The Wall Street Journal - 13.09.2019

B12| Friday, September 13, 2019 THE WALL STREET JOURNAL.

Enterprise value to forward

earnings before interest, taxes,

depreciation and amortization

Source: S&P Global Market Intelligence

China

Resources

Beer

Tsingtao

Beer

Heineken

Anheuser-

BuschInBev

Carlsberg

21.0 times

14.0

12.8

12.3

11.5

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Operating margins for SkyWest, which flies as United Express, and Mesa Airlines top those of major U.S. airlines.

IRENE NORTH/THE STAR-HERALD/ASSOCIATED PRESS

Bud Brewer

IPO Should

Go Down

Smoothly

By its nature and size,Oracleis

a rather steady ship. But losing

even one of its captains still makes

some waves.

The software giant put out fiscal

first-quarter results late Wednes-

day—a day earlier than planned—

to get ahead of the news that Mark

Hurd, one of the company’s two

CEOs, is taking a leave of absence

for undisclosed health reasons.

The move doesn’t exactly leave

Oracle rudderless; 75-year-old

chairman and founder Larry Ellison

will continue to run the company

with the other co-CEO Safra Catz,

continuing an unusual leadership

structure that was formalized five

years ago but was effectively in

place about four years before that.

In other words, losing even an

executive of Mr. Hurd’s stature

shouldn’t rock Oracle’s boat. But

Mr. Hurd closely oversaw Oracle’s

sales structure. Oracle’s relentless

focus on sales has largely kept the

company from slipping into the

melting-iceberg status that has af-

flicted some of its other aging tech

peers. Oracle’s revenue growth has

averaged a little over 1% annually

for the past eight fiscal years, com-

pared with an average annual 3%

decline atIBM.

But Oracle can’t rest on even

those humble laurels. Current Wall

Street projections have sales grow-

ing an average 2% annually over

the next three years, as the com-

pany has sharpened its focus on

cloud-related deals and still has a

very large population of database

customers to sell into. But Oracle’s

first-quarter revenue was slightly

below analysts’ estimates, and the

company’s projection for the cur-

rent quarter was merely in line.

The company noted on Wednes-

day’s call that it recently reorga-

nized its key North American sales

force, which affected results. Most

notably, the company’s earlier fore-

cast for accelerating revenue

growth in the current fiscal year

wasn’t reaffirmed.

Thus, Oracle’s share price fell

more than 4% on Thursday. The

company’s long history suggests its

sales disruption will be short-lived.

Mr. Ellison and Ms. Catz also have

plenty of experience. But a change

at the top is still a bit jarring. The

years ahead won’t be smooth sail-

ing.

—Dan Gallagher

Oracle’s revenue

Sources: S&P Capital IQ (actual); FactSet (projections)

Note: Fiscal year ends in May.

$40

0

10

20

30

billion

FY2010 ’12 ’14 ’16 ’18 ’20 ’22

PROJECTED

Mario Draghi’s European Central Bank cut rates to a record low Thursday.

RONALD WITTEK/EPA/SHUTTERSTOCK

In Classical Europe, priests sacri-
ficed pigs and sheep to appease the
gods. These days, central bankers
announce obscure monetary stimu-
lus measures to boost the economy.
The interventions are designed to
bring comfort, but neither stands
up to much empirical scrutiny.
The European Central Bank
wants to offset the impact that a
China-led global economic slow-
down is having on the eurozone. On
Thursday, it lowered interest rates
to a record-low minus 0.5%, an-
nounced new bond purchases and
lowered the cost at which banks
can draw long-term loans.
By market measures, the an-
nouncement was a success. Expec-
tations for extra monetary juice
were running high, so the news
could have disappointed. But the
euro didn’t shoot up, and nor did
German bond yields.
But investors should remember
that the masterful way in which
ECB President Mario Draghi has
learned to steer them is mostly ir-
relevant when it comes to the econ-
omy. Mr. Draghi himself appeared
to recognize this by spending a big
part of his penultimate news con-
ference as ECB head arguing—
again—that governments need to
loosen their purse strings. “There
was complete agreement on that”
among ECB officials, he said.
For almost a decade, inflation in

the eurozone has remained below

the ECB’s target of below but close

to 2%—and is now stubbornly stuck

at 1%. None of the levers that the

central bank has pulled to stoke

prices have had very visible effects.

