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Not Tempted by Apple, and Is Rockwell in a Hard Place?

July 28, 1998|JAMES PELTZ and MICHAEL HILTZIK

The Times today continues a new feature, Stock Exchange, in which staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Apple Computer (AAPL)

Apple close Monday: $34.44

Mike: You know what's interesting about Apple? This is a golden opportunity to buy stock in a religion.

Jim: One of the few opportunities, I believe.

Mike: And not just any religion. This one comes with its own pope and its own Grail. I'm alluding, of course, to its CEO, Steve Jobs, and its main product, the Macintosh personal computer.

Jim: This religion even has its own devil, Microsoft.

Mike: The question is whether this is the most profitable religion to invest in.

Jim: Not to me. And before we go any further, let me say I don't want to hear from any of the Apple apostles who get angry whenever someone criticizes their company.

Mike: The zealots' case, of course, rests on the assumption that the world needs a counterbalance to Microsoft. Whether you believe that's true or not, the question is whether Apple is any longer well-positioned to provide that counterbalance.

Jim: Look, let's first give Apple credit: This company was all but written off 12 to 15 months ago because PCs using Microsoft's Windows operating system were blowing the Macintosh away. But Jobs, the Apple co-founder who returned as chief executive, stopped the bleeding. He put the company back in the black and is ready to trot out some new machines. Because of that, the stock is around $35, double its price of a year ago.

Mike: But where do we go from here? In the education market, a traditional Apple stronghold, its market share has dropped by nearly half in three years, from 47% to 27%. In laptops, business and home PCs, its market share is 5% or less, which gets it lumped on most charts with "others."

Jim: Any improvement on that small base is going to look good.

Mike: Right. Apple's profit chart reminds me of how I once heard an economist describe the economy of Zaire. He said to think of it as a point on the rim of a bicycle wheel rolling downhill--periodically it's going to look as if it's moving up, but the general trend is distinctly down.

Jim: That's Apple. I just don't see the Macintosh market share growing significantly in the next few years, and you can only get so far cutting costs and reorganizing the business. It's true they are bringing out some exciting new products, including a whole line of speedy Powerbooks. And isn't there a new desktop machine on the horizon?

Mike: There is, and it's a good illustration of Apple's strengths and weaknesses. The new desktop is called the iMac, which is a version of a so-called Internet computer in that it's optimized to function as a terminal of the Internet. The iMac has gotten very respectful reviews from the computer press, in part because of its snazzy design--it comes in a very appealing teal-and-white case that will certainly set it apart physically from the dull run-of-the-mill PC.

Jim: I wasn't aware that lots of PC buyers were complaining about the color scheme of their machines. All I ever hear them talk about is processing speed, memory and whatnot.

Mike: Remember, ergonomics and design have always been a very large part of the Macintosh's appeal--including the appeal of its user interface.

Jim: English, please?

Mike: How it feels to use, and how it looks. This reflects Steve Jobs' world view, and there's no denying that as a visionary, Jobs has had a powerful and on the whole positive effect on the computer industry. But as a leader at Apple, he's been something more of a mixed blessing. As inspiring as he can be, he's never had to run a major company, particularly one in a crisis, without strong adult supervision around.

Jim: He tried, but Apple threw him out in the mid-1980s when it got to be a major company.

Mike: Now here's the iMac. It's got a lot of features that are well ahead of the market, but it lacks some that I think are indispensable in the market. For example, it comes without a floppy disk drive, which means you have to buy an add-on at additional cost that makes the iMac uncompetitive in price with standard PCs.

Jim: This is quintessential Jobs. The product is visionary, but it requires that the customer catch up to Steve Jobs' vision.

Mike: That's so. Given the commoditization of the PC market, I don't see how the iMac is going to carry Apple beyond the first couple of quarters after it goes on sale. This is a big reconstruction job, and I think that the three quarters of profits that we've seen recently are only the first steps in what could be a very, very tough slog.

Rockwell (ROK)

Rockwell close Monday: $41.56

Jim: Mike, numerous readers asked us to review Rockwell International, and I can see why. Once a leading player in aerospace, the company has hit bottom lately and taken its investors along for the ride.

Mike: This is a case of the incredible shrinking company, isn't it?

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