Crisis-Induced Profits: The Blueprint For Turning Calamity Into Opportunity
by Robert Williams, Publisher
Thursday, May 13, 2010: Issue #1259
Crisis is bad. (Just ask Lehman Brothers.)
Crisis is good. (Just ask Nomura Holdings.)
So which assertion is correct? Both of them.
Borne out of the financial crisis, one – Lehman Brothers (OTC: LEHMQ.PK) – sits in Chapter 11 as the biggest bankruptcy case in history with over $600 billion in assets.
The other – Nomura (NYSE: NMR), an otherwise insignificant Japanese brokerage house – traded more shares on the London Stock Exchange than any firm in the world last summer.
You see, Nomura nicely managed its exposure to toxic loans by falling on its sword early…
- It bailed out of the U.S. residential mortgage market altogether, slashing its exposure from $2.3 billion in the summer of 2007 to just $119 million by that fall.
- When the financial crisis hit full-tilt, it shrewdly anted up $200 million for Lehman Brothers’ European, Middle Eastern and Asian operations. (Lehman’s European division only cost $2… and that’s not a typo!)
On the merit of Lehman’s former operations, Nomura recently announced a $531 million profit through the first three quarters of its fiscal year. Not bad for a $6.50 stock.
And with little fanfare, Nomura may have achieved one of business’ greatest feats – turning crisis into a “useful interruption.”
I realize that no one invites crisis into their life. But history has shown that it can often help companies (and economies) in the long run.
The key lies in the ability to respond quickly and constructively during a crisis, so you can turn a calamity into opportunity.
Let me give you an example of how this has worked in reality. I’ll then weigh in on a few “headliners” currently in crisis mode – and tell you which is most likely to emerge stronger.
Turning Trouble into Triumph
Harley-Davidson’s (NYSE: HOG) resurgence from the brink of extinction serves as a fitting example of how to turn trouble into triumph. I chose the firm because the outcome is fully realized and has produced measurable results.
In the 1950s, Harley dominated the U.S. motorcycle market, destroying any and all comers to its throne.
But with success came complacency. And in the 1960s, Harley got caught with its pants down when a Japanese upstart – Honda – invaded the market with a better-built, lightweight motorcycle that appealed to a new genre of customer.
The one-time king shockingly saw its market share plunge from 70% to less than 5%.
Talk about crisis. Few companies have ever experienced (and survived) such a shattering of market share. Worse yet, by the 1970s, the Harley brand itself was the butt of jokes among bikers: “If you’re buying a Harley, you’d better buy two – one for the spare parts,” they’d say. Ouch.
And building a lousy bike wasn’t Harley’s only issue. The company also had an image problem, appearing to cater exclusively to tattoo-covered, leather-clad bikers.
But the beauty of a crisis is that it forces the slate to be wiped clean. You start with what’s working and build upward from there. (It’s not easy. Many companies in crisis never figure it out.)
In that sense, Harley’s dire situation was enviable. Although it was losing nearly every lightweight bike sale to overseas competitors, its customer base was extraordinarily loyal. Company research showed that 92% of its customers remained with Harley.
The solution?
Get Your Motor Runnin’
Harley made a bold strategic decision: Let Honda have the lightweight market.
Instead, the company focused on two goals:
- Manufacture an irresistibly sound product for heavy-bike enthusiasts.
- Redefine the stereotypical image of a bike enthusiast.
The latter was the genius stroke. By the 1980s, the inflated price of a Harley-Davidson motorcycle was no bother to its new clientele – bankers, doctors and lawyers. And by 1993, Harley was once again one of the most sought-after brands in the world – and couldn’t keep up with the whirlwind of demand.
Although its showrooms were empty (i.e. – sold out), customers showed up anyway. The waiting time for new bikes was longer than six months. And used-bike prices trumped the ones rolling off the assembly line.
Today, Harley-Davidson has again achieved iconic status. Sure, it faces new challenges brought forth by the financial crisis and tighter consumer spending. But the point is this: The crisis that Harley endured ushered in a Golden Age of sorts for the company – one that it’s still enjoying.
And speaking of Golden Ages, are we witnessing the end of a few right now?
Three Crisis-Hit Heavyweights in Full-On Damage Control Mode
Emerging from crisis requires managers to act fast. They need to transition quickly from damage control mode to rolling out a fresh plan of action. Nomura executed this gameplan perfectly.
After all, the longer a company spends on damage control, the less likely it is to recover.
And when it comes to damage control, there are three heavyweights in crisis mode at the moment…
So which one will emerge stronger?
And the Winner Is…
Toyota: It took forever for Toyota’s CEO, Akio Toyado, to finally confess that the carmaker’s growth outpaced its ability to control quality: “These priorities became confused and we were not able to stop, think and make improvements as much as we were able to before.”
He also hinted that bureaucratic red tape was the reason that a recall in the United States didn’t occur sooner.
We all hate excuses, so Toyota’s out of the running.
BP: Estimates on how much the Gulf oil spill will cost vary widely, ranging from $2 billion to $14 billion (or higher). The two greatest variables in determining the final price tag center on how fast BP can seal the well and how much oil washes ashore.
Worse yet, as my colleague, Marc Lichtenfeld, pointed out last Wednesday, BP doesn’t carry insurance that would cover the spill, because it self-insures. Ugh.
As it stands now, BP management has publicly stated that it intends to pay all “legitimate claims,” despite a federal law that caps its economic liabilities at $75 million.
Either way, the situation is dire for a company that’s a perennial laggard in the oil and gas space anyway. During the greatest “bull run” in history for oil (2006 to mid-2008), the company returned only 15% to shareholders.
What I’m saying is that BP was no superstar even before the spill. So let’s pass here, too.
That leaves us with Goldman.
Goldman: The complexity of the instruments used to commit the alleged fraud – collateralized debt obligations – actually work in the company’s favor.
So, too, does the fact that these financial weapons of mass destruction – whose value was tied to credit default swaps – were barely regulated.
This storyline has other unsympathetic characters, too, namely the ratings agencies.
If the SEC wins its case, it will have exposed just one rotten apple among a basket of many.
So while we’ll likely see more transparency from the big Wall Street firms over the coming years, for better or worse, none of it will stop Goldman – the most profitable company in Wall Street history – from continuing to thrive.
Ahead of the tape,
Robert Williams
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3 Responses to “Crisis-Induced Profits: The Blueprint For Turning Calamity Into Opportunity”
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In addition to once being a full-time trader of equities and equity derivatives, Robert Williams has served as the lead financial analyst for a Forbes top-50 private corporation and an analyst for the endowment of a major academic institution. He's also been profiled in such books as Trade with Passion and Purpose and Alexander Green's The Secret of Shelter Island. 
Excellent article… so… Mr. Williams, how do we play Goldman??? a LEAPS call, or naked puts to a comfortable price… a no-cost spread ?? Do you have any idea? May be I should ask Karim?
Regards,
Frederic
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Sorry,Goldman Sachs isn’t for me. I’d only have a handful of shares at that price, so I’d only make a few bucks if it went up. My rule is don’t pay over $50 a share for anything.
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You forgot to mention one thing, that to save Harley Davidson from extinction, the Reagan administration in 1981 had imposed a tariff of 150% on Japanese bikes like Kawasaki and Honda. It was a protectionist move justified on the grounds of saving an Industry.
I may also add that the same year, a voluntary quota of 20% of market share was imposed on import of Japanese cars which resulted in a six month waiting list for Japanese cars. I wonder whether the omission of this fact was intentional?
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