Bank lending to European nonfinan-

cial companies has slowly picked up

over the past few years, but with no

sign of acceleration after rounds of

ECB stimulus.

This makes sense, because banks

were always able to get liquidity

from the central bank when needed.

The ECB has given them cheaper

cash, but banks’ lending decisions

are still mostly made on the basis

of having enough creditworthy bor-

rowers.

The ECB has tried to lower bor-

rowing costs for companies by buy-

ing almost €3 trillion ($3.32 tril-

lion) of debt—including €180 billion

in corporate bonds. But surveys by

economists have long found that

companies pay more attention to

opportunities for putting money to

work than they do to borrowing

costs. The reality is that investing

in capital has made little sense in

much of Europe, where spending

has been weak due to falling wages,

fiscal austerity and the absence of

the kind of powerful technology

sector that has created such wealth

in the U.S. and China.

Pushing borrowing costs deeper

into negative territory will do little

to change this dynamic. Even hopes

that the policy will help exporters

by weakening the euro could be

dashed if President Trump sees this

as an affront and slaps tariffs on

European manufacturers.

Also, lower rates hurt bank prof-

itability. The ECB confirmed that it

would establish tiers in its deposit

facility to shield banks from some

of the ill effects, but eurozone bank

stocks still suffered for a while.

Central banks aren’t completely

out of ammunition: They could

print money and give it directly to

households. But this or any other

form of truly expansive policy re-

mains unlikely while Germany

clings to economic orthodoxy.

Until this changes, the ECB can

only hope that its arcane pro-

nouncements restore some opti-

mism among investors, firms and

households. And that the gods are

listening. —Jon Sindreu

ECB Is Running Out of Options

Draghi’s emphasis on fiscal policy acknowledges further monetary stimulus can do little for economy

The Secret Life of Regional Airlines

Under the surface of the U.S. air-
line industry, 65 largely unknown
regional carriers account for 40%
of all fliers. After years of stability,
they are facing a shake-up.
Earlier this summer,Delta Air
Linessaid it would cut ties with
two out of the five regional carriers
it contracts to feed traffic to its
hubs, confirming a trend toward
fewer regional carriers flying lon-
ger distances.
Not for the first time in recent
years, the winners may be the ma-
jor airlines.
Regional carriers’ transformation
started after deregulation in 1978.
They moved toward almost exclu-
sively flying planes painted with
the colors of the majors, who also
sell the tickets. Nowadays, most
passengers aren’t aware of what
airline they are actually using.
Full-service carriers cut costs by
outsourcing low-density routes to
these companies, where pilots and
crews are paid less.
Two of the regional market lead-
ers are publicly traded:SkyWest—
the biggest one, which carries more
than 30 million passengers a year—
andMesa Airlines, which returned
to the stock market last year fol-
lowing a 2010 bankruptcy.
Even though data by the Re-
gional Airline Association shows
that the number of U.S. regional
airlines has stayed close to 70 over
the past 15 years, many have ended
up being acquired by the same air-
line.American Airlines, for exam-
ple, now owns PSA Airlines, Envoy
Air and Piedmont Airlines.
Still, fewer competitors may not
be a boon for these companies,
which are more under the yoke of
the majors than ever before.
Market power tends to reside in

the party that controls capital ex-

penditure. Over the past decade,

big airlines have increasingly taken

ownership of small-jet fleets which

they then lease to regional part-

ners.

Regional airlines’ investment ap-

peal is steady income. They achieve

this by selling their seat capacity

upfront to the major airlines with-

out uncertainty about ticket de-

mand. But becoming mere lease op-

erators also means that the costs of

any disruption hit them first.

Mesa’s shares plunged in August af-

ter a truck struck one of its air-

craft.

Indeed, it is U.S. legacy airlines

pushing regional consolidation as

part of their clever network rede-

sign, which has involved shifting

more passengers to preferred hubs

at the expense of medium-size air-

ports.

