Beltway Money Man: Jon Kutler

Being buried alive can change your view of making money.

Prior to December 2005, Jon B. Kutler fit the profile of the hard-charging investment banker. A Harvard business school grad and founder of a successful aerospace and defense boutique, he had worked on hundreds of deals. Long hours and constant travel were his companions–and fond ones, given the money he made.

One afternoon in December 2005, though, Kutler found himself under six feet of snow, buried by an avalanche on the last run of the day during an Austrian ski vacation. It took 45 seconds for him to pass out and 20 minutes for rescuers to dislodge his head. By the time he reached the hospital, his body temperature was 89 degrees.

“Your life flashes before your eyes,” says Kutler, 50, of those 45 seconds of consciousness trapped beneath the snow. “None of my thoughts related to investment banking.”

So in March 2006, Kutler turned a new chapter. He quit the banking outfit he had started, sold in 2002 to New York’s Jefferies Group, and turned his attention to private equity. He put up $70 million of his own money to found Admiralty Partners.

But in contrast with today’s private equity environment, where big players are raising billions and closing massive deals, Kutler had no intention of building another financial empire. “I rarely travel,” he says, “except for vacations.”

Out too are the long hours at the office. In their place, Kutler says he substituted more time doing charitable work with his wife and more attention to their two teenage kids. A U.S. Naval Academy grad who majored in engineering, he became a trustee of the California Institute of Technology. He also helps oversee the Jet Propulsion Laboratory, NASA’s center for robotic research of the solar system, which Caltech manages.

The scaled-back schedule means less time for scrutinizing deals. With Admiralty, Kutler gets plenty of pitches sent his way but invests in just one or two a year. His targets are usually companies with sales in the range of $25 to $250 million.

Full story at Forbes.com

A Happy Birthday For The Forbes Beltway Index

A year ago this week, Forbes.com debuted the Forbes Beltway Index, our means of tracking the stock market fortunes of just over 100 public companies that either do significant business with the federal government or benefit from federal law.

One rationale for the index is that a solid business rapport with Uncle Sam is a positive indicator for investors. Federal statutes, for example, occasionally shield companies from competition. And big contractors can depend on a steady flow of government dollars when the private-sector business cycle turns down.

So far, the Forbes Beltway Index hasn’t disappointed us. On a 52-week basis, through Monday’s market close, the index has gained 14%, three points ahead of the Standard & Poor’s 500.

We’re not claiming here that an investor hitching a ride on the Beltway Index would have necessarily enjoyed that 14% increase. Unlike the Dow Jones industrials or the S&P 500, there are no mutual or exchange-traded funds tracking it. Trading expenses would have taken a bite out of performance.

Note also that in the course of the year, we made a few changes to the Beltway Index roster to keep it up to date with the latest federal contracting information and movement among the defense companies appearing on our own Forbes lists.

Still, here’s a look back at the first year’s winners and losers. In the former category, a notable is Horizon Lines, the Charlotte, N.C.-headquartered shipping concern. As the company acknowledges in its filings, a key to Horizon’s business is the Jones Act. That protectionist federal law requires that vessels transporting cargo between certain ports be built in the United States, be manned by predominately U.S. crews and be owned by U.S. businesses.

Full story at Forbes.com

A Gold Star for this Growth Stock

These are heady days for Blackboard, the developer of educational software. Earlier this year, the company posted $183 million in 2006 sales, a 35% year-over-year jump. Several hundred of its 800 employees will soon move to a roomier headquarters, a downtown Washington, D.C. building being vacated by the Department of Justice.

Chief executive Michael Chasen, who at age 25 left law school to found the company in 1997, says he’s still keeping entrepreneurs’ hours.

“You’d think that with 800 people, there’d be less for me to do,” he quips. “I was up until two o’clock last night.”

Wall Street has shared in the excitement. Blackboard’s stock, up 11% year-to-date, has more than doubled since debuting in 2004. It now goes for a frothy 86 times its consensus earnings forecast for 2007.

If you’re a growth-oriented investor, there’s an argument to jump on the bandwagon. On average, analysts expect Blackboard to increase earnings at a 25% annualized rate over the next three to five years. And while the stock is richly valued, some measures don’t look outrageous. Its price-to-sales multiple of 5.0, for example, stands under an industry aggregate of 5.3 for U.S. software stocks. Salesforce.com goes for 10 times its revenues. Google’s sales multiple? 14.

Full story at Forbes.com

Singapore Defense Firm Thrives in U.S.

Washington, D.C. – When he left the Army for the private sector in 2001, John Coburn had a résumé few could match: a four-star general with 39 years in the service, a combat veteran with a law degree, and, at the end of his Army career, a manager of a $19 billion materiel command with 50,000 employees in 28 countries.

So which company did Coburn join? Northrop Grumman? Lockheed Martin? Nope. Try VT Systems. The Alexandria, Va., company is the U.S. subsidiary of Singapore Technologies Engineering, a $2.9 billion (revenues) aerospace and defense concern ranked No. 1661 on the 2007 Forbes Global 2000.

“It was an opportunity to grow something,” says Coburn, 65, VT System’s chief executive. “I wanted to see how far I could take it.”

In sales term, he’s taken it fairly far. Since 2002, annual revenues at VT Systems have gone from $163 million to $788 million (for its fiscal year, ended last December). That increase has helped parent company ST Engineering turn in 17% annualized revenue growth over the past three years, a number bested only by L-3 Communications Holdings and Precision Castparts among the aerospace and defense industry components of our Forbes Global 2000 list.

