DETROIT - When Richard Snell took control of Federal-Mogul Corp. in late 1996, he created one of the most compelling growth stories in the auto industry.
He took the supplier's sales from $1.8 billion annually to $6.5 billion within three years. Using the playbook that helped him build Tenneco Automotive with 20 acquisitions in three years, Snell was at the height of his game. As it grew, Federal-Mogul would become an engine components consolidator.
Wall Street analysts hailed the company for its sales and earnings growth. Snell, meanwhile, continued to pursue his self-proclaimed 'big, hairy, audacious goal' of $10 billion in annual sales by 2002.
But late last year, the game changed. First, the stocks of auto suppliers languished as investors spurned many industrial companies in their race to invest in Internet technology. Then Federal-Mogul slipped trying to meet the lofty 1999 earnings Wall Street had forecasted.
'It was a double whammy,' said Steve Feeny, Federal-Mogul's investor relations chief. He has watched helplessly as the stock tumbled more than 70 percent during the past year to a five-year low of $13.62 on Feb. 29.
Federal-Mogul is an unlikely poster child for the automotive parts industry.
While the entire sector wrings its hands over falling stock prices, Federal-Mogul has stood out.
Its stock price has plunged while sales and earnings have risen. By all accounts, its businesses are performing well. Federal-Mogul is winning big contracts with new technology.
True, its sales have slipped in the aftermarket parts business. And the company acknowledges that it could have done a better a job in predicting revenue from its acquisitions.
But its biggest mistake has been not meeting the expectations for financial performance set by Wall Street. Federal-Mogul had built a golden reputation. When it delivered silver, it was punished severely.
Federal-Mogul's 1999 operating earnings rose sixfold from three years ago, to $4.08 per share.
But Wall Street does not like surprises, and Snell, 57, missed the $4.70 per share earnings analysts expected. Investor reaction startled industry analyst Darren Kimball of Lehman Brothers in New York. 'Some even asked `will these guys survive,'' Kimball said. 'Wall Street's picture is way out of whack with reality.'
How it happened
Three years earlier, investors reacted favorably when Snell replaced Dennis Gormley as chairman and CEO. They liked Snell's focus on core manufacturing to the auto industry and the replacement motor vehicle parts market worldwide. They also cheered when Snell sold off a retail parts business created by Gormley. The analysts also saw Snell as someone who could increase the value of the giant supplier of engine bearings, oil seals and anti-friction bearings.
In a $6 billion acquisition binge - three major acquisitions announced between Oct. 16, 1997 and Aug. 18, 1998 - Snell scooped up British gasket maker T&N Plc, U.S. gasket maker Fel-Pro Inc. and Cooper Automotive.
He rebuilt Federal-Mogul's original equipment business and added to its replacement parts business. The moves gave each business 50 percent of Federal-Mogul sales. But his replacement parts business was crucial because it is about twice as profitable as parts sold to automakers.
First Call/Thomson Financial, a Boston firm that tracks analysts' estimates, put Federal-Mogul's consensus 1999 earnings at $4.70 per share. That was well above the $2.69 per share the company earned in 1998.
Wall Street analysts tend to be conservative in their earnings estimates, but they liked Federal-Mogul's growth story. Investors responded by pushing the company's share price to a peak of $70.45 on July 10, 1998.
A tricky business
Investors demand solid predictions. That's because a stock's value is not based on its history, but its expected earnings per share. The hitch: For a stock to appreciate, it has to hit the predicted numbers.
'That's a real hard job with Federal-Mogul, because its many acquisitions create unknowns,' said David Strickler, an analyst with First Union Securities Inc. of Charlotte, N.C.
For Feeny, the 1999 earnings game put him on the hot seat. A 26-year veteran of Federal-Mogul, he is the top liaison to the investment community. It's his job to keep analysts' assumptions about the coming quarters consistent with those of management.
A shortfall on Wall Street's estimate can slam the stock price and call into question management's credibility. Beating a reduced estimate can also call into question management's forecasting abilities.
Yet Feeny, like other investor relation chiefs, cannot supply Federal-Mogul's analysts with hard numbers because of strict Securities and Exchange Commission disclosure rules. 'I've never been to jail, and I don't plan on it,' he said.
So when analysts were badgering about the company's 1999's earnings, all he could do was steer them with new product information, contracts, revenue assumptions and growth rates. Analysts applied that to the company's historical profit margins and expense ratios to derive earnings estimates.
With Wall Street full of surprises these days, some companies report bad news before their actual earnings report. Analysts can reduce their estimates - allowing the company to then beat the targets. That didn't work for Federal-Mogul.
On Sept. 13, the company put out a 'pre-announcement,' saying it would not meet its year-end earnings target. An analyst said Federal-Mogul had not anticipated the slowdown in its global aftermarket business.
A big factor was Cooper Automotive's aftermarket brake business. It was unable to rescue a key contract with the Carquest auto parts chain.
The company scaled back its third-quarter profit estimate. It also reduced its estimated 1999 earnings to between $4.20 per share and $4.30 per share. But the damage was done.
Federal-Mogul share price fell $9 the following day, or 23 percent to $30.38, it's largest one-day decline since January 1995.
Analyst Efraim Levy of Standard & Poor's Equity Group in New York said Wall Street has clear expectations. 'If you miss (Wall Street's) targets you will be penalized.'
More shocks were in store. A group of analysts in Detroit for the North American International Auto Show met Jan. 12 with Snell. One or more of those analysts reportedly said Snell warned of still another earnings shortfall for the company's fourth quarter.
Federal-Mogul denied Snell gave such a warning, but it was reported by a financial wire service. 'It was not a positive thing,' said Kim Welch, a company spokeswoman.
On Feb. 2, the company's fourth-quarter and year-end report contained still more bad news. The quarter's earnings were up 38 percent - but below Wall Street's forecast. The lagging replacement parts business was again the culprit.
Profit from operations reached $70 million, or 90 cents a share, up from $51 million, or 78 cents a share a year earlier. Wall Street expected $1 per share.
Investment banker Clifton Roesler said investors showed too little patience.
'Instead of giving Snell time to show that the plan would work,' said Roesler, managing director of W.Y. Campbell & Co. of Detroit, 'investors unfairly whacked the company when it missed earnings projections.'
But Federal-Mogul executives concede their share of the blame by overestimating revenue from the Cooper Automotive acquisition. 'We know the business much better now,' Feeny said.
Analyst Kimball said Wall Street shares in the blame, too. 'Wall Street was unquestioningly bullish about everything the company has done,' he said, 'There should have been a more measured response.'
They may now have gotten the message. First Call's consensus 2000 earnings forecast for Federal-Mogul is a more measured $4.16 per share.
Feeny is not off the hook. He still hears the demand: 'Get the damn stock price up,' but now the order comes from his wife.