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Wall Street, California | STOCK EXCHANGE

Checking Out Chase but Avoiding Planet Hollywood's Orbit

September 22, 1998|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

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Chase Manhattan (CMB)

Chase Manhattan Monday: $46.81

Jim: This is the nation's biggest banking company, Mike, and I'll say right off that this is a great stock, even though bank stocks have taken a drubbing lately.

Mike: I'd buy it, too, and one reason is because the banks are so beaten up.

Jim: Which makes Chase a bargain.

Mike: Exactly. In fact, every time I look at Chase and see it's trading for only 10 or so times earnings, it gives me heart that we're nearing a bottom in the stock market's slump. I find it very hard to believe that a stock of this caliber should sell that low.

Jim: Chase, with about $385 billion in assets, was formed by the 1996 merger of the old Chase Manhattan and Chemical banks, both based in New York. To see why Chase is well run, just look at its return on average assets. That's the benchmark in banking, because it measures how profitably a bank is using the assets at its disposal. If it's 1% or higher, you're earning your keep.

Mike: What is it for Chase?

Jim: It's been running slightly above 1% for nearly two years now, and it keeps improving, which is especially notable considering that Chase has been digesting Chemical during that time--not an easy task.

Mike: Particularly given the pain and suffering that occurs when you merge two cultures. So why has Chase been slugged so badly with the rest of the banks?

Jim: The banks are getting creamed because they have loans and other exposure to Asia, Russia and Latin America, whose economies are rapidly becoming basket cases. But this is a huge overreaction by Wall Street, which is probably due to two things: The rest of the stock market is falling sharply as well, and many people vividly recall how big banks took it on the chin in the 1980s with bad loans to South America and other locales.

Mike: But the situation today is quite different.

Jim: Absolutely.

Mike: The exposure isn't as bad this time, and it's being better managed by the banks. Chase has been steadily reducing its foreign credit exposure, and even though the exposure it has left could pull its earnings down, it isn't as bad as the stock market would have you think.

Jim: Oddly, this all seems lost on investors. Chase is selling in the mid-40s, so that's a 38% drop since June 30! They've wiped out almost $25 billion of Chase's market value. The devastation has been even worse at Chase's cross-town rival, Citicorp.

Mike: Crazy. But that overreaction will end soon. On top of that, we're now facing the prospect of an interest-rate cut by the Federal Reserve, and possibly a coordinated round of cuts by the industrial world. Japan may have started the round with its own recent rate cut.

Jim: People are expecting lower interest rates to help those foreign economies get back on their feet. Which would give the bank stocks a lift, both because a rebound in those economies would ease the banks' credit risks there, and because lower rates would simply cut their cost of doing business.

Mike: Right. The bad news is already in many of these stocks, and any surprises from here are going to be on the upside.

Jim: I'm not saying Chase's exposure overseas is a nonissue. Remember, that's why banks charge interest--for the risk of lending their money. There's plenty of risk it will get burned by bad loans. But overall Chase is a solid stock in any portfolio, and when rates do come down further, Chase will be rewarded for being well-managed and profitable despite its lumbering size.

Mike: Agreed. There are some banks I wouldn't touch because their record is frightful, but Chase isn't one of them. Chase domestically is top-notch, and it's going to benefit from whatever remedial actions the industrial nations take overseas.

Jim: BUY

Mike: BUY

Planet Hollywood International (PHL)

Planet Hollywood Monday: $4.06

Jim: Going from the penthouse to the cellar, we move from Chase to Planet Hollywood, the glitzy restaurant chain started by Arnold Schwarzenegger, Sylvestor Stallone, Bruce Willis and others.

Mike: Jim, investing in this mess is like being on the business end of a Schwarzenegger pasting. Hasta la vista, baby.

Jim: All that glamour helped this stock win Wall Street's favor when it went public in '96. But guess what? The business and the stock have tanked, even though Planet Hollywood now has nearly 90 restaurants, about half of which are franchised.

Mike: That's part of the problem. If there was only one Planet Hollywood restaurant--say in Hollywood, just to pick a location at random--it would be a huge success and a perennial tourist attraction. Then if you got a T-shirt or a leather jacket from Planet Hollywood, it would be pretty cool.

Jim: Which is why there aren't 90 Russian Tea Rooms, I suppose.

Mike: That's right. All that movie bric-a-brac that makes Planet Hollywood what it is would be pretty top shelf.

Jim: You mean it isn't now?

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