View Full Version : GE vs. CryptoLogic

04-03-2005, 03:06 PM
GE vs. CryptoLogic link (http://www.fool.com/News/mft/2005/mft05033122.htm)

By Robert Brokamp (TMF Bro) and Bill Mann (TMF Otter)
March 31, 2005

The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."

But, please, make no mistake -- "Stock Madness 2005" is a GAME!

Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.

General Electric (NYSE: GE)
Fairfield, Conn.
52-week low-high: $29.55-$37.75
$382.6 billion market cap

By Robert Brokamp (TMF Bro)

August 1999 was a momentous time for The Motley Fool. The stock market was soaring, dot-coms were all the rage, and, on Aug. 16, both Bill Mann and I began our first day as Fool employees. I remember turning to Bill during one of the hazing activities (it involved passing along eggs without using hands) and predicting, "In less than six years, you and I will square off in a stock-picking contest that will attempt to emulate March Madness -- something we'll do because on the inside we're still kids and love competition, but on the outside we're overweight and out of shape and couldn't play basketball to save our lives. And I'll win!"

Well, here it is, less than six years later, and the stock market is no longer a rocket that just goes up, no one wants to be called a dot-com anymore, and it looks like my prediction has partly come true. Whether I'll be 100% correct depends on you, dear reader, choosing GE over CryptoLogic.

In previous rounds of Stock Madness, I discussed the merits of General Electric as a global behemoth, so I won't retrace those paths. You probably already know that stuff anyhow. On the other hand, how many people know about CryptoLogic? The massive general investing public surely doesn't. So who are the people who have been driving up CryptoLogic stock? Probably the people who know its product, which is online gambling software.

So consider this: Buying stock in CryptoLogic essentially means you're casting your lot with a bunch of other investors who are also online gamblers. Can you see where I'm headed with this? I don't think it's much of a leap to assume that for many of these people, there's a very blurry line between gambling hard-earned money on online poker and investing hard-earned money through an online broker. Hey, it's a free country. But could you, as an investor, expect these same people to hold on to their shares -- or are they more likely to dump them on a whim, leaving you holding the bag?

Contrast that type of investor with someone who buys GE, as staid and boring as they come. But as Wharton Business School professor Jeremy Siegel points out in his new book, The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, history shows that established, solid, dividend-paying companies beat the faddish hot stocks over the long term. GE is the perfect example, having now been a part of three centuries and yielding almost 3%. CryptoLogic, on the other hand, is a dot-com.

There's a difference between gambling and investing. The former is, as they say, a crapshoot, whereas the latter is based on analysis, homework, and a respect for history. As you might expect, dear Fool, an investment in the "gaming" company CryptoLogic is much more of a gamble than putting your money on GE.

Robert Brokamp owns none of the companies in this article. He is the editor of The Motley Fool's Rule Your Retirement newsletter service, which you can try for 30 days without gambling any money because the trial is free.

CryptoLogic (Nasdaq: CRYP)
Toronto, Canada
52-week high-low: $11.82-$34.96
$393.1 million market cap

By Bill Mann (TMF Otter)

In 2003, General Electric CEO Jeffrey Immelt sent a warning to investors who were demanding that the company make better disclosures about its various businesses: "be careful what you wish for." The company, if it were pushed, would go so far as to provide annual reports the size of Manhattan phone books.

Does this strike you as the signal of a company with its shareholders' best interests at heart?

This matchup is a clash between the simple and the mind-bendingly complex. You know what CryptoLogic's business model is? Yeah -- it's eBay (Nasdaq: EBAY). OK, OK, it doesn't have the same nearly competition-free tableau that eBay does, so we shouldn't take the allegory too far, but the comparison is apt.

CryptoLogic provides the platform where businesses can conduct lots and lots of little transactions with customers. In this case, the customers are online gamblers. CryptoLogic doesn't have much inventory risk; its WagerLogic subsidiary serves as a PayPal clone in processing wagers, having done more than $20 billion in multiple currencies. CryptoLogic runs the casinos for gaming companies but doesn't take on any of the risks associated with being a casino. It is a breathtakingly simple business at its core, run on some equally breathtakingly robust technology.

GE, on the other hand, is unanalyzable. It is lightbulbs, aircraft engines, turbines, and medical equipment. But its biggest segment, and its fastest-growing one, is GE Capital -- its financial division. GE has gone through several years when its AAA credit rating has been put at risk by virtue of the fact that GE Capital's percentage of company revenues has continued to grow. GE spun out Genworth Financial (NYSE: GNW) and tried to sell Employers Reinsurance. It has helped, but GE Capital continues to be a disturbingly large component of General Electric.

Here's why this matters. I noted before the potential for losing GE's AAA credit rating, which would send it down the same road as AIG (NYSE: AIG), which got dropped from the highest rating this week. Financial companies don't generally have the risk profile necessary to make them eligible for the top rating, which would mean that GE's debt issuances would come at a higher cost. With the company's more than $200 billion in debt outstanding, this is not a small consideration. And what's more, GE sports a growth-company multiple of 24 times earnings. No company that is largely financial in nature justifies a multiple that high. Go look at the big ones -- you'll see the story. They're about half as much as GE's.

So this is a big company with a big history and is and will remain a huge part of the fabric of American commerce. But it's going up against a small growth company that lacks any of the structural limitations on growth that GE faces, nor does it have to worry about being redefined in a way that could be quite negative to shareholders.

Bill Mann holds none of the shares mentioned in this article.