A 2012 renegotiation with

unions allowed them to use more of

the larger 76-seat jets to fly longer

distances while carrying fewer peo-

ple overall. This fits their network

strategy better, allowing airlines to

refit these planes with lucrative

premium cabins. But it may end up

meaning less revenue for regional

carriers.

United Airlinesis now renegoti-

ating scope clauses again. Since the

traditional 50-seat planes are get-

ting older without direct replace-

ment, the majors may push for

larger planes—eventually maybe

even 90-seaters.

Both SkyWest’s and Mesa’s oper-

ating profit margins now surpass

those of all major U.S. airlines,

making the latter’s shares look par-

ticularly cheap. Mesa stock trades

at 4.3 times earnings, less than half

the average of the industry. The

catch is that big airlines may get to

those margins before investors do.

—Jon Sindreu

The world’s largest brewer is

taking another shot at an initial

public offering of its Asian busi-

ness. It should taste better this

time.

Budweiser Brewing, the division

ofAnheuser-Busch InBevrespon-

sible for much of East and South-

ern Asia, has filed to list in Hong

Kong again. The company canceled

a similar project two months ago,

citing reasons including market

conditions. The previous plan to

raise up to $9.8 billion would have

been this year’s largest IPO.

The Hong Kong market hasn’t

been doing great recently as pro-

tests continue. China’s beer stocks,

however, have bucked the trend:

China Resources Beer, the coun-

try’s largest brewer, is up 18%

since Budweiser Brewing scrapped

its IPO.

More important, AB InBev has

learned lessons from the flop. The

deal size is smaller, around $5 bil-

lion, partly because the company

sold its Australian business to Jap-

anese rivalAsahifor $11.3 billion a

week after it scrapped the IPO.

And the deal will include cor-

nerstone investors, which were ab-

sent last time. Such backers com-

mit to invest a certain amount

with a lockup period, wherever the

deal is priced. They are common in

Hong Kong IPOs and should help

the company to anchor demand.

The sale of the Australian

business also should help

Budweiser Brewing to get the high

multiple it wanted. Last time, the

company tried to pitch the IPO as

a growth story when about half of

its adjusted earnings before

interest, taxes, depreciation and

amortization came from mature

markets, including Australia. Now,

nearly three-quarters of adjusted

Ebitda comes from growth

markets—mainly China but also

India and Vietnam. AB InBev is

much more profitable than its

rivals in China because it focuses

on premium brands.

This should allow Budweiser

Brewingto sell the IPO at a multi-

ple closer to that ofChina Re-

sources Beer, which has an enter-

prise value equal to 21 times

forward Ebitda. Diversified brew-

ers generally trade well below

that. AB InBev, for example,

fetches about 12 times.

Budweiser Brewing’s IPO

shouldn’t leave AB InBev with any

bitterness this time around.

—Jacky Wong

Oracle’s Future Gets Slightly Cloudier

OVERHEARD

First there was Beyond Meat.

Now there is Beyond Investing.

The investment adviser

launched a vegan exchange-

traded fund this week that looks

remarkably like an index fund,

costs a good bit more and will

even bleed realistically in a bear

market. But the fund delivers

certain intangibles, according to

its marketing materials.

Beyond Investing explains in a

press release that, “until now,

vegans and environmentalists

have had little choice but to profit

from animal cruelty and

environmental devastation

through their investment options.”

The fund excludes the fossil-

fuel industry, companies that test

on animals and other activities

anathema to environmentally

conscious vegans and promises to

help buyers “take the pain out of

their portfolios.”

But its biggest holdings aren’t

exactly exotic, with Microsoft,

Apple and Facebook making up

the top three—a very similar mix

to the large-cap S&P 500 index

followed by most passive stock

investors.

The firm calculates, through

some convoluted measurements,

that investing $1 million in the

fund would indirectly spare

13,000 animals in a year. Of

course, not investing in a

company’s shares doesn’t deprive

it of money and thus alter its

practices.

On the other hand, one could

invest in a far cheaper index fund

and, as long as one didn’t spend

the money saved on pricey meat

substitutes, donate it to an

animal-welfare charity rather than

a financial firm.