disgraced Gov. Eliot Spitzer at Midtown Plaza to announce his company's plan to move to the downtown location after Spitzer said the state would spend $55 million to redevelop the property.

The stock was at $12.57 the week before the highly publicized news conference and has dropped some 70 percent to the $3.50 range recently. Its 52-week range has been from $2.30 to $5.30.

"When you have public shareholders, you have a responsibility to create value for them," Chesonis said. "In this country, many of us tend to be more short-term investors than longer-term investors, so people want to see stock appreciation in three months, six months or 12 months as opposed to more than a couple of years.

"That's the challenge, to balance the long-term investment in the business with short-term results."

The stock's downward movement will have no direct impact on Paetec's plan to move its headquarters from Perinton to the city, Chesonis said.

"I think the shareholders would get nervous if you were going to pay a significant premium to go downtown, because it's their money," he said.

The move will be a positive, "as long as you're not spending more money, and even saving some money and building equity by owning a building and being all under one roof in a high-profile place like downtown," Chesonis said.

Paetec became a publicly traded company on March 1, 2007, after merging with US LEC Corp. Its shares briefly surpassed $20 on the first day after opening at $14.30, then fell to the $10 range.

The company has had the same kinds of problems as most others during a recession that many are calling the country's worst since the Great Depression.

"Everyone was trying to cover all their cash needs," Chesonis said. "Our stock is not that well traded. It doesn't have that high a market cap. One person wanting to sell a million shares can really lower the effective stock price.

"When you get good momentum, it rockets up. When you get bad momentum, it can go down pretty fast. It was pretty much tied to the general economy and what was happening to the shareholders and all their other investments." 

7/23/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail

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