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Wednesday, September 20, 2006

The Ten Worst Managed Companies In America Ciena and Avon

From 24/7 Wall St.

We set out to pick the ten worst managed companies in America for the year that began June 2005 and ended June 2007. At this point virtually all companies have reported their June financials and filed their 10-Qs.

We looked only at companies with market capitalizations of over $1 billion. Most of the companies on the list are much larger. We looked at several financial measurements: return on invested, return on asset, return on equity, gross margins, sales growth over one, three and five years and operating income growth over the same period. To be fair, we made the comparisons within industries so we would not be comparing airlines with banks.

The other important aspect to our evaluation, and the most difficult, is picking companies where management was responsible for decisions that went wrong. In an industry where all companies are doing very poorly, management may not be the single most important key to financial and stock market performance. Even in strong industries bad management may cripple a company. We looked for a combination of poor long-term strategic decisions and tactical mistakes in areas like marketing, operations, or manufacturing.

The companies are not presented in any particularly order. The first company on the list is not considered more poorly managed than the company presented in the sixth or seventh place. We will cover two companies each day for the week so that by Friday the full list of ten will have been posted.

5. Ciena (CIEN) It is very hard to lose many the way Ciena has. The optical equipment maker had a tremendous run during the internet bubble. Revenue nearly doubled from 2000 to 2001 when it hit $1.6 billion. But, the company had an operating loss of over $1.7 billion. Ciena never recovered. In 2005 (fiscal ends in October), revenue was $427 million, but the operating loss was $432 million. The company now has nearly $900 million in convertible notes payable and just over $1 billion in cash and short-term investments. And, at this point, the company has spent so much time trying to get back in the game that larger rivals like Alcatel and Cisco have mounted a nearly insurmountable lead.

Ciena’s stock has gone from over $20 five years ago to just above $4. Although the telecom equipment business will grow, Ciena is unlikely to be a big part of it.

6. Avon (AVP) Avon was on a roll for a long time. The stock ran from under $25 five years ago to over $45 in 2004 and 2005. The stock price managed to drop back to $25 in late 2005, and has recovered a bit to just under $30.

How could things have gone so wrong? According to Morningstar, two key metrics have faltered. One is that sale of products that are discounted rose from 65% last year to 80% this year. And, Avon has not been able to break out of its $40,000 and below household income target market.

In late July, Avon announced that its net fell 54% from the year earlier. Revenue in North America remained flat from the previous year. In China, which had been presented by management as a key new market, product sales were 4% lower than in the same period last year.

Avon's move into markets overseas seems to be slowing, and its products no longer sell well in the US.

Earlier companies:

1. The Ford Motor Company can be found here.

2. Affymetrix can be found here.

3. Bristol-Myers Squibb can be found here.

4. Amazon can be found here.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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