The fortunes of VT Systems and its parent also underscore how the forces of globalization are as pertinent to the U.S. defense business as any other. “The U.S. is going to have to get used to this globally-integrated defense industrial base,” says James Lewis, analyst with Washington’s Center for Strategic and International Studies.

Full story at Forbes.com

Breaking The Grip On Storage

WASHINGTON, D.C. – This week, Washington hosts FOSE, a government technology convention that draws 25,000 attendees. Among the 400 companies exhibiting are government contracting giants like Cisco Systems and Motorola.

But the event also has its share of scrappy upstarts looking to gain ground on bigger competitors. Boulder, Colo.’s LeftHand Networks, an information storage concern, is one.

“[FOSE] gives us a great forum,” says LeftHand chief executive William Chambers, 46.

Full Story at Forbes.com

Network Stocks: A View From Washington

For investors with a Washington focus, the business of networks and network gear ought to be an area of interest. Even with budget outlooks getting cloudier, civilian, intelligence and military agencies face unrelenting pressure to improve and secure the way they communicate with data, video and voice.

“A lot of the routed networks out there are kind of long in the tooth,” says Robert Stevens, a vice president at Juniper Networks and the head of its federal government business. “It’s time to upgrade.”

In terms of placing your bets, two competitors stand out here: Juniper and Cisco Systems. Which stock looks more attractive now? The metrics give mixed signals.

In the realm of price-to-earnings ratios, the advantage goes to Cisco. Based on consensus earnings forecasts for the next two fiscal years, Cisco’s P/E multiples are 20 and 17, respectively. Juniper now carries equivalent multiples of 23 and 19.

But Juniper looks cheaper by other measures. Its price-to-book ratio now stands at 1.7, versus 6.0 at Cisco. The stock also looks relatively less expensive according to the price-to-sales, price-to-cash flow (in the sense of net income plus depreciation) and enterprise multiples. The latter is defined as enterprise value (market value plus net debt) divided by earnings before interest, taxes, depreciation and amortization. Juniper’s enterprise multiple is just 4.9, versus 14.1 for Cisco.

Given the split decision in the numbers, the investment decision may boil down to a simple choice: incumbent or insurgent?

Full story at Forbes.com

Political Risk Watch: Hotels

WASHINGTON – Economically, the U.S. lodging business has nice momentum. The industry sold a billion room-nights last year, which meant $134 billion in revenues. Investors have been enthusiastic too–hotel and cruise stocks in the Standard & Poor’s 500 are up 14% in the past year, six points ahead of the broader market.

Yet could politics prove a problem? The industry’s standard bearers in Washington admit a mixed forecast, given the new policy priorities on Capitol Hill.

“Many of them are good for our industry,” says Joseph A. McInerney, chief executive of the American Hotel & Lodging Association (AHLA). “Some of them are not that great.”

Full story at Forbes.com

Beltway Bet: Ceradyne

WASHINGTON, D.C. – On Thursday, Arlington, Va., investment bank Friedman Billings Ramsey held its annual Washington conference. At the event, execs at some of the biggest names in the defense business–Lockheed Martin, Northrop Grumman, among others–made their case to investors.

Early in his presentation, Ceradyne Vice President Marc King distinguished his employer from the pack. “The majority of what we do today is related to defense,” he said, “however, I want to be perfectly clear, we do not categorize ourselves as a defense company.”

Not a defense company, eh? No, that wouldn’t be perfectly clear to the casual observer of Ceradyne’s business. The Costa Mesa, Calif., company makes high-end ceramics from synthetic materials (as opposed to traditional ceramics, fired from non-metallic minerals like clay). In 2006, nearly three-quarters of Ceradyne’s $663 million revenues came from sales of ceramic body armor to defense customers.

Full story at Forbes.com

Skunk At The Innovation Party

WASHINGTON, D.C. – Every business lobbyist–and politician for that matter–favors spurring technological innovation and advancing American economic competitiveness. So how did a Capitol Hill hearing Wednesday, on just those subjects, turn contentious?

Network neutrality crashed the party.

The hearing was called by Rep. Nydia Velázquez, D-N.Y., who in January became chairwoman of the House Committee on Small Business and declared herself a champion for entrepreneurs. But at Wednesday’s hearing, Velázquez and colleagues heard from groups representing big businesses too.

Among the eight trade associations on the witness panel: USTelecom, whose members include AT&T and Verizon Communications, and the American Electronics Association, which counts Apple and Intel among the 2,500 companies on its roster.

There was agreement on most of the items discussed. America needs to produce more engineering and math students. And the Sarbanes-Oxley rules have gone too far.

But then they got around to network neutrality–the matter of whether big Internet service providers should be allowed to charge certain customers, mainly big bandwidth consumers like Google and Yahoo!, extra for access.

Full story at Forbes.com

Stock Focus: Betting The Farm

WASHINGTON – Activity on farm policy is buzzing in Washington, as the big 2002 law on American agriculture nears its September expiration and needs renewing.

In January, the Bush administration unveiled its proposal for the so-called “farm bill,” and the appropriate congressional committees have also been busy. Wednesday, for example, a House Agriculture subcommittee took up the topic of organic farming in the Bush package. Gigantic pieces of legislation like this usually have implications for stock investors. Take the reauthorization of the 2005 law on highway and transit spending, which stirred up interest in publicly held heavy equipment, engineering and construction materials companies.

Full story at Forbes.com