| BUSINESSWEEK ONLINE : APRIL 19, 1999 ISSUE | ||||||||
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| COVER STORY
A CEO Who Takes Pay for Performance to the Extreme It would be ridiculous to buy a stock just because the chief executive has an innovative pay package that builds in an unusually large incentive to drive the stock price higher. But if there was ever a company you might buy on that basis, tiny Cleveland-based Oglebay Norton (OGLE) is it. When John N. Lauer assumed leadership of the industrial minerals processing and shipping company at the end of 1997, he agreed to work for no salary, and his annual bonus was capped at a maximum of $200,000. He spent more than $1 million of his own money to buy shares on the open market. And the board bought him more than $1 million worth of restricted shares, which won't completely vest until 2003. But his real payoff will come -- if it does -- via a one-time stock option grant he received for up to 8% of the company. It is exercisable at $38 a share -- about a 70% gain from where the stock is now. "Essentially, he is going to work for free if he can't get the share price up over $38 in the next three to five years," says Harry Millis, who covered the company for more than 30 years as a stock analyst. Millis recently became a managing director at S.M. Berger & Co., Oglebay's investor relations firm. "I'M NOT UNIQUE." A critic of excessive CEO compensation who has done doctoral studies on the topic, Lauer says his pay package basically replicates the private-company model, where top execs are expected to buy their way in to small, nonpublic companies. "I'm not as unique as people think," he says. "When I put my own money, my own financial risk, on the line, what I'm really doing is investing in the employees of this company." So far, Lauer's investment -- as well as the investments of other shareholders who bought Oglebay's stock on excitement over Lauer's ascension -- is far from paying off. Oglebay got some positive press when Lauer, who was president and chief operating officer at B.F. Goodrich and was considered perhaps overqualified for the Oglebay job, came in and promised to transform the stodgy, slow-growth outfit into a fast-growth company. The stock hit a high of 50 1/2 on April 16, 1998, about when the small-cap segment of the market began to take it on the chin, and when natural-resources stocks also weakened. The stock has mostly been falling ever since. The shares closed this Apr. 8 at 21 5/8. Natural resources continue to be in a slump, and Oglebay has exposure to the steel industry, through its shipping and limestone businesses as well as the oil and gas industry, which uses Oglebay's industrial sands for processing. Lauer has begun to transform the company, mainly by taking on debt and expanding through acquisition into the faster-growing lime and limestone production business. Now the largest of Oglebay's three segments, lime and limestone accounted for 47% of sales in 1998, with marine transportation (bulk shipping on the Great Lakes) providing 34%, and industrial sands adding 19%. But the acquisitions haven't helped earnings yet. In 1998, Oglebay's net income fell to $12 million, or $2.52 a share, from $16 million, or $3.37 a share in 1997. Still, the company's revenues grew 65% from $145 million in 1997 to $239 in 1998. Earnings before interest, taxes, depreciation, and amortization (or EBITDA, a common measure of cash flow) rose 55% for the year, to $58 million from $37 million. Debt increased to more than $300 million, but the company still has more than enough cash flow to cover the costs, says Rochelle Walk, Oglebay's director of corporate affairs who oversees investor relations. WINTER CHILL. On Apr. 26, the company will report first-quarter earnings -- normally its weakest of the year, since the Great Lakes and one of Oglebay's limestone quarries shut down in the winter months. The increase in financial leverage creates opportunity but also more risk if there's an economic slowdown. Why? If there's a "hiccup," the company can't just tighten its belt, says Robert Robotti of New York investment boutique Robotti & Co. Some value investors are starting to see Oglebay's cheap price relative to its assets and cash flow as an opportunity. "It has some debt, it's a small cap, and it has economic exposure -- those are three death words to this market," says Paul Orlin, a general partner at value-oriented investment firm Porter Felleman, which has accumulated about 5% of the stock. "People don't want to own these kinds of stocks in this market." Given its free cash flow, Orlin says it's as if for every $100 you invested in the company, you got back $20 each year in cash. And he expects that cash stream to grow. Orlin says he was also attracted to the stock by the strength of the management team, which has much more experience than managements in most companies this size. "Obviously, the stock is extremely cheap," says Millis. It is trading at about a 15% discount to its book value of $27 a share, and its current p-e is only 8.5. Unlike other companies selling at such a low multiple, Oglebay could achieve double-digit earnings growth in 1999, he believes. Because of the way Oglebay accounts for its acquisitions, Orlin thinks investors won't see better earnings until the second half of 1999, when quarterly comparisons start to look better. And "it's not going to take much to move this stock," he says. Oglebay has only a $100 million market capitalization, no Wall Street coverage, and trades just an average of about 10,000 shares a day. With only about 2.4 million shares available to change hands, even trades of just a few hundred shares can move the stock, making volatility more likely. Lauer is clearly taking more risk with Oglebay than the 145-year-old company is used to. But it should comfort those investors bent on finding small-cap bargains that at the same time he's betting the company's future, he's betting his own. By Amey Stone, with Jennifer Reingold, in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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