S&P's Sub-$10 Club, Lexmark's `Buy,' Zimbabwe's Dollar: Timshel

Sept. 7 (Bloomberg) -- Sun Microsystems Inc.'s plan for a reverse stock split is an acknowledgement that Standard & Poor's 500 Index members just shouldn't trade for less than $10 a share after an almost five-year bull market.

Sun, the world's third-largest maker of server computers, is one of only 10 companies below that threshold. The number has fallen from 56 in August 2002, two months before the S&P 500 hit bottom and started climbing.

Many companies that made the earlier lineup because the 1990s Internet bubble burst, including Oracle Corp. and EMC Corp., grew their way out.

Oracle, the world's third-biggest software provider, has more than doubled from its 2002 low of $7.25. EMC, the world's largest producer of data-storage computers, has risen more than fivefold since tumbling to $3.67 in the same year.

Sun, which returned to profitability last year after five straight annual losses, wasn't so lucky. The highest price for shares of the Santa Clara, California-based company during the last five years was $6.78, reached on Feb. 5. Since then, the stock has fallen 19 percent from its peak.

Now the company plans to follow the lead of other S&P 500 members -- Ciena Corp. and JDS Uniphase Corp., to name two -- and surpass $10 by reducing the number of shares outstanding. Stockholders will vote on the reverse split, giving them one share for every four they own, on Nov. 8.

Three Reasons

The other S&P 500 members that trade for less than $10 are Compuware Corp., Dynegy Inc., Ford Motor Co., LSI Corp., Novell Inc., Qwest Communications International Inc., Solectron Corp., Tenet Healthcare Corp. and Unisys Corp.

Sun's chief financial officer, Michael Lehman, cited three possible benefits of the reverse split in a letter to investors: lower trading costs, ``increased earnings per share visibility'' and a ``more attractive stock price.''

The first two come down to mathematics. It can cost less to buy 500 shares at $20 than 2,000 shares at $5 because brokerages often use the number of shares traded in setting commissions.

And each dollar of profit will have four times the effect on the corresponding per-share figure after the reverse split. Sun's net income of $473 million last year would have equaled about 52 cents a share, rather than 13 cents.

Whether Sun's stock becomes more attractive is a matter for debate. The performance of Ciena and JDS Uniphase, two makers of telecommunications equipment, following their reverse splits has been less than stellar.

Two Shortfalls

Ciena, based in Linthicum, Maryland, lagged behind the S&P 500 for the first eight months after its 1-for-7 share swap last September. JDS Uniphase, based in Milpitas, California, declined 9.9 percent after its 1-for-8 swap in October. The loss compared with an 8.4 percent advance for the index.

Sun has already benefited from switching its ticker symbol to JAVA, the name of its programming language, from SUNW. Since the change was made on Aug. 27, the stock has risen 9.4 percent. The proposed reverse split is an equally mechanical way to lift Sun's share price above $10. Yet it's no panacea.

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Lexmark International Inc., the second-biggest U.S. printer maker, has lost about half its value this year and is one of the most unloved companies in the S&P 500. Its fortunes may be about to change.

Sanford C. Bernstein & Co.'s Toni Sacconaghi, the top-rated computer analyst in a survey by Institutional Investor magazine, put the equivalent of a ``buy'' rating on Lexmark yesterday for the first time since last September.

``Better Early Than Late,'' as Sacconaghi headlined a report on the Lexington, Kentucky-based company. Lexmark can increase operating profit to more than 10 percent of sales from 6.4 percent last quarter, he wrote, and ``appears to be trading well below the sum of its parts.''

Sacconaghi, based in New York, is the only brokerage analyst who recommends buying Lexmark's shares, according to data compiled by Bloomberg. Eleven have ``hold'' ratings and three say ``sell.'' His one call was enough yesterday as the stock rallied 5.2 percent, its biggest gain in 13 months.

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Zimbabwe devalued the local dollar by 92 percent yesterday, according to news reports. A stock-market-based indicator of the currency's value shows they didn't go far enough.

The country's official rate was set at 30,000 to the U.S. dollar, Deutsche Presse-Agentur and Reuters reported. The rate for government transactions tumbled from 250 to the dollar.

A number closer to 200,000 would have been more in line with reality, based on a comparison of Old Mutual Plc's share price in Harare, the Zimbabwean capital, and London.

Old Mutual closed yesterday at 615,000 Zimbabwe dollars and 154.3 pence. The company, based in London, is Zimbabwe's largest insurer and has traded there since going public eight years ago.

The valuation method is similar to one used for Venezuela's bolivar after President Hugo Chavez imposed capital controls in February 2003. Estimates of the bolivar's value were calculated from the share price of CA Nacional Telefonos de Venezuela, the country's largest phone company, in New York and Caracas. This approach worked before Chavez nationalized the company in May.

To contact the writer of this column: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net