5 CEOs Who Should Be Fired This Year

Jul. 20, 2011 12:28 PM ETAVP, CSCO, MSFT, EBAY, JNJ15 Comments
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Investment Underground

By Larry Gellar

With news of News Corp.'s (NWS) Dow Jones CEO Les Hinton stepping down, here are five other CEOs who should be fired this year.

Cisco Systems, Inc. (CSCO): John Chambers joined Cisco as senior vice president of worldwide sales and operations in 1991. Twenty years later, he may very well be the most disliked CEO at America’s biggest companies. Earlier in his tenure, Cisco was one of the most successful companies in the world. There were even rumors that Cisco would be the first company ever to reach a market capitalization of $1 trillion. However, with shares trading for about the same amount that they were eight years ago, the company has pretty much stagnated.

A YouTube video of the CEO making duck calls may not be helping his case either. One problem that the company has been having is its indecisiveness regarding the consumer market. Cisco was actually able to make a pretty good camcorder, called the Flip, but the division was shut down recently. Acquisitions of companies like Scientific Atlanta and Linksys have also been questioned. Additionally, Cisco’s corporate structure has been perplexing to say the least; the company is well-known for at one point having almost 60 “committees of executives.” (In all fairness, Chambers recently admitted that this was a poor idea and a reorganization of the company is currently being planned).

As competitors like Hewlett-Packward (HPQ) and Juniper Networks (JNPR) creep up on Cisco, it remains to be seen whether Chambers can turn the company around. Luckily for the CEO, though, some aspects of Cisco are still quite healthy. For example, the company is currently sitting on $43.37 billion of cash. Furthermore, the company operates in an industry with seemingly unlimited growth potential; consider having a look at this diagram from Cisco’s website.

Avon Products Inc. (AVP): Andrea Jung joined this cosmetics giant in 1994 as president of the company’s product marketing division. Outside of Avon, she is frequently cited as being one of the most powerful women in the world. Numerous scandals have haunted the company since 2008, however, and the stock price has yet to recover. In fact, as recently as February of this year, the company filed with the SEC to report that the company’s investigation should be seen as a risk factor by investors.

Most of Avon’s problems revolve around charges of bribery, and the negative headlines continue as investors seek answers. Most recently, a class-action lawsuit has been filed against the company stating, “The complaint alleges that during the Class Period, defendants misled investors as to the breadth of potential violations of the Foreign Corrupt Practices Act (FCPA) allegedly perpetrated by the Company.”

Writing as an unbiased spectator, it is amazing that Jung is still the head of the company. Regardless, the company has managed to gain about $10 per share since the height of the scandal, so if nothing else Jung may be performing some miraculous damage control.

The pain is not over yet though, because even if the class-action lawsuit above is resolved favorably, there are at least three other law firms that have filed against Avon. For a company that used to never be in the headlines, look for news of these lawsuits to dominate the way this company is traded in the future. The company trades at a significantly higher P/E ratio than competitors L’Oreal SA (OTCPK:LRLCY) and Revlon (REV), so it is unlikely that there is a value play to be made even if Avon can come out of the lawsuits unscathed. Avon’s current P/E is 17.34 compared to 4.46 for L’Oreal SA and 2.74 for Revlon.

Cash flow has been negative for three of the past four quarters, so look for Avon’s earnings report on July 28 to provide more answers about the company’s future. Avon has also been negatively affected by a weak dollar, so the company may do better in the future as it adjusts to this development.

Microsoft Corporation (MSFT): Steve Ballmer’s history with Microsoft dates back to 1980 when he left Stanford Business School to join the company. Since that time, Microsoft has entered into numerous markets including operating systems, office software, video games, and digital services. After dipping into the teens a few years ago, the stock now trades in the mid-twenties.

Like Chambers at Cisco, Ballmer too has had his share of YouTube fame with this video. In all seriousness, though, MSFT stock has been beat quite handily by Apple (AAPL) and Oracle (ORCL) in the past five years. One concern that investors have is the company isn’t adequately preparing for the next waves of technology, specifically what will happen in the wireless market. Microsoft’s recent failure with its Kin family of mobile phones is one incident related to this. (It should be noted that Microsoft has had better success with its Windows Phone operating system.) There are also investors who found Microsoft’s accidental release of socl.com to be sloppy.

On the other hand, it seems more likely that the so-called accident was a completely purposeful way to stir up some excitement about the company’s future project. Regardless, it seems doubtful that Microsoft will find success with a social network of its own when it has to compete with “cooler” companies like Facebook and Google (GOOG). Video game hardware sales have been on a negative trend as of late, and it is not certain how the company will improve demand for its Xbox 360. Microsoft has been trading at a particularly low P/E ratio lately though, so it seems likely that the market is aware of these developments. Specifically, compare a P/E ratio of 10.64 for MSFT with 19.22 for ORCL and 23.21 for GOOG. Microsoft’s price-to-sales is also low – 3.25 – compared to 5.48 for GOG and 4.56 for ORCL.

eBay Inc. (EBAY): John Donahoe began working for eBay in 2005 as president of eBay Marketplaces. Since taking the role of CEO in March 2008, the stock has at times barely managed to stay above $10 a share. Needless to say, this is a far cry from its split-adjusted highs of $60 a share earlier in the decade. Recent performance has been better with shares now trading above $30, but many eBay sellers are griping about recent changes made to the auction part of its business. One concern has come in regards to the penalties that are sometimes incurred by sellers. Other sellers believe that they are virtually being forced to accept PayPal payments against their will (eBay owns PayPal).

With only approximately 25% of eBay’s revenue coming from its auction website now, many eBay users feel that the company has lost its focus. In fact, this is why eBay remains a strong company despite Donahoe’s questionable leadership – the company owns so many other websites that are doing very well. eBay owns at least some of each of the following companies: PayPal, Half.com, Gumtree, Craigslist, Shopping.com, Skype, StubHub, and GSI Commerce; see here for the complete list. These holdings have helped eBay to diversify while still retaining a focus on e-commerce. Reports have also shown that eBay’s companies had strong sales in June. So while many long-time eBay users are calling for Donahoe to step down, it is quite clear that the company is doing fine. Additionally, look for eBay’s ownership of PayPal to be enormously profitable in years to come.

Johnson & Johnson (JNJ): William J. Weldon has spent his entire career working at J&J, and he has been CEO since 2002. Despite his lack of popularity with shareholders, shares have appreciated in the past few months and are currently trading around $67. Recent problems with the company have centered on declining revenues and recalls on some of its products such as Tylenol. In fact, Weldon’s compensation package was reduced by 9% back in March, as reported by this article. Some shareholders question the CEO’s work ethic, but this is merely a rumor. What is certain is that until the past couple of years, the company had experienced yearly growth in revenue for decades.

Johnson & Johnson has maintained decent earnings during this period of revenue decline, but it has been achieved through cost cutting that can only go so far. Look for Tuesday’s earnings report to be an important one for Johnson & Johnson.

Johnson & Johnson has also had to close its coronary stent division, as discussed in this article. This was preceded in 2007 by the failure of Conor Medsystems to produce an effective stent (Johnson & Johnson bought Conor in 2006 for $1.4 billion). Other acquisitions under Weldon have been contentious as well, specifically the buying of pharmaceutical companies Alza in 2001 and Scios in 2003. Despite all this, JNJ remains a good investment for those seeking dividends. Additionally, certain trends like people living longer can only mean good things for the company. Johnson & Johnson also boasts a AAA credit rating, which could prove important if the U.S’s credit rating is downgraded